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Appeals court allows 100% stepped-up basis for pre-1977 spousal joint property.

In Gallenstein, 6th Cir., 1992, aff'g DC Ky., 1991, Mr. and Mrs. Gallenstein had purchased real estate for $38,500 in 1955. Mr. Gallenstein provided all of the consideration for the purchase but title was taken jointly. Mr. Gallenstein died in 1987. Mrs. Gallenstein sold a portion of the property in 1988.

What is her tax basis in the property?

Possible responses

1. Mrs. Gallenstein's tax basis is 50% of the original purchase price plus 50% of the fair market value (FMV) on Mr. Gallenstein's death. 2. Mrs. Gallenstein's tax basis is 100% of the FMV on Mr. Gallenstein's death.

Court of Appeals

The Sixth Circuit upheld the district court's decision that response No. 2 was correct.

Before 1977, marital joint interests were subject to Sec. 2040(a), which required the full value of property jointly owned by a decedent to be included in his gross estate, except to the extent that the survivor could show that she provided consideration. The Tax Reform Act of 1976 amended this rule to provide that only 50% of the value of a spousal joint interest was included in the first estate if the spousal joint interest was created after 1976. The provision was again amended in 1981m effective for estates of decedents dying after 1981.

The Sixth Circuit held that the effective date of the 1981 amendment did not repeal the effective date of the 1976 amendment. Therefore, the pre-1977 rule applied for spousal interests created before 1977. According to the court, Congress intended to create two rules. If the spousal joint interest was created before 1977, the "consideration provided" rule applied; if the spousal joint interest was created after 1976, the 50% rule applied.

Therefore, Mrs. Gallenstein's basis in the property was 100% of its FMV on Mr. Gallenstein's death, since she provided no consideration for the property.


Consider filing amended estate tax returns for estates with joint spousal interests created before 1977 in which only 50% of the property was included in the estate of the first spouse to die. Since the spousal joint property qualifies for the unlimited marital deduction, there is no increase in the estate tax by including more than 50% of the property in that first spouse's estate. A stepped-up basis of up to 100% may be available for income tax purposes under the "consideration provided" test.
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Article Details
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Author:Springgate, Susan K.
Publication:The Tax Adviser
Article Type:Brief Article
Date:May 1, 1993
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