Troubling Transfer Tie-Ins

"It ain't over 'til its over," may now be the new transfer tax credo. More than fifteen years since its inauguration, a new way of interpreting one of the most basic transfer tax provisions-the estate tax computation itself-has emerged. Recently, in Estate of Frederick R. Smith v. Commissioner, the government received judicial approval to revalue adjusted taxable gifts for estate tax purposes, despite the fact it was precluded from doing the same for gift tax purposes. Given that the estate and gift taxes are unified and viewed as separate computations of one tax, it is puzzling that an immutable gift tax value can be altered many years later when the gift is blended into the estate tax computation.

Whether the goal was revenue enhancement, improved tax compliance, or a little of both, the end result can be nothing less than increased taxpayer dissatisfaction over current tax administration practices. The Smith decision places a severe strain on some of the more practical aspects of estate planning. It also brings to the fore a greater issue, namely, the current Tax Court predilection for strict statutory construction irrespective of the resulting consequences. It is unclear whether the government'sgain will outweigh the costs, burdens, and as yet unrealized issues its victory will spawn.