“In this Tax Court Memorandum decision, which is appealable to the United States Ninth Circuit Court of Appeals, Tax Court Judge Halpern held that the effect of a non-judicial settlement agreement that terminated a QTIP trust created a $35,141,321 gift by each of the remainder beneficiaries to their father. QTIP trusts aren’t easily unwound. Fortunately, most who are making QTIP elections today are doing so with nontaxable estates, so the prospect of a QTIP remainder beneficiary making a taxable gift is not likely to occur unless the QTIP trust is significant like in Lewis/McDougall”

Paul Hood provides members with commentary on McDougall & Lewis.

A native of Louisiana (and a double LSU Tiger), Paul Hood obtained his undergraduate and law degrees from Louisiana State University and an LL.M. in taxation from Georgetown University Law Center before settling down to practice tax and estate planning law in the New Orleans area. Paul has taught at the University of New Orleans, Northeastern University, The University of Toledo College of Law and Ohio Northern University Pettit College of Law. Paul has authored or co-authored nine books, including his most recent book, Yours, Mine & Ours: Estate Planning for People in Blended or Stepfamilies and hundreds of professional articles on estate and tax planning and business valuation. Paul’s website is www.paulhoodservices.com and his e-mail address is paul@paulhoodservices.com

Here is his commentary:

EXECUTIVE SUMMARY:

In this Tax Court Memorandum decision, which is appealable to the United States Ninth Circuit Court of Appeals, Tax Court Judge Halpern held that the effect of a non-judicial settlement agreement that terminated a QTIP trust created a $35,141,321 gift by each of the remainder beneficiaries to their father.

FACTS:

This is the fourth and latest decision connected to two different base cases, as noted below:

Docket No. 856-21-Estate of Sally J. Anenberg, Donor, Deceased, Steven B. Anenberg, Executor and Special Administrator v. Commissioner (162 T.C. 199, dated May 20, 2024)-28 Pages (Judge Toro)-One Opinion.

 

Docket Nos. 2458-22, 2459-22, 2460-22-Bruce E. McDougall, Donor, Petitioners v. Commissioner (163 T.C. 112 (2024)-Filed September 17, 2024. 30 Pages (Judge Toro-17-page Opinion [13-page concurrence by Senior Judge  James S. Halpern]-Two Opinions.

 

Docket Nos. 2459-22, 2460-22. Linda M. Lewis, Donor, Petitioner v. Commissioner Peter F. McDougall, Donor, Petitioner v. Commissioner, April 25, 2025-5 Pages-Judge Halpern-One Opinion.

 

Docket Nos. 2459-22, 2460-22. Linda M. Lewis, Donor, Petitioner v. Commissioner Peter F. McDougall, Donor, Petitioner v. Commissioner, T.C. Memo. 2026-58-24 Pages-Judge Halpern-One Opinion.

 

COMMENT:

The Leadup and the Cases

Judge Halpern was the assigned trial judge in McDougall/Lewis. However, for cause, Tax Court Chief Judge Kerrigan assigned Judge Toro to write the Tax Court Reviewed Opinion in McDougall/Lewis in which Judge Halpern concurred. Apparently, Judge Halpern’s concurring opinion, set forth in pertinent part below, ruffled a few feathers, as signified by this quip from the majority opinion:

The analysis in the Opinion Concurring in the Result misreads the holding of Estate of Anenberg and our holdings in these cases.  See Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181, 230 (2023) (An opinion that concurs only in the result “is generally not the best source of legal advice on how to comply with the majority opinion.”).  And the analytical path it offers is neither more straightforward nor sounder than the one we adopt.  See concurring op. pp. 18, 29–30. [emphasis added]

In my opinion, the inclusion of the swipe at Judge Halpern seems unfortunate, especially given that, as I set forth below, Judge Halpern displayed the far better QTIP analysis.

Judge Halpern was well within his rights as a Senior Tax Court Judge to file a concurring opinion, and one certainly could interpret any change in judge as internal court bickering based on personalities and/or politics, especially when the reassigned judge takes a swipe at the senior judge.

Without further ado, let’s review Judge Halpern’s concurring opinion in pertinent part, to-wit:

While I agree with the results the majority reaches, I believe an alternative analysis to reach those results would have been preferable.  The majority’s analysis raises questions it does not adequately address.  I therefore offer an alternative analysis that avoids those questions and, in my judgment, provides a sounder basis for the Court’s conclusions. [emphasis added]

 

Again, concluding that Bruce made no section 2519(a) disposition of his qualifying income interest in the Residuary Trust property, in my judgment, provides a sounder basis for the conclusions the majority reaches.  The analysis I suggest does not depend on treating a surviving spouse as receiving consideration for a deemed transfer for property he does not actually own—a transfer that is entirely a fiction created by the QTIP rules.  Moreover, that analysis does not depend on treating a single exchange differently from the perspective of the transferors and the transferee.  The majority views as “complicated” the “question of whether implementing the Nonjudicial Agreement gave rise to ‘any disposition’ of Bruce’s qualifying income interest for purposes of section 2519(a).”  Op. Ct. p. 11 n.5.  I do not share the majority’s reluctance to answer that question.  Instead, I view the questions the majority takes on as more complicated than the disposition question.  Concluding that the implementation of the Nonjudicial Agreement did not effect a disposition of Bruce’s qualifying income interest provides a more straightforward justification for the conclusions that Bruce did not make a taxable gift but Linda and Peter made taxable gifts to him. [emphasis added]

 

In my opinion, the majority’s reliance on the QTIP hokus-pokus forced itself to interpose extra steps only to avoid checkmate. The concurring opinion essentially was Halpern’s Razor (Hat Tip: William of Ockham)? But Judge Halpern’s identification below is, in my opinion, fatal to the majority’s clearly intellectually weaker model:

treating a surviving spouse as receiving consideration for a deemed transfer for property he does not actually own…. does not depend on treating a single exchange differently from the perspective of the transferors and the transferee [N.B. which the majority’s model clearly does].[emphasis added]

Query: Was Judge Halpern’s Message to the Tax Court: Don’t fly another Kite?

Judge Halpern was on the Tax Court when it issued the unfortunate Kite decision, i.e., Kite Est. v. Comr., T.C. Memo 2013-43, the QTIP analysis of which was mangled. That decision has been criticized by many pundits. In my opinion, the IRS could be fairly accused of misusing the decision since it was released back in 2013. Another current Tax Court Senior Judge, Elizabeth Crewson Paris, authored Kite.

Query whether Judge Halpern was relying on his significant number of years of experience to prevent attempted hyperextensions or dyslexic interpretations of the majority’s position.

The Two Subject Cases Involved Different Facts

Judge Toro is a fairly recent appointment (2019) with only judicial clerk/law experience prior to his appointment to the Tax Court, especially when compared to the much more widely experienced Judge Halpern (who also spent time in the IRS National Office as well as stints as a tax law professor), who was first appointed in 1990. With all due respect, Judge Toro’s articulation of one of the holdings in the reviewed decision in which Judge Halpern concurred, “Held: The consequences of the transactions here are governed by the principles set out in Estate of Anenberg v. Commissioner, No. 856-21, 162 T.C. 199 (May 20, 2024)” is simply wrong. Why? I explain why below.

Though there were some similarities, “transactions” in Anenberg and McDougall/Lewis were quite different, even though both involved essential commutations/donations.

The primary similarities between the cases are (1) the taxpayers in both sets of cases were represented by the same counsel (Baker Botts); and (2) appellate jurisdiction for both cases would lie in the U.S. Ninth Circuit Court of Appeals (Anenberg-California; McDougall/Lewis-Washington).

However, those similarities are more than outweighed by the significant differences in the substantive rights of the respective parties. In Anenberg, the surviving spouse only had a QTIP trust income beneficiary interest that was surrendered/commuted.

In McDougall/Lewis, the surviving spouse was not only entitled to all of the QTIP trust’s fiduciary accounting income at least annually as income beneficiary, the trustee also was authorized to make HEMS distributions of trust principal to the surviving spouse, in “his accustomed manner of living.” In McDougall/Lewis, the decedent also gave the surviving spouse a testamentary special power to appoint the principal of the trust “to or among [Clotilde’s] descendants, equally or unequally, outright or in trust, on such terms and in such amounts as he shall determine.”

The Subject Opinion Involves Valuation

The Valuation Issues per Judge Halpern from His Opinion:

Almost all of the difference between the parties is attributable to three issues: (1) whether the value of the gifts petitioners made to their father should be reduced by reason of Bruce's limited power of appointment, (2) whether those gifts should be reduced by reason of section 2207A, and (3) whether the value of the gifts should be determined by the tables prescribed under section 7520. As explained below, resolution of those three issues leaves the parties only $241,321 apart. And we can close that remaining gap by addressing a fourth, less significant, issue: whether Bruce's life expectancy should be determined on the basis of his actual age on October 31, 2016, or by treating him as though he were five years younger. [emphasis added]

Valuation Positions of the Parties:

The Taxpayers primarily asserted that valuation required a consideration of the relative probability of three different scenarios, described below, so the IRS had to rebut the Taxpayers relative positions.

Scenario I

Scenario I-Included the surviving spouse’s QTIP life income interest; entirely disregarded his testamentary special power of appointment as well as the trustee’s discretionary HEMS principal rights.

Taxpayers: $36.6 million (Discounted from $53.21 million by adjustment for DLOM and IRC Sec. 2207A).

 

IRS: $53.4 million (Determined using IRC Sec. 7520 tables at a 5.2 AFR with no adjustments).

 

Judge Halpern: $35.14 million (essentially siding with the Taxpayers, but holding that state law governs property rights, not the IRC Sec. 7520 tables, but recognizing the reality of IRC Sec. 2207A).

Scenario II

Scenario II-Factored in the surviving spouse’s discretionary right to draw from the trust principal by simulating a hypothetical $16.2 million principal distribution.

Taxpayers: $34.9 million (Calculated using an assumed younger life expectancy for the surviving spouse; would be $37.4 million using the surviving spouse’s actual age).

 

IRS: Rejected (The IRS rejected any deviation from standard lifespans or mechanical tables based on subjective discretionary rights).

 

Judge Halpern: Sided with IRS (Rejected the Taxpayer's expert life expectancy adjustment because the business appraiser lacked qualifications to calculate subjective mortality).

Scenario III

Scenario III-Factored in the father’s testamentary limited power of appointment, arguing he could legally redirect assets away from the taxpayers at death.

Taxpayers: $156,000 (Argued the children's remainder interests possessed only a "remote probability" of ever materializing, rendering the gift nominal).

 

IRS: Rejected (The IRS maintained that a purely potential testamentary power does not reduce the present value of surrendered property).

 

Judge Halpern: The Court explicitly threw out Scenario III, ruling that potential future exercise of a power of appointment is too speculative.

Halpern’s Holdings in McDougall/Lewis

What follows are each of Judge Halpern’s important in part interdependent holdings:

Held: Because the provisions of C’s will must be interpreted to effect the intent expressed in her will, if Ps had agreed with B to terminate the Residuary Trust without specifying how the trust assets should be distributed, the distributions to which Ps would have been entitled would not have been reduced by reason of B’s limited power of appointment. [emphasis added]

 

From Judge Halpern’s Opinion: The question of how the Residuary Trust assets would have been allocated under section 12.8 involves the interpretation of Clotilde’s will.  Under Washington state law, a court’s “paramount duty in construing wills is to give effect to the testator’s intent.”  Schreiner v. Riemcke (In re Estate of Riemcke), 497 P.2d 1319, 1323 (Wash. 1972). Petitioners would have us accept that, if they and their father had agreed to terminate the Residuary Trust without specifying a distribution of assets, section 12.8 of Clotilde’s will would have required 9Petitioners endorse the arithmetic approach taken by Mr. Eckstein, but Mr. Eckstein acknowledged that the propriety of his approach might involve a legal issue on which he was not qualified to opine. [footnotes omitted but emphasis added]

Held, further, because Ps’ receipt of the distributions to which they would have been entitled under C’s will would have carried with it obligations to reimburse B for gift taxes under I.R.C. § 2207A(b), the gifts Ps made to B in allowing him to receive all the Residuary Trust assets should be reduced by Ps’ avoided reimbursement obligation. [emphasis added]

 

From Judge Halpern’s opinion: And respondent agrees that, if petitioners had received the distributions to which they would have been entitled under Clotilde’s will, those distributions would have carried with them obligations to reimburse Bruce for gift tax under section 2207A(b).  What Linda and Peter each gave up, therefore, is the distribution he or she would have received net of the avoided liability to reimburse Bruce for gift tax.   While respondent acknowledges that Linda’s and Peter’s gifts might be reduced by reason of section 2207A, his primary position is that that section does not require any reduction in the taxable gifts.  He argues that “[a] hypothetical gift tax liability under § 2519 is too speculative to impact the valuation of Linda’s and Peter’s remainder interests.”  He notes that, when petitioners and their father agreed to terminate the trust, they did not leave assets in the trust as a reserve to cover Bruce’s gift tax liability.   Respondent’s arguments miss the mark.  The likelihood that section 2207A would have come into play as a result of the transaction. [emphasis added]

Held, further, the amounts to which Ps would have been entitled under C’s will is a question of state law; consequently, the tables prescribed under I.R.C. § 7520 to value remainder interests for federal tax purposes do not determine the value of Ps’ gifts to B. [emphasis added]

Comment: IRC Sec. 7520 is what first introduced me to a then Professor Steve Leimberg at The American College, as we were among the very first to write and speak when the “rate of the month” club came into effect in April 1989 (I still have my LSBA Tax Section Technical Meeting materials from 1989).

From Judge Halpern’s opinion: Respondent claims support for his position from “the plain language of section 7520.” He reminds us that the statute provides that “the value of any . . . remainder . . . interest shall be determined” under the prescribed tables. But respondent quotes the statute selectively. He omits the first five words of the text: “For purposes of this title.” A trustee determining how to divide the assets of the Residuary Trust under section 12.8 of Clotilde's will upon the trust's termination would not be making that determination, in the first instance, for purposes of the Code. Instead, the trustee would be determining the beneficiaries' entitlements to the trust property — a matter of state law.

 

A trustee might look to the section 7520 tables for guidance, but we do not agree that those tables would be determinative. Suppose, for example, that the trustee determined that Linda and Peter were entitled to $49,197,850 each upon the termination of the Residuary Trust (the value determined by Mr. Fuller). And suppose they challenged that allocation, claiming that, under the section 7520 tables, they were entitled to $53,408,746. Would they prevail before a Washington state court in their claim that, as a matter of law, the section 7520 tables determined the distributions to which they were entitled? We think not. [emphasis added]

 

Held, further, the amounts to which Ps would have been entitled under C’s will is a question of state law; consequently, the tables prescribed under I.R.C. § 7520 to value remainder interests for federal tax purposes do not determine the value of Ps’ gifts to B. [emphasis added]

From Judge Halpern’s opinion: Respondent claims support for his position from “the plain language of section 7520.” He reminds us that the statute provides that “the value of any . . . remainder . . . interest shall be determined” under the prescribed tables. But respondent quotes the statute selectively. He omits the first five words of the text: “For purposes of this title.” A trustee determining how to divide the assets of the Residuary Trust under section 12.8 of Clotilde's will upon the trust's termination would not be making that determination, in the first instance, for purposes of the Code. Instead, the trustee would be determining the beneficiaries' entitlements to the trust property — a matter of state law.

 

A trustee might look to the section 7520 tables for guidance, but we do not agree that those tables would be determinative. Suppose, for example, that the trustee determined that Linda and Peter were entitled to $49,197,850 each upon the termination of the Residuary Trust (the value determined by Mr. Fuller). And suppose they challenged that allocation, claiming that, under the section 7520 tables, they were entitled to $53,408,746. Would they prevail before a Washington state court in their claim that, as a matter of law, the section 7520 tables determined the distributions to which they were entitled? We think not. [emphasis added]

Held, further, in valuing B’s income interest in the Residuary Trust, and thus Ps’ gifts to B, B’s high income alone does not justify departing from standard actuarial tables to determine his life expectancy. [emphasis added]

From Judge Halpern’s opinion: Respondent contends that the record is “devoid of medical expert testimony or medical records or any other evidence that would support any expert using an age other than Bruce's actual age.” Petitioners acknowledge that “none of the experts had access to Bruce's medical records.” Petitioners contend, however, that “nothing in the record demonstrates that [Bruce's medical] records would have caused Mr. Eckstein to reach a different conclusion.” They argue that Mr. Eckstein “exercised his professional judgment in making his determination regarding the appropriate life expectancy in the Social Security Actuarial Life Tables to use.” [emphasis added]

 

We are unpersuaded that, for the purpose of valuing Bruce's income interest in the Residuary Trust to determine the distribution to which he would have been entitled under section 12.8 of Clotilde's will upon the termination of the trust on October 31, 2016, Bruce would have appropriately been treated as five years younger than he actually was. Life expectancy tables, such as those issued by the Social Security Administration, rely on the law of large numbers. The standard tables will inevitably understate the life expectancy of some individuals and overstate that of others. But if the tables are based on an adequate sample size, the inaccuracies in each direction will balance out. The tables will thus provide a reasonable estimate for individuals of agiven [*23] age. Adjusting the estimates provided by the tables to take into account some, but not all, factors unique to a particular individual would introduce bias and, in our judgment, would be methodologically questionable. Bruce's income was but one of myriad factors relevant in determining his life expectancy. All else being equal, that one factor might have caused the standard Social Security tables to understate Bruce's life expectancy. Without considering all factors relevant to Bruce's life expectancy, however, Mr. Eckstein could not conclude that all else was equal. [emphasis added]

Held, further, in valuing B’s income interest in the Residuary Trust, and thus Ps’ gifts to B, B’s high income alone does not justify departing from standard actuarial tables to determine his life expectancy. [emphasis added]

From Judge Halpern’s opinion: We find no indication in the record that Mr. Eckstein conducted an adequate study of the factors relevant in predicting Bruce's life expectancy. Mr. Eckstein was unaware of physical or mental conditions Bruce might have had, other than his osteoporosis and mobility issues, that would have reduced his life expectancy. It does not follow, however, that Bruce did not have any such physical or mental conditions. Mr. Eckstein did not even interview Bruce, much less review Bruce's medical records. That the record does not disclose factors that might have caused Mr. Eckstein to revise his opinion does not establish that no such factors existed. An investigation limited to talking with Linda did not necessarily provide Mr. Eckstein with all information regarding Bruce's health relevant in predicting his life expectancy. Moreover, Mr. Eckstein's expertise is in valuation. He is not an actuary and did not consult an actuary in determining Bruce's life expectancy. Therefore, contrary to petitioners' argument, predicting Bruce's life expectancy was not a matter within Mr. Eckstein's “professional judgment.” [emphasis added]

Held, further, in light of the conclusions stated above and R’s concession, the gifts Ps made to B had a value of $35,141,321 each. [emphasis added]

Concluding Comments:

Valuation Was a Huge Problem for the Taxpayers. The court record is littered with a number of valuation expert witness procedural issues. The Taxpayers’ valuation expert admitted that he was not an actuary, and he did not discuss the surviving spouse’s life expectancy with an actuary. The Taxpayers’ valuation expert witness also prepared a flawed computation report that Judge Halpern asked him to correct, which he did, in the quote below.

At trial, Mr. Eckstein testified: “I couldn’t think of any other way that somebody would do this other than proportionately.”  When asked whether it might have been more consistent with Clotilde’s wishes for the excess value to be allocated to Linda and Peter so that the trust assets would “stay within the family,” Mr. Eckstein acknowledged that that would be “a legal issue, not a valuation issue.”

Prospects for Appeal? Because the valuation issues really are legal issues, as opposed to, for example, discounts for lack of marketability, etc., one must conclude that reversal or serious reduction on appeal is actuarily possible and, perhaps, more likely to result in some settlement, and I can see that the IRS should be inclined to discount for hazards of litigation-your real valuation experts on appeal will be lawyers, and judges detest when lawyers attempt to usurp what the judiciary jealously guards and vouchsafes as its protection. However, in my opinion, I’m less than sanguine about the Taxpayers' prospects on appeal in the U.S. Ninth Circuit. The failure to use an actuary hurt. I always preach the importance of considering using actuaries in business succession and estate planning, particularly around buy-sell agreements.

The Relevance of Actuaries. The asset in a self-canceling installment note (SCIN) must be valued and is a technique in which actuaries should always be consulted. However, unlike a regular installment sale, the most careful evaluation that must be made is exactly how much additional interest or purchase price must be charged as a risk premium for the risk of death before the note is fully paid off. This requires, in my opinion, use of an actuary who has full and complete access to the note recipient’s medical history is a necessity in my opinion (this is the only way that I ever did a SCIN-I certainly never relied upon the actuarial tables alone as that was too risky in my opinion, which the Davidson Estate case pointed out).

The bottom line: QTIP trusts aren’t easily unwound. Fortunately, most who are making QTIP elections today are doing so with nontaxable estates, so the prospect of a QTIP remainder beneficiary making a taxable gift is not likely to occur unless the QTIP trust is significant like in Lewis/McDougall.

But, let’s still be careful out there!!!

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Paul Hood

CITE AS:

LISI Estate Planning Newsletter #3336 (September 21, 2026) at http://www.leimbergservices.com. Copyright © L. Paul Hood, Jr., Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

CITES:

Lewis v. Comr., McDougall v. Comr., T.C. Memo. 2026-58; McDougall v. Comr., 163 T.C. 112 (2024); Lewis v. Comr., McDougall v. Comr. (April 25, 2025) and Anenberg Estate v. Comr., 162 T.C. 199 (2024).