Loopholes and Ambiguities of Section 2036

The possibility of divergent tax treatment of economically similar situations has made section 2036 of the Internal Revenue Code’ one of the most abused of the federal estate tax provisions. Originally enacted to ensure inclusion within the gross estate of the value of all property ostensibly transferred by the decedent prior to his death and yet beneficially enjoyed by him during his lifetime, the section is being circumvented by an increasing number of tax avoidance patterns. Although some of the confusion can be traced to the erratic approach of the courts to cases involving section 2036, the primary interpretive difficulty stems from Congress’ failure to define precisely what it hoped to accomplish by the enactment of that section. Under section 2036, the inter vivos gift of property in which the lifetime income is reserved for the transferor is clearly includible in the gross estate of the decedent-transferor. On the other hand, it is equally clear that the transferor may accomplish the same economic result, without subjecting the property to inclusion within his taxable estate by virtue of section 2036, simply by dividing his property and giving away an amount equal to the actuarial value of the remainder interest while retaining an amount equal to the actuarial value of the lifetime income. Taxation under section 2036 thus seems to turn on the form utilized by the decedent in dividing and transferring his property, rather than on the economic result. Unfortunately, most of the tax avoidance patterns fall within the gray area between the two forms of transfers mentioned above. A discussion of some of these patterns may serve to focus attention on the need for a review of the congressional purpose underlying section 2036 and for a possible statutory recasting of that section.