Lewis v. Commissioner (T.C. Memo. 2026-58): $35,141,321 Gifts When Children Ended a QTIP Trust

What happened, in order

The opinion says that in 2011 a decedent left the residue of her estate to a trust that paid net income to her husband at least annually, allowed principal for his health, maintenance and support, and gave him a limited power to appoint the principal among her descendants at his death. Anything he did not appoint was to be split among her children. Her husband, as personal representative, made the QTIP election, which gave her estate a marital deduction. We leave the family members unnamed; the cases are known by their captions and numbers.

On October 31, 2016, the husband and both children signed a nonjudicial agreement. Its section 2 says the trust “shall be commuted and the entire remaining balance of the Trust shall be distributed outright and free of trust” to the father. The opinion adds in a footnote that the agreement “made no provision for trust assets to be retained as a reserve for the payment of taxes.” The parties stipulated the assets at $117,604,143.

Source: T.C. Memo. 2026-58, read on November 2, 2026.

Why the children, and not the father, made the gift

The court did not change its 2024 view. Because the father ended up owning outright what the QTIP rules treated him as owning, 26 U.S.C. 2519 produced no gift from him. The children, in the court’s words quoted from the earlier opinion, engaged in “giving up something for nothing”: they gave up the remainder rights and got nothing back. The valuation question left open in 2024 is the subject of this opinion, and the court answered it by asking what each child would have received if the parties had ended the trust without saying how to divide it.

From $53 million to $35 million, one step at a time

Source: T.C. Memo. 2026-58 parts III.A to III.D; division by 1.4 is our arithmetic.

The point to take from the last two rows is the premise correction. A reader skimming summaries could assume the court set the value at $35.1 million on its own analysis. The opinion says the opposite: the evidence in the record supported at least $37,400,000 each, and the court stopped at $35,141,321 only because of what the IRS had conceded. Whether a higher figure could ever have been assessed is not something the opinion decides.

Step 1: the father’s power of appointment did not shrink the gift

The children argued that a buyer of their remainder would pay almost nothing, because the father could appoint the assets elsewhere by will. The IRS argued the power vanished on termination and so did not matter. The court agreed with neither. It asked what the trustee would have done under the will’s termination clause, which required distributing assets worth each beneficiary’s interest, and concluded a Washington court guided by the will’s intent would have treated the children as entitled to equal shares of the remainder. The expert scenario that ignored the power therefore applied.

Step 2: the net-gift reduction under section 2207A

Section 2519(a) treats a disposition of a qualifying income interest as a transfer of everything else in the property. Section 2207A(b) then lets the person who paid that gift tax recover it from the people who received the property. Treasury Regulation 25.2519-1(c)(4) reduces the transfer by the recoverable amount and says the two are computed together, using “the same interrelated computation” that applies when a recipient assumes the gift tax.

The court used the IRS’s own numbers to illustrate. At a 40% rate (the parties agreed the father’s 2016 gifts would be taxed at the top rate because of prior gifts), $53,408,746 divided by 1.4 is $38,149,104, and 40% of that is $15,259,642 of reimbursement owed by each child. The opinion treats that avoided reimbursement as part of what each child gave up, so the gift is the net amount.

Worked example (our arithmetic, hypothetical numbers). A $10,000,000 QTIP trust is ended early and two children would each have been entitled to $4,000,000 under the trust’s termination clause.

• Without the 2207A step: gifts of $4,000,000 each, $8,000,000 in all.
• With it: $4,000,000 / 1.4 = $2,857,143 each, and the reimbursement each child avoided is $1,142,857. The two gifts total $5,714,286.
• Cross-check: the parent’s deemed gift of the $8,000,000 remainder, net of recoverable tax, is also $5,714,286 and the tax on it is $2,285,714, which equals the two reimbursements.

The example uses a 40% marginal rate for everyone; a person with unused exclusion would pay less at the margin, and the division factor would change. The numbers are for scale, not a forecast.

Step 3: why the section 7520 tables did not set the value

Section 7520(a) says that “for purposes of this title” the value of an annuity, life interest or remainder is determined under tables using 120% of the federal midterm rate. For October 2016 that rate was 1.6%. The IRS used it to value the remainder interests at $106,817,492 in all. Footnote 7 shows the arithmetic: $117,604,143 received in 6.06 years, discounted at 1.6%.

The court held the tables are not determinative here because a trustee dividing assets on termination decides the beneficiaries’ entitlements under state law, not “for purposes of” the Code. It also said a trustee “might look to” the tables for guidance. The practical effect is that the court used the IRS expert’s valuation, $49,197,850 per child, in place of the tables’ $53,408,746.

For context on today’s rate: Rev. Rul. 2026-21 sets the section 7520 rate at 6.20% for November 2026, against 1.6% in October 2016. The court did not apply the tables in this case, so the rate is background, not a way to estimate a gift like this one.

Step 4: no five-year age discount

The children’s expert treated the father as five years younger because of his high income. The court said life tables work because errors cancel across a large sample, and that adjusting for one factor while ignoring others “would introduce bias.” It used his actual age. This is a narrow point about this expert’s method on this record.

What this changes, and what it does not

• It does not say every early termination of a QTIP trust creates a gift by the remainder beneficiaries. It says that where everything was paid to the income beneficiary and the remainder beneficiaries got nothing back, they made gifts, and the value is what they gave up.
• It does not hold the IRS tables are wrong for gifts generally. It holds they were not the right measure of what these beneficiaries were entitled to under this will and Washington law.
• It leaves open what happens if the remainder beneficiaries receive something in return, or if the trust keeps a tax reserve. The opinion notes only that this agreement had no reserve.
• The contrast case is the surviving spouse who ends up owning the property outright: the earlier opinion treats that as no gift by the spouse.

For the other side of QTIP planning, the basis trade-off between a QTIP trust, a credit shelter trust and a disclaimer, see our credit shelter, QTIP and disclaimer comparison. The federal exclusion that frames a gift of this size (Rev. Proc. 2025-32 section 2.14 sets the 2026 basic exclusion amount at $15,000,000) is covered in our estate tax exemption guide, and the annual gift exclusion in annual gift tax exclusion 2026.

What a reader can do with this

• Find the termination clause. The case turned on a will clause that required distributions equal to each beneficiary’s interest. Read yours before any agreement is drafted.
• Ask who the donors would be. If the agreement sends everything to the income beneficiary, the opinion treats the remainder beneficiaries as the donors, not the surviving spouse.
• Ask for the net-gift computation. Have the professional show the 1.4 division at your tax rate and the reimbursement right under section 2207A(b).
• Ask what the tax reserve is. In this case there was none.
• Ask whether a Form 709 must be filed and for which year, and whether the valuation will rest on the 7520 tables or an appraisal.
• Watch the Rule 155 step. The tax, interest and penalties come after the opinion, and an appeal is possible.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on November 2, 2026: T.C. Memo. 2026-58, Lewis v. Commissioner and McDougall v. Commissioner, Docket Nos. 2459-22 and 2460-22, filed July 20, 2026 (kpmg.com copy of the opinion); 26 U.S.C. 2044, 2056, 2207A, 2511, 2519 and 7520 (Cornell Legal Information Institute); 26 CFR 25.2519-1 and 25.7520-3; Rev. Rul. 2026-21 and Rev. Proc. 2025-32 (irs.gov). Divisions, totals and the worked example are our arithmetic from those documents. This is analysis of public documents, not investment, legal or tax advice.