New Jersey Law Journal

June 5, 2006

The Internet has allowed new assets to spring into existence for consideration by competent tax and estate planners. For tax and estate planning purposes, each Internet asset is subject to one of three different legal classes.

Internet Law

Internet Assets of a Decedent

Tax and estate planning issues raised by the Internet

By Jonathan Bick

Bick is of counsel to WolfBlock Brach Eichler of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law [Random House 2000].

            The Internet has allowed new assets to spring into existence for consideration by competent tax and estate planners. All Internet assets are intangible personal property -- they cannot be seen felt or perceived by the ordinary senses. For tax and estate planning purposes, each Internet asset is subject to one of three different legal classes.

            The first class is Internet assets contained in a decedent’s computer or storage device. Class one Internet assets include e-mails, software, content and data stored in tangible property, typically a decedent’s home computer.

            A second class of Internet assets are access rights and use rights to Internet assets located in a computer or other storage device owned by a person other than the decedent. Class two Internet assets are e-mails, software, content and data stored in tangible property on a third party’s computer or other tangible property.

            Class three Internet assets are access and use rights related to Internet assets, but unlike class two assets, class three Internet assets do not have any physical point of presences (i.e. their existence is not dependant upon storage), hence they need  not stored anywhere. A domain name is an example of a class three Internet asset.

            All three types of decedent's Internet assets are susceptible to traditional estate and tax planning. The treatment of each of the three types of Internet assets is generally analogous to the treatment of certain tradition assets for the purposes of distribution and taxation.

            The treatment of class one Internet assets may be analogized to the treatment of traditional assets which are intangible tangible in nature, and stored in a tangible asset which are in the possession the decedent at the time of his or her death. Thus, with respect to class one Internet assets, a party with the lawful right to the tangible property within which the Internet assets are contained is normally granted the rights to them. For example, e-mails are typically distributed with the home computer which holds them.

            For tax purposes, the gross estate includes value of all property in which decedent had interest, including intangible and tangible personal property, wherever located. In accord with I.R.C. § 2033 and Treas. Reg. § 20.2033-1(a), all personal property both tangible or intangible is included in the gross estate as long as the decedent has a beneficial ownership interest in it at the time of his death.

            As indicated by Stewart v. Commissioner, 49 F.2d 987 (10th Cir. 1931), regardless of who holds title to a decedent's property, it is the beneficial ownership interest in property that determines whether it is included in the gross estate, which has tax ramifications. Thus, even if the class one Internet property is contained in a computer owned by a party other than the decedent's beneficiary, the beneficiary is the owner of the class one Internet property.

            It should be noted that even trustees are not the owner of class one Internet assets because of the principle that legal title does not control estate inclusion is the case of the decedent acting as trustee. Whether a trustee under a valid trust instrument or under a resulting trust due to state law, a trustee is not the owner of class one Internet assets and said assets should be includable in the decedent's gross estate.

            A legal difficulty may arise with respect to the disposition of class one Internet assets if a number of members of a family pooled their income and the deceased purchased a computer on which the class one Internet some real property in his name and there are no records of how much each family member contributed. In this case, the class one Internet assets must be included in the deceased's estate, according to Estate of Brickert v. Commissioner , 37 T.C. 57 (1961).

            If each member of the family documents the amount contributed towards the purchase of the computer, the result may be different. Additionally, if state law allows, a resulting trust can be established for each of the contributors. In that case, only the portion of the property attributable to the decedent-titleholder's contribution is included in his gross estate according to Rev. Rul. 78-214.

            Class one Internet assets are valued as traditional intangible assets. According to Guaranty Trust Co. v. Commissioner, 79 F.2d 245 (2d Cir. 1935), the gross estate includes the full value of all tangible personal property, wherever located, beneficially owned at the time of death.

            Clearly, if a beneficiary is in possession of the desired e-mails -- because said beneficiary saved a copy of each e-mail received or because he owned or inherited the decedent’s computer within which the desired e-mails still reside – the beneficiary would own the e-mail. However, alternate facts are possible and the desired e-mails are not in the possession of the beneficiaries.

            With class two assets, the decedent merely had access, not possession. Contracts normally govern access to class two Internet assets. Consequently, the rights to class two Internet assets are determined based on the assignment or non-assign clause associated with the class two Internet assets.

            In the event that class two Internet assets are in fact assignable, such assets are treated like other intangibles owned by decedent and are included in gross estate. Thus, typically all assignable class two Internet assets belonging to the decedent at the date of his death are included in his gross estate. Assignable class two Internet assets are included at face value unless the asset has some intrinsic value greater than its face value.

            For example, the decedent could posses an assignable electronic contract stored in a third party computer for 100 one dollar noncirculating coins that are no longer minted. This electronic agreement, which is a form of class two Internet assets, must be included in the gross estate at the fair market value rather than face value of $100, in accord with Rev. Rul. 78-360.

            Class two Internet assets also include all money held in Internet bank accounts and PayPal accounts owned by the decedent. These class two Internet assets are also included in the decedent's gross estate. Internet bank accounts are generally owned by the person whose name is on them; however, legal title does not always control. For example, when a portion of the decedent's Internet bank account is determined to be the property of a third party (such as when an amount authorized by the decedent to pay for an e-Bay purchase pending receipt of goods).

            The legal difficulties associated with Internet bank accounts and other Internet fund storage program is similar to the difficulties associated with checking accounts. In both instances, payments are authorized and delivered prior to a decedent's death but are not actually paid (i.e., they do not actually clear the decedent's fund storage area) until after his death. These payments are excluded from the gross estate if three conditions are met: (1) the payments are given to discharge a lawful obligation of the decedent; (2) the payments are subsequently honored by the Internet fund holder and charged to the decedent's account; and (3) the obligations are not claimed as deductions from the gross estate.

            As in the case of traditional checks, a decedent making gifts, charitable or otherwise, delivered via the Internet before the decedent's death, but clearing the decedent's Internet fund storage area after his death, may result in a legal difficulty. The Internal Revenue and the Tax Court are still attempting to resolve such matters. It is presumed such funds would be included in decedent’s gross estate if the courts rely on McCarthy v. United States, 806 F.2d 129 (7th Cir. 1986), rev'g 624 F. Supp. 763 (N.D. Ill. 1985).

            The E-Sign Act (15 U.S.C. 7001-7006), was enacted to encourage the use of electronic signatures in interstate commerce. According to E-Sign, electronic signatures are lawful for any transaction that is "an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons."

            Generally, a signature may not be denied legal effect, validity or enforceability solely because it is in electronic form; and a contract relating to such a transaction may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation.

            Thus, Internet notes owned by and Internet loans made by the decedent must be included in the gross estate to the same extent as other intangible property. As in the case of traditional notes representing loans to family members, Internet loans are not included in the gross estate when the evidence indicates that the advances were in reality a gift.

            Not all class two Internet assets are assignable. For example, a descent's e-mail held by an Internet Service Provider (ISP) is only assignable if so stated in the agreement between the ISP and the deceased.

            Like class two Internet assets, contracts normally govern access to class three Internet assets. Under the common law's expansive "bundle of rights" conceptualization of property, a domain name (or, at least, the right to use the domain name) would be property because a holder has the right to use it, exclude others from using it, and transfer it to another entity. As such, the holder's rights in the domain name and/ or in an Internet site access are substantially similar to the rights of a tenant or licensee. However, the holder of such Internet rights also has some of the same rights as the real estate owner and/or the inventor, such as the rights associated with a creator or inventor.

            Courts have not treated the domain name itself as property of the estate, but as an executory contract which can be transferred in a will just like other contracts involving tangible or intangible property. Thus it has been included in the estate.

            This tax treatment, consistent with the Tax Code, includes generally nontransferable property in the estate and permits the trustee to sell the property. The trustee nonetheless must comply with any contractual provisions that place restrictions on the manner in which the original party can transfer the property, or conditions that must be satisfied before the property can be transferred. Thus an executor who seeks to transfer a decedent’s Internet rights in the domain name or Internet site access rights must comply with appropriate contract transfer procedures.