On 7/26/2013 the
Office of Chief Counsel issued Chief Counsel Advice (CCA) 201330033, where the IRS has addressed:
ISSUES:
1.
Does all or any
portion of the Date 1 transfers of stock from the decedent to the grantor
trusts in exchange for the notes with the self-cancelling feature constitute a
gift?
2.
How should the fair
market value of the notes with the self-cancelling feature be determined?
3.
If the Date 1
transfers do not constitute a gift, what are the estate tax consequences of the
cancellation of the notes with the self-cancelling feature upon the decedent’s
death?
FACTS:
Taxpayer transferred
stock to a grantor trust in return for notes receivable. The notes had the
following terms:
1.
The term of the notes
was based on the taxpayer's life expectancy as determined in the Sec. 7520
tables.
2.
Each note required
only payments of interest during the note term and the payment of principal to
the note holder on the last day of the term.
3.
Each of the notes
contained a self-cancelling feature. This feature relieved the issuer of the
obligation to make any further payments on the note if the taxpayer died before
all of the payments under the note came due.
4.
The total face value
of one group of the notes was almost double the appraised value of the stock
transferred for those notes. The higher value of the notes supposedly
compensated the taxpayer for the risk that he would die before the end of the
note term and thus not receive the full amount of interest or any of the
principal.
5.
The total face value
of the rest of the notes equaled the appraised value of the stock transferred
for those notes. To account for the possibility that the self-cancelling
feature would take effect, these notes contained an above-market interest rate.
The taxpayer was in
very poor health at the time of the transfer and died less than six months
after the transfer. He received neither the interest payments nor the
principal due on the notes.
CONCLUSIONS
1.
1. If the fair market
value of the notes is less than the fair market value of the property
transferred to the grantor trusts, the difference in value is a deemed gift.
2.
The notes should be
valued based on a method that takes into account the willing-buyer willing
seller standard of § 25.2512-8 and should also account for the decedent’s
medical history on the date of the gift.
3.
In this case, we
believe there is no estate tax consequence associated with the cancellation of
the notes with the self-cancelling feature upon the decedent’s death.
Need Help With Estate or Gift Taxes?
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at Marini & Associates, P.A.
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