Significant recent developments in estate planning.

Part I of this article, published in October, covered gifts; disclaimers; debts, claims and administration expenses; powers of appointment; retained interests; and charitable deductions. Part II, published in November, covered valuation, special use valuation and the marital deduction. Part III, below, includes cases and rulings on fiduciary income tax, generation skipping transfer tax, the Chapter 14 special valuation rules and miscellaneous estate tax issues.

Fiduciary Income Taxation

* Joint educational trust was a grantor trust.

* SCINs triggered cancelation of debt income.

* License to publish books did not create IRD.

* Option exercisable on decedent's death will not trigger IRD.

* No gain generated on merger of trusts.

* Basis step-up denied after like-kind exchange of deferred annuity contracts.

* S corporation was a qualified CRUT donor.

* Rulings on QSSTs.

* Joint educational trust deemed owned by grantors under Sec. 676

In Letter Ruling 9333028,(112) pursuant to their 1989 divorce, former spouses (grantors) created an educational trust for their son. Their joint contributions were segregated into two equal subaccounts and separate contributions would be added to the particular grantor's sub-account. Distributions were to be withdrawn equally from each sub-account. On the son's attaining age 35, amounts remaining in the sub-accounts were to be distributed to the respective grantors.

By written instrument signed by both grantors, a grantor could revoke or amend the trust in whole or in part with respect to either subaccount. The IRS ruled that (1) the sub-account's income was taxable to the respective grantor, (2) each undistributed sub-account balance will be includible in the respective grantor's estate and (3) no gift occurs until distributions are made to the son.

Critique: Sec. 676(a) directs that a grantor will be treated as the owner of any portion of a trust over which he, either alone or in conjunction with a nonadverse party, possesses a power to revoke. The IRS found that each grantor held a beneficial interest only in his respective sub-account. Since neither grantor had any beneficial interest in the other's sub-account, they were not adverse parties under Regs. Sec. 1.672(a)-1(a).

Planning hints: Sec. 676(a) could have been avoided if the son had a veto power over the grantors' power to revoke. Clearly, the son possessed an income interest in the trust that would have been adversely affected by the exercise of such power. Obviously, such a provision would have changed the transaction's economics by reducing each grantor's ability to undo the transfer. Notwithstanding Sec. 676(a), the grantors also could be deemed owners under Sec. 673(a) if their reversionary interests, at inception, had values in excess of 5% of the amount transferred. This issue was not addressed by the IRS.

* Note's self-canceling feature causes debt forgiveness income

In Frane,(113) the decedent sold stock in the family business to his four sons. Each son executed a self-canceling installment note (SCIN) requiring the payment of principal and interest over 20 years. The SCINs provided that any balance remaining unpaid at the seller's death would be deemed canceled and extinguished as though paid. As compensation for the self-canceling feature, the SCINs contained a higher-than-market interest rate.

At the time of sale, the decedent's life expectancy exceeded 20 years. However, his death occurred after only two payments had been made. The SCINs were excluded from the decedent's gross estate and no income was reported because of the cancelation. On the corporation's subsequent liquidation, the sons reported as basis the principal actually paid, rather than the SCINs' face amounts. The Eighth Circuit held that the debt forgiveness income to be recognized in the estate's income tax return equalled the unrecognized gain at the time of death.

Critique: Sec. 453B(f) requires income recognition when an installment obligation between family members is canceled or otherwise becomes unenforceable. The taxpayer argued that Sec. 453B is directed exclusively at cancelations extraneous to, and independent of, the note establishing the obligation. In Frane, the self-canceling feature was an integral part of the obligation, for which additional consideration had been paid.

The Eighth Circuit disagreed. It noted no statutory distinction between an independent cancelation act and a cancelation triggered under the obligation's provisions. In each instance, the cancelation relieves the obligor of any further obligations. The court stated that Congress's intent to impose income recognition regardless of the reason for cancelation was amply demonstrated by the legislative history behind Sec. 453B(f).(114) The taxpayer's argument also was undermined by the SCINs' clear language, which described the extinguishment as a cancelation.

Although the Tax Court had required the debt forgiveness income to be reported in the decedent's final income tax return, the Eighth Circuit disagreed. It noted that Sec. 691(a)(5)(A)(iii) unambiguously provides that cancelation of an installment obligation occurring at death is a transfer by the estate of the decedent. Thus, the Eighth Circuit required the gain to be recognized in the estate's income tax return. Finally, the sons' basis was determined by reference to the SCINs' face amount, not the amount of installments actually paid prior to death.

Planning hints: Although a self-canceling feature may eliminate estate tax on the unpaid SCIN balance at death, advisers must consider the source of funds available to the estate to pay the associated income tax. This issue becomes particularly difficult if the residuary heirs differ from the installment note obligors.

* Book royalty agreements do not generate IRD

In Letter Ruling 9326043,(115) the decedent authored various copyrighted literary works, and during his life, entered into agreements with third parties concerning publication. The agreements characterized the transactions as publishing licenses giving rise to royalties, rather than as sales. Although they were community property, the copyrights and agreements were held individually by the decedent or by a revocable trust established by the decedent and his spouse. The IRS ruled that the agreements were licenses, rather than sales. Thus, the royalty interests did not constitute income in respect of a decedent (IRD).

Critique: For estate tax purposes, the copyrights were valued by reference to the discounted present value of the income streams expected to arise under the royalty agreements. At issue were the Federal income tax consequences of the eventual receipt of these royalties. If the agreements were sales, the copyrights' entire value would be IRD. However, if the agreements were true licenses, no IRD would result and the estate would receive a Sec. 1014(a) basis step-up equal to the estate tax value. In the latter event, the estate could depreciate(116) the entire new basis as royalties were received.

Payments received pursuant to a contract granting a third party an exclusive right to exploit a copyrighted work throughout the copyright's life are generally treated as sales proceeds. It is irrelevant that the payments are designated as "royalties" under the contract.(117) However, such agreements are treated as licenses if the copyright holder receives an interest resembling a royalty and retains other rights in the property. In Letter Ruling 9326043, the IRS ruled that the following types of limited licenses avoided IRD treatment:

* An exclusive right to publish a work for the length of the copyright, but limited to the British Commonwealth.

* An exclusive right to publish a work throughout the world, but limited to trade editions in the Spanish language.

* An Exclusive right, for five years, to make a television program based on a specific work.

* Option exercisable at death does not result in IRD

In Letter Ruling 9325029,(118) the taxpayer created an option to sell real estate at a certain price that could not be exercised before the taxpayer's death. The taxpayer also reserved the right to terminate the option and return the consideration received, if she failed to obtain an IRS ruling stating that (1) any sales proceeds from the option's exercise were not IRD and (2) the optioned real estate was entitled to a basis step-up at her death. The IRS ruled favorably on both counts.

Critique: Citing Rev. Rul. 71-265,(119) the IRS stated that the option in question did not give rise to IRD because prior to death, there could be no transfer of the rights and burdens of ownership. The optionee held nothing until the taxpayer's death. Further, on the taxpayer's death, the optionee was under no obligation to exercise the option, and the estate could not force a sale. If the option was exercised, the parties were then required to execute a sales contract and convey title. While the taxpayer's termination right was not a factor in the IRS's favorable determination, it did provide an insurance policy allowing the taxpayer, or her estate, to undo the deal if an adverse ruling was received.

The IRS came to a similar conclusion in Letter Ruling 9319005,(120) which involved a "short-sale-against-the-box" option strategy. The decedent's revocable trust entered into a short sale of publicly traded stock. The short sale was collateralized by cash and the same company's shares already held by the trust (the "long" shares). Citing Rev. Rul. 73-524,(121) the IRS permitted the basis of the long shares to be stepped up and concluded that there would be no IRD.

Planning hints: Subject to transaction costs, these rulings illustrate an excellent way to liquify highly appreciated assets, while delaying capital gains tax (and potentially avoiding it on the short seller's later death).

* Merger of two trusts does not trigger gain

In Letter Ruling 9338020,(122) the decedent created an inter vivos trust for the benefit of his three daughters. Trust income was distributable to the daughters in equal shares. On a daughter's death, her income share was distributable to her issue. Principal was distributable based on certain standards and, in the discretion of the trustee, could be treated as an advance on a daughter's share. Subsequently, the decedent's will created a testamentary trust that was identical to the inter vivos trust, except that principal advances were required for the beneficiaries' reasonable care, maintenance, support and education. The IRS ruled that the merger of the inter vivos and testamentary trusts into a single trust resulted in no gain or loss.

Critique: Citing Silverstein,(123) the IRS concluded that the merger was not a realization event, as the beneficiaries' property interests and rights were the same both before and after the merger. It noted, however, that the merger agreement recognized the somewhat differing treatment accorded principal invasions and applied each trust's invasion standard to the portion of the merged trust's principal attributable to each.

In a somewhat analogous situation, the IRS concluded in Letter Ruling 9411033(124) that the partition of a single testamentary trust into three separate trusts did not trigger Federal income tax. There, the testamentary trust provided for a separate share to be maintained for each of three grandchildren.

Further, no gain or loss resulted even though, after separation, each trust held some entire interests in property, to equalize value and to facilitate individual investment decisions. The IRS distinguished Letter Ruling 9411033 from Rev. Rul. 69-486,(125) in which gain was triggered when a non-pro rata distribution of trust corpus in kind was made pursuant to the mutual consent of the beneficiaries. In that ruling, the fatal non-pro rata distribution was based on a beneficiary-requested court order, rather than trustee authorization in the original trust instrument.

* No basis step-up for deferred annuity contract received in Sec. 1035 exchange

In Letter Ruling (TAM) 9346002,(126) the taxpayer's mother (the contract owner) purchased a deferred variable annuity contract (Contract One) in 1974. The contract provided an annuity for life, beginning on Sept. 30, 1983, with a guaranteed minimum of 120 monthly payments. If the contract owner died before receiving these payments, the remaining balance was payable to her designated beneficiaries under one of two settlement options. Her two sons were named beneficiaries.

In 1989, the contract owner entered into a Sec. 1035 like-kind exchange of Contract One for a second deferred variable annuity contract (contract Two) issued by a different insurance company. The starting date of the Contract Two annuity was Sept. 1, 1993. If the contract owner died before the payment commencement date, the contract's accumulated value was payable to designated beneficiaries (the sons).

The contract owner died in 1990 and a lumpsum payment, equal to one-half of the accumulated contract value, was made to each son. The accumulated contract value was included in the contract owner's gross estate for Federal estate tax purposes. The IRS disallowed a Sec. 1014(a) basis step-up for the contract.

Critique: An annuity described in Sec. 72 is expressly excluded from basis step-up by Sec. 1014(b)(9)(A). Prior to 1979, the IRS took the position, in Rev. Rul. 70-143,(127) that mandatory lump-sum settlement options under deferred variable annuity contracts similar to those in Letter Ruling 9346002 were not "annuities described in section 72" and that basis step-up was therefore available. This position was reversed in Rev. Rul. 79-335(128) to deny the basis step-up, but did not apply to deferred variable annuity contracts purchased before Oct. 21, 1979. The taxpayer argued that Contract Two was entitled to relief because it was received in exchange for a contract purchased in 1974.

The IRS disagreed, noting that acquisition of a new annuity contract from a different insurance company (by way of exchange) is generally within the scope of Sec. 1035, to prevent unintended triggering of income tax liability due to such exchanges. Thus, under Sec. 1035, the new contract may provide for different contractual provisions, as well as a different insurer.

The purpose of the protection extended under Rev. Rul. 79-335 was far more restrictive. It was intended to protect taxpayers who had purchased deferred variable annuities in reliance on the IRS's previous position as expressed in Rev. Rul. 70-143. This protection was accorded to Contract One in letter Ruling 9346002. The contract owner's decision to exchange Contract One for Contract Two was made well after the "effective date" of Rev. Rul. 79-335.

* S corporation could be a CRUT donor

In Letter Ruling 9340043,(129) a wholly owned S corporation contributed a 78% limited partnership interest to a charitable remainder unitrust (CRUT). Prior to the contribution, the appreciated inventory, cash and receivables were distributed by the partnership to the S corporation and the other partners. Subsequent to the contribution, the partnership sold its highly appreciated assets to a third party. The IRS ruled that the S corporation was a valid contributor to a CRUT and that the CRUT was not taxable on its share of the partnership's gain.

Critique: This ruling illustrates a creative way to defer (and possibly avoid) income tax on built-in gains of S corporations. The IRS recognized that Sec. 664 does not restrict CRUTs to individuals. The charitable deduction flows through to the S shareholders. Caution must be exercised with respect to the possibility of a bargain sale (if the corporation is relieved of liabilities) and unrelated business income.

* Rulings on QSSTs

The IRS has issued a number of rulings concerning qualified subchapter S trusts (QSSTs) under Sec. 1361, including the following:

* In Letter Ruling 9319020,(130) the IRS ruled that a beneficiary's son's receipt of a durable power of attorney from an S corporation allowed him to make the appropriate elections under Secs. 1361(d)(2) and 1362(d)(2). The taxpayer represented that state law required the son to exercise his power on behalf of the beneficiary in the same manner as a similarly situated trustee, custodian or guardian.

* In Letter Ruling 9315030,(131) a testamentary trust was established for the life of the decedent's husband. There were no requirements for annual income distributions or for undistributed income to be distributed to the husband's estate at death. The IRS concluded that the trust could make a valid QSST election, assuming that:

--the trustee distributed all income currently for the duration of the beneficiary's life;

--state law entitled the beneficiary's estate to any undistributed income at the time of death and the trustee intended to pay such undistributed income to the beneficiary's estate; and

--the trust instrument prohibited principal distributions to any person other than the income beneficiary during his lifetime.

* In Rev. Rul. 93-79,(132) a trust participated in an S election filed on Mar. 15, 1992. The trust qualified as a QSST, except that a portion of its corpus could be distributed to a person other than the current income beneficiary. In January 1993, the beneficiaries executed a trust agreement reforming the trust instrument to restrict corpus distributions to the current income beneficiary for the duration of his life. They then obtained a court order retroactively applying the reformation.

The IRS invalidated the initial S election because the trust was not qualified at that time. Citing American Nurseryman Publishing Co.,(133) the IRS refused to be bound by the retroactive alteration of the trust agreement. In so ruling, the IRS rejected the Ninth Circuit's decision in Flitcroft.(134) However, the IRS left open the potential for retroactive interpretation and construction of actions that do not alter amend a trust agreement.

* In Rev. Rul. 93-31,(135) an S shareholder transferred his shares to a trust. B and C were the named beneficiaries; under the instrument, their interests were to be maintained as separate shares in the same manner as if separate trusts had been created. However, the trustee was authorized to distribute all or a portion of the trust corpus to B if necessary (after considering B's other income) for health, education, support or maintenance. B's individual income was so substantial that the likelihood of distributions was extremely remote. Nonetheless, the IRs ruled that the trust failed QSST status under Sec. 1361(d)(3)(A)(ii).

Planning hints: Document drafters should take care to avoid even a remote possibility of distributions to anyone other than the current income beneficiary during that beneficiary's life.

* In Letter Ruling 9349009,(136) the taxpayer sought to have S corporation distributions to QSSTs characterized as corpus for fiduciary accounting purposes. The plan involved distributing cash to all shareholders in proportion to their stock ownership in exchange for stock. Citing Rev. Ruls. 92-84(137) and 72-471,(138) the IRS ruled that the redemptive distributions were distributions to the beneficiaries for tax purposes, even though they constituted corpus to the recipient QSSTs.

Planning hints: Parents often resent the Sec. 1361 requirement that QSSTs currently distribute all accounting income to minor children and spendthrifts. This ruling provides a road map to allow at least one significant S corporation distribution to be made without placing the proceeds in the QSST beneficiary's hands.

* Contrary to numerous past rulings,(139) the IRS has changed its position of issuing unqualified rulings of grantor trust status when an instrument provides the grantor with a Sec. 675(4) substitution power. Recently, in Letter Rulings 9335028,(140) 9352004(141) and 9352007,(142) the IRS premised its grantor trust ruling on whether the facts and circumstances demonstrate that the substitution power is held in a nonfiduciary capacity.

Critique: Since "facts and circumstances" are to be determined on examination by the district director, the IRS National Office now has created a substantial uncertainty by qualifying trusts as S shareholders under the grantor trust rules. Unfortunately, the rulings give no indication of which facts are relevant to this determination beyond the document's four corners.

Generation-Skipping Transfer Tax 

* Rulings on grandfathered GST trusts.

* QTIP partition allowed reverse QTIP election and zero GST inclusion ratio.

* Misallocation of GST exemption did not trigger automatic application rules.

* Extension of time granted to make reverse QTIP election.

* Letter rulings on grandfathered status

Section 1422(a) of the Tax Reform Act of 1986 (TRA) generally provides that Chapter 13 only applies to generation-skipping transfers (GSTs) occurring after Oct. 22, 1986. The following letter rulings issued during the past year concern whether certain actions taken with respect to grandfathered trusts will result in a loss of this exemption.

* In Letter Ruling 9334030,(143) a grandfathered trust had both a corporate and an individual trustee. Neither trustee had discretion over income and principal distributions. The IRS concluded that proposed trust instrument modifications expanding the class of family members who could serve as individual trustees would not result in a loss of grandfathered status. Since there was no trustee discretion over the amount and timing of distributions, the modifications would not change the "quality, value, or timing of beneficial interests, rights or expectancies provided under the terms of the original trust."

Similarly, in Letter Ruling 9352013,(144) only the corporate trustee could exercise discretion over income and principal distributions. The IRS held that grandfathered GST exemption status would not be lost on modification of the trust to add a grandson (a trust beneficiary) as a co-trustee.

A third letter ruling, Letter Ruling 9406033,(145) allowed a similar modification, even though the individual trustees participated in all trust decisions. The controlling factor was that the trust instrument's dispositive provisions were fixed and the trustees possessed no discretionary authority to vary from them. Several other rulings with varying facts also permitted trustee changes.(146)

* If a decedent, prior to death, was not adjudicated incompetent by a court, Regs. Sec. 26.2601-1(b)(3)(iii) directs that the decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, include a qualified physician's certification that the testator was incompetent from Oct. 22, 1986 until death. In Letter Ruling 9335004,(147) the IRS ruled that the late filing of the certification did not invalidate the grandfathered exemption when the decedent's physician and records were readily available to provide support for the state of the decedent's mental condition during the transition period.

* In Letter Ruling 9340027,(148) the decedent had created a revocable trust in 1950. Income was distributable to the decedent for life; at her death, the corpus passed to her children. The share of a predeceased child went to that child's issue on attaining age 21. In 1983, the decedent executed a durable power of attorney empowering her attorney-in-fact to execute instruments necessary to clarify or correct technical or administrative provisions of the trust, but not to revoke, amend or modify the trust.

Prior to Oct. 22, 1986, the decedent became mentally incompetent and remained so until her death in 1992. Within nine months of death, her children proposed to execute qualified disclaimers of their remainder interests. The IRS concluded that the trust was exempt from Chapter 13 and that the qualified disclaimers resulted in remainder distributions to the grandchildren free of GST tax.

* In Letter Ruling 9318019,(149) the IRS ruled that proposed modifications to change the state of legal situs of a trust and to name a successor corporate trustee would not cause the trust to lose its GST exemption. However, it declined to rule on the Federal income, estate or GST tax consequences of a proposed amendment to the trust instrument allowing the original grantor to reacquire the trust corpus and substitute for it property of equal value.

* In Letter Ruling 9348029,(150) two identical vocable trusts (Trusts A and B) were created for each of the grantor's two childrne. On a child's death, each trust was to be divided into three identical trusts for each of the child's three children. The IRS ruled that the separate grandchildren's trusts created under Trust A could be merged with the identical separate trusts created under Trust B without loss of the GST exemption. Other rulings permitting mergers of grandfathered trusts included Letter Rulings 9330031(151) and 9339008.(152)

* In Letter Ruling 9324015,(153) in 1953, the decedent's will created a testamentary trust under which one-third of the income was payable to each of his son and daughter and one-sixth to their respective children as a class. The IRS ruled that the testamentary trust could be divided into two trusts (one each for the son's and daughter's family lines) without loss of grandfathered status. This result obtained despite the fact that, in effecting the partition, the trustee would allocate the trust's real property on a non-pro rata basis between the successor trusts based on net values, which would be offset by cash contributions to the other trust to equalize value. All other assets and all liabilities would be allocated between the trusts on a pro rata basis.

* In Letter Ruling 9324014,(154) two identical testamentary trusts were created, one each for the decedent's daughter and son. The decedent's surviving spouse received an income interest in each trust, together with a noncumulative five-and-five withdrawal power. Thus, 5% of each trust was includible in the spouse's estate under Sec. 2041. The trustees and beneficiaries proposed to partition each trust. In each instance, one of the two successor trusts would be equal in value to the fraction of the trust includible in the spouse's estate. The second successor trust would hold the remaining value.

Assets would be allocated between the trusts based on fair market value (FMV), pursuant to an authorization granted to the trustee in the governing instruments. The IRS ruled that each of the trusts was to be treated as a separate trust for purposes of the GST tax. The smaller two trusts were deemed created by the surviving spouse because they were includible in her estate. The IRS also ruled that the GST exemption was unaffected by the partition.

* In Letter Ruling 9347019,(155) the grantor funded a revocable trust with closely held stock. The trust became irrevocable in 1985. Income was distributable equally to the grantor's niece and two nephews. On their deaths, their shares were payable to their issue. If a beneficiary died without issue, his share was divided among the remaining beneficiaries or their issue per stirpes. No principal was distributable until the death of the last surviving primary beneficiary.

In 1993, the trust sold the business and held only cash and marketable securities. To enable each primary beneficiary to pursue different investment options, the trust was partitioned into three identical trusts, one for the benefit of each primary beneficiary and his issue. The successor trusts were identical in terms to the original trust. The IRS ruled that the quality and timing of each beneficiary's interest had not changed by virtue of the partition and that the successor trusts retained their GST exemption.

* In Letter Ruling 9404018,(156) the donor created a revocable inter vivos trust for the benefit of his spouse, his daughter and her issue. The trust became irrevocable at his death in 1971. The trust instrument granted the daughter a testamentary limited power of appointment exercisable in favor of her issue, her children's issue, and their spouses. The daughter exercised her limited power and directed that the assets be distributed to a new family trust that would pay income to her children for life. The principal would be distributable per stirpes among her issue 21 years after the death of the last of the six of her seven children living at the time of the donor's death.

The IRS ruled that the exercise did not change the quality or timing of any beneficiary's interest vis-a-vis the donor's trust and that the new family trust, to the extent funded with assets distributed from the donor's trust, retained its GST exemption. A different result would have occurred had the new trust terminated 21 years after the death of all of the decedent's children. In that instance, the timing of distribution would have been changed and the entire trust tainted.

* In Letter Ruling 9335027,(157) an exchange of assets between two grandfathered trusts was permitted.

* QTIP partition allows reverse QTIP election and zero inclusion ratio

In Letter Ruling 9331004,(158) prior to filing the Federal estate tax return, the executor proposed to partition a marital trust into two separate (but identical) trusts. Trust A would be funded with assets equal to the decedent's unused GST tax exemption. Trust B would receive the remaining marital trust assets. After the partition, a qualified terminable interest property (QTIP) election would be made for both trusts and the decedent's unused GST tax exemption would be allocated to Trust A. A reverse QTIP election would then be made for Trust B. The IRS ruled that the decedent's unused GST tax exemption could be allocated to Trust A, which would have a GST inclusion ratio of zero. Trust B would have a GST inclusion ratio of one.

Critique: The IRS noted that the legislative history behind the 1988 amendment to Sec. 2652(a)(3) indicated that a single trust may be divided into two trusts so that a reverse QTIP election may be made with respect to all of the assets of one of the successor trusts. For this technique to work, however, the partition must occur prior to filing the decedent's Federal estate tax return containing the QTIP and reverse QTIP elections. Similar results occurred in Letter Rulings 9317007(159) and 9332011.(160)

* Inadvertent misallocation of exemption does not trigger automatic allocation

In Letter Ruling 9324029,(161) the decedent bequeathed her estate to a grandfathered family trust created under her husband's will. Under Sec. 2654(b)(1), the family trust portion attributable to her additions was treated as a separate trust for Chapter 13 purposes. After making "mandatory" allocations of $330,000 of the exemption to various grandchildren's bequests, the executor allocated the remaining GST exemption to the family trust.

Subsequently, it was noted that the $330,000 bequests were not direct skips, because they were covered by the transitional $2 million grandchild exemption provided by TRA Section 1433(b)(3)(A). The IRS permitted the entire GST exemption (without the $330,000 reduction) to be allocated to the family trust. The executor substantially complied with the procedures necessary to effectively allocate the unused exemption. The IRS concluded that allocation to the grandchildren's bequests was based on a mistake of law.

* Estate granted extension of time to make reverse QTIP election

In Letter Rulings 9321044(162) and 9321045,(163) under the decedent's will, the executor was supposed to establish a separate marital trust in an amount equal to the remaining portion of the GST tax exemption. The executor claimed a marital deduction for the trust on Schedule M of the estate tax return and allocated the remaining GST exemption to that trust on Schedule R. However, the executor failed to check the box on Schedule R indicating that a Sec. 2652(a)(3) reverse QTIP election was being made for the trust. In each ruling, the IRS granted the estate an extension of time to make the election, finding that such relief was appropriate under Regs. Sec. 301.9100-1(a).

Chapter 14 Special Valuation Rules

* Recapitalization did not trigger special valuation rules.

* Rulings on QPRTs.

* Special valuation rules did not apply to gifts of interests in a family partnership.

* Rulings on GRATs.

* Special valuation not triggered by grant of compensation program options.

* Receipt of employment agreement and voting stock resulted in special valuation.

* Equity restructuring not subject to Sec. 2701

The IRS issued a number of rulings on partnership and corporate equity transactions that were not subject to the Sec. 2701 special valuation rules, including:

* In Letter Ruling 9414012,(164) shareholders exchanged their voting stock for voting and nonvoting stock. Other than voting rights, the two stock classes were identical. Shareholders received one share of voting stock and five shares of nonvoting stock for every old share of voting stock exchanged. Subsequently, the controlling shareholder planned to transfer nonvoting stock to family members while retaining his voting stock. Citing Regs. Sec. 25.2701-1(c)(3), the IRS concluded that neither the recapitalization nor the proposed nonvoting stock gifts were subject to Sec. 2701, because the stock classes were identical except for voting rights.

* In Letter Ruling 9427023,(165) a grandparent owned a corporation that owned a general partnership interest in a family partnership. A trust for the benefit of the grandparent's descendants owned a limited partnership interest. Both the general and limited partners contributed additional capital to the partnership. The IRS concluded that Sec. 2701 did not apply to the capital contributions because the partners owned the same interests both before and after the transaction.

* In Letter Ruling 9352012,(166) an exchange of preferred stock in the merger of two corporations was not subject to either Sec. 2701 or 2704. The preferred stock issued was almost identical to the stock surrendered.

* Rulings concerning QPRTs

The IRS addressed a variety of issues pertaining to Sec. 2702 qualified personal residence trusts (QPRTs), such as the following:

* In Letter Ruling 9249014,(167) the taxpayer owned a penthouse in a cooperative apartment building. Since the cooperative association would not permit transfer of legal title to a trust, the taxpayer instead transferred to the trust beneficial title to the cooperative stock and proprietary lease, and continued to hold legal title as a nominee, with the right to reside in the apartment for 10 years. The taxpayer also retained the right to enter into an FMV (determined by appraisal) lease on expiration of the use term. A friend lived in the apartment with the taxpayer, but did not own an interest in it. The IRS ruled that the trust was a QPRT. Citing Rev. Rul. 70-155,(168) the IRS also concluded that the value of the apartment would be excluded from the taxpayer's estate if death occurred after the 10-year term and the taxpayer actually paid fair market rent after that term. Similar results occurred in Letter Ruling 9433016.(169)

* In Letter Ruling 9343034,(170) an individual owned a 1.6-acre parcel of land with a house on it and a second, vacant 3.4-acre parcel of land adjoining the first parcel. For purposes of meeting Regs. Sec. 25.2702-5(c), the IRS ruled that distinct parcels of land can constitute "adjacent land." However, the IRS would not rule on the factual issues of whether the properties involved were in excess of what is reasonably appropriate for residential purposes or whether the trust was a QPRT.

* In Letter Ruling 9328040,(171) a vacation house, including a guest house provided without remuneration to others, qualified as a QPRT.

* In Letter Ruling 9425028,(172) a rental and purchase option did not violate the QPRT rules, since the agreement provided for FMV terms determined at the time of exercise.

Planning hints: Caution should be exercised with respect to the retained right to rent a residence after the use term expires. The cash consideration is only one element that could be relevant in determining whether the retained right can result in estate inclusion under Sec. 2036(a). If the other terms (e.g., sharing of taxes, insurance, utilities, maintenance; leasehold improvements; etc.) differ from the norm, the cash consideration may require adjustment. Similarly, payment and other purchase provisions could be relevant in determining whether a purchase right is for FMV.

* In Letter Ruling 9315010,(173) on creating a QPRT, the taxpayer entered into an agreement to pay to the trustee all property taxes, maintenance, repairs, remodeling, homeowner's insurance and mortgage payments during the trust term. The IRS concluded that the agreement conformed with the Regs. Sec. 25.2702-5(c)(ii)(A)(1)(i) provision permitting additions of cash to the trust. However, the IRS did not address the agreement's gift tax implications. Had those implications been addressed, the grantor's payment of mortgage principal and, possibly, leasehold improvements, likely would have been considered an additional taxable gift.

* Family partnership interest gifts not subject to Sec. 2701

In Letter Ruling 9415007,(174) a father was the general partner in a family partnership. He also owned a portion of the limited partnership interests. The general and limited partnership interests shared partnership income, gains, losses and other items proportionally. Although the father controlled the partnership and its distributions, the IRS ruled that Sec. 2701 did not apply because his control affected all partners in proportion to their partnership interests.

Planning hints: It is important to avoid giving the general partner in a family partnership discretion to make distributions other than those proportionately based on ownership. Byrum(175) generally prevents inclusion in a donorgeneral partner's estate because fiduciary responsibility governs his control over distribution timing and amount. However, the partnership agreement can override this fiduciary responsibility if the general partner is given excessive discretion and the ability to treat differently otherwise identical interests. Excessive control also can result in the assertion of an incomplete gift and can raise additional issues under Sec. 2701.

* Trusts qualify as GRATs

The IRS has approved a variety of provisions as acceptable in grantor retained annuity trusts (GRATs).(176) Examples included:

* In Letter Rulings 9352004(177) and 9352007,(178) the IRS accepted provisions requiring additional distributions to the extent needed by the grantor under Sec. 671 to pay the tax on trust income in excess of the annuity amount. The IRS stated that such a provision simply prevents the grantor "from paying income tax on the portion of trust property which, in a true economic sense, has been given away." No gift tax discount was allowed for the potential increased distributions.

Planning hints: In most cases, GRATs will be treated as wholly grantor trusts under Sec. 677 and/or 673. Thus, the grantor will be taxed on the entire trust income, regardless of its relationship to the retained annuity. Grantors take significant economic risk absent a provision for additional distributions to pay income tax. This risk becomes most acute in situations involving a GRAT owning S stock, because the grantor is taxable on the trust's allocable share of S corporation income. The risk also becomes significant for longer-term GRATs, because of the potential for inflation and growth to significantly increase GRAT income relative to the retained annuity.

However, absent the additional distribution requirement, the grantor would be required to fund the potentially increased income tax burden from other funds, thereby reducing his taxable estate. This trade-off should be addressed by taxpayers and their advisers.

* In Letter Ruling 9351005,(179) the IRS held that no gain or loss would be triggered if the annuity was paid in kind rather than in cash, assuming the trust is a wholly grantor trust under Sec. 671.

Planning hints: As stated above, most GRATs are grantor trusts. However, if a GRAT will hold S stock or the grantor anticipates that the annuity may be paid in kind with appreciated property, advisers will want to make certain that the trust is wholly grantor. Accordingly, it is common to include a power of substitution in a nonfiduciary capacity under Sec. 675(4). Unfortunately, the IRS is now "hedging" its rulings as to the effectiveness of the substitution power.(180)

* In Letter Ruling 9352017,(181) the taxpayer created six GRATs, each with a different annuity percentage. Each provided for annuity percentages that increased annually by up to 20% over the preceding year. The IRS ruled that the GRATs qualified under Sec. 2702.

Planning hints: Letter Ruling 9352017 illustrates a taxpayer's attempts to structure a series of GRATs, with differing payouts and terms, to accomplish specific objectives based on the different assets used to fund the trusts. Advisers should consider the possibility of using multiple trusts to accomplish a variety of objectives. For example, creating two trusts with different length annuities permits the taxpayer to "hedge bets" concerning life expectancies. The taxpayer may outlive the shorter term (accomplishing one GRAT's objective), but die before the longer term concludes. Had the taxpayer created a single, long-term trust, none of the planning objectives would be accomplished. Of course, the initial and ongoing administrative costs must be considered.

* Compensation program options not subject to Sec. 2701 or 2703

In Letter Ruling 9350016,(182) an employee and his children owned 45% of a publicly traded corporation. The corporation adopted a stock option program for the benefit of its directors, officers and employees. Under the program, the option price per share could not be less than the share's FMV on the grant date. In the employee's case, the options carried a purchase price of 110%--115% of stock value at the grant date. Each option was exercisable between the six-month and five-year anniversaries of the date of the grant. The options were exercisable in all events and were not contingent on continued employment.

The employee proposed to transfer the options to an irrevocable trust for his children's benefit. The IRS concluded that neither Sec. 2701 nor 2703 applied to the options.

Critique: The Sec. 2701 conclusion was based on the IRS's determination that the options were not "equity interests" as contemplated by Regs. Sec. 25.2701-1(a)(1). An apparent rationale was that the options were "under water" at the time of transfer, making it problematic as to whether they would be exercised. In the meantime, neither the employee nor the trust would have voting or dividend rights.

The Sec. 2703 conclusion is more interesting. The IRS ruled that that section did not apply because the options were (1) a bona fide business arrangement, (2) not a device to transfer property to the employee's family for less than full consideration and (3) comparable to similar arrangements entered into by persons in arm's-length transactions.

These three conclusions are necessary to comply with the Sec. 2703(b) staturory exception. Given the inherently factual and subjective nature of these requirements, the authors are pleased that the IRS National Office even agreed to rule on the issue. Clearly, the IRS was impressed by the fact of public ownership (despite 45% family control) and the option plan's inclusion of nonfamily directors and employees. It is also clear that the plan terms (particularly the five-year term) are common.

Planning hints: Unfortunately, advisers to typical closely held businesses cannot gain much comfort from this ruling. It appears that substantial public ownership, combined with the apparent substantial participation of nonfamily employees, swayed the IRS to conclude favorably. The authors urge caution in issuing options in private business settings. If Sec. 2703 applies, substantial unexpected gift taxes may result.

* Employment agreement and voting stock transfer trigger Sec. 2704

The facts of Letter Ruling 9352001 were discussed in Part I of this article.(183) Acting under a power of attorney, the decedent's child transferred $3.21 million of the decedent's property to the decedent's wholly owned corporation. Concurrently, the child recapitalized the corporation and issued 10,000 shares of nonvoting common stock to the decedent. The decedent surrendered the voting stock. The corporation then executed an employment agreement with the child's spouse. Under that agreement, the spouse received two shares of voting common stock, which were the only outstanding voting shares.

Based on the spouse's lack of any significant prior experience and expected nonperformance of significant future services, the IRS concluded that the employment agreement was not arm's length. Accordingly, the transfer of the two shares and the compensation under the agreement were taxable gifts by the decedent. The IRS also concluded that there was a lapse of a liquidation right under Sec. 2704. That gift was measured as the difference between (1) the value of the decedent's nonvoting stock before the employment agreement (i.e., when the decedent had control) and (2) the value of his stock after the control was shifted through the issuance of the voting stock.

Critique: The IRS's reasoning concerning Sec. 2704 is quite circuitous. First, the IRS noted that, immediately after the recapitalization, the decedent was the sole shareholder (even though only nonvoting stock existed at that time). Thus, he could have liquidated the corporation. Second, the IRS concluded that this sole ownership constituted a liquidation right within the meaning of Sec. 2704. Third, the IRS focused on the employment agreement. Since the agreement provided for excessive compensation, the IRS concluded that it should be viewed as an "equity" interest. Fourth, that equity interest was "senior" to the common stock held by the decedent because the compensation (recharacterized as a dividend) was payable before any common stock dividends. Fifth, the voting stock transferred under the agreement caused a "lapse" of the decedent's unilateral right to liquidate the corporation. That lapse resulted in a taxable gift.

Perhaps the IRS has forgotten the repeal of Sec. 2036(c)! Its attempts to characterize employment agreements as "equity interests" were instrumental to that section's ultimate demise. The logic in this ruling is confused. Sec. 2704 does not require findings on the seniority of equity interests; rather, that concept is in Sec. 2701.

This ruling appears to be yet another "back door" attack on minority interest discounts. The apparent effect of the IRS's rationale would be to apply Sec. 2704 even to a single class of stock corporation if a family member possesses voting control and transfers sufficient stock to give up that control. The result is a "lapse" of control with respect to any remaining stock. The IRS should reread Rev. Rul. 93-12.(184)

One interesting aspect of the ruling is the suggestion that a single transaction can be subject to both Chapters 12 and 14. In this ruling, gift tax resulted directly from the application of the "normal" Chapter 12 gift tax rules to the nonarm's-length compensation agreement and from the application of Chapter 14 to the lapse induced "transfer" of value attributable to the retained stock.

Miscellaneous Estate Tax Matters

* Undistributed interest in a profit-sharing trust was includible in decedent's estate.

* Resulting trust arose from improper transfer to life tenant.

* Proceeds of settlement of tort litigation instituted after death were includible in estate.

* Estate could not revoke prior QTIP election.

* Estate tax valuation of gifts was not barred by gift tax statute of limitations.

* Undistributed interest in parent's profit-sharing trust deemed includible

In Stack,(185) the decedent possessed at death an undivided one-third interest in her deceased father's profit-sharing account from his former employer. Her interest arose pursuant to a beneficiary designation in favor of herself "or her issue per stirpes." Under the profit-sharing trust agreement, the interest was payable either in a lump sum or over the lesser of 10 years or the beneficiary's life expectancy. The trustee elected an installment payout and a substantial portion of the account remained undistributed at the daughter's death.

The district court held that the daughter possessed a full vested interest, rather than merely a life estate, in the profit-sharing account. Thus, the entire one-third interest was includible in her gross estate. The Eighth Circuit affirmed this result.

Critique: The estate argued that the decedent had received merely a life estate, with the balance of the account passing to her issue by operaion of the trust agreement. According to the estate, it was a terminable interest, no part of which was includible in the decedent's gross estate. Its position relied on the "or her issue per stirpes" language in the beneficiary designation.

The district court had noted that the trustee was authorized to pay the account balance either in a lump sum or installments and that there were no limitations on its choice of payment options. Thus, the decedent could have received the entire balance shortly after her father's death. Such a result was inconsistent with possession of only a life interest.

Both the district court and the Eighth Circuit relied on Higgins, quoting the Michigan Supreme Court: "where the right to receive the gift is immediate and only the time of payment is postponed, the gift vests immediately."(186). Under this principle, the trustee's election to spread payments over a period of years did not change the fact that the profit-sharing interest vested in the daughter immediately.

The Eighth Circuit's holding was further bolstered by the fact that the maximum installment payout period was 10 years, less than the daughter's life expectancy. Had the daughter lived her normal life expectancy, the entire profit-sharing interest would have been paid out to her. That possible result was inconsistent with a mere life interest in property.

Planning hints: The father could have avoided estate tax at the daughter's level by distributing the profit-sharing account balance to a trust in which the daughter's interest was limited to net income. The trustee could have been given a power to distribute corpus based on an ascertainable standard. Of course, this approach could have dramatically reduced the distributions available to the daughter, as well as raised possible GST issues. Notwithstanding the result in Stack, the estate presumably will obtain some relief from the prior transfer tax credit provisions of the Code.

* Trust deemed created due to improper transfer to life tenant

In Letter Ruling 9338011,(187) the decedent was the beneficiary of a trust established by her sister's will. She was entitled to income for life and, on her death, the principal was distributable to her children. Several years after the sister's death, the sole individual trustee, tired of his administrative duties, unilaterally transferred the trust assets into the decedent's brokerage account without the decedent's knowledge or approval. The IRS ruled that a resulting trust was created and the trust assets were not includible in her estate.

Critique: As a result of the trustee's actions, the decedent held in her own name assets that previously had been held by the trust. In the absence of a "resulting trust," these assets would have been includible in her estate under Sec. 2031. Generally, a resulting trust is equitable relief arising when an individual clearly holds property in trust for others, but no express trust relationship has been established.

Citing Burleson,(188) the IRS ruled for the taxpayer in light of the following facts: First, the sister's trust agreement clearly indicated that the decedent's interest was limited to a life estate. Second, the decedent was initially unaware of the trustee's actions with respect to the trust property. Third, on discovering the error, the decedent ensured that the assets were segregated and accounted for separately from her own. Fourth, the decedent received only the income from those assets during her lifetime. All of her actions with respect to the "trust assets" were consistent with the limitation of her interest to a life estate.

Planning hints: Trustees should not distribute assets beyond that which is allowed by the trust instrument. Numerous problems can result, including unnecessary estate inclusion and negligence assertions by beneficiaries.

* Tort litigation settlement received after death includible in estate

In Rubenstein,(189) the decedent owned two limited partnership interests. For several years preceding his death, the decedent and his agents had been in controversy with the managing partner. Shortly before death, assertions had been made that the managing partner mismanaged the properties and misappropriated partnership funds. On at least one occasion, the managing partner had offered to purchase the decedent's interests in an attempt to settle all disputes. While the decedent had rebuffed these offers, his sister, who held identical interests, sold them for $1.5 million. After the decedent's death, his executors initiated a civil action against the managing partner.

In the decedent's estate tax return, filed in May 1985, the partnership interests were valued at $1.5 million. Seven moths later, a final settlement was reached under which the estate received $3.375 million for the partnership interests. A district court held that the full settlement was includible in the gross estate.

Critique: the estate argued that the settlement was a postdeath event and that the sole tangible measure of the partnership's date-of-death value was the amount received by the decedent's sister for the sale of her interests. While acknowledging that date-of-death value was the appropriate measure for estate tax purposes, the court concluded that the sister's sales price was not indicative of that value. Citing Simmons,(190) the court noted that later-discovered facts can play a role in ascertaining the value of an estate asset.

In Rubenstein, the executors knew that a claim existed against the general partner. The fact that the decedent had turned down an offer similar to that accepted by his sister was evidence that he believed his likely recourse against the general partner was greater than $1.5 million. In addition, the Eighth Circuit noted that there was no evidence demonstrating that the decedent's sister was privy to the potential claims against the managing partner. Thus, her decision to sell very possibly was made without knowledge of all facts. In holding for the IRS, the court quoted the Fifth Circuit in Simmons that "ignorance of the value of an asset at the time of a decedent's death does not justify treating the asset as valueless, any more than ignorance of the existence of an asset discovered after the date of death, justifies exclusion of the asset from the decedent's gross estate."(191)

Planning hints: It appears that the executors in Rubenstein committed a tactical error. They were aware of their claim against the general partner, and of their plan to pursue a civil action on that claim. Instead of attempting to develop an estimated estate tax value for that contingency, they chose to ignore it altogether. As a result, the court had no other measure of the claim's value than the actual settlement proceeds. It may have been more advantageous to have set a relatively low estimated value on the claim and then fight the appropriateness of that valuation in court. For example, in Davis,(192) only a fraction of the ultimate settlement proceeds was taxable based on three discounts (45% for costs of litigation, 5% for hazards of litigation and 10% for the delay in receiving the funds).

* Estate's attempt to revoke a prior QTIP election held invalid

In Cavenaugh,(193) Mrs. Cavenaugh, who had predeceased her husband, hd bequeathed her one-half community share of the spousal estate to a family trust. Under its terms, her surviving spouse was to receive income for life, payable "monthly or at the end of such other periods as may be necessary or desirable in the discretion of the trustee."(194) The will also stated her desire that his interest not be construed to confer any interest greater than that of a life tenant or "to cause the principal or corpus ... to be includible in" his estate for either Federal or state transfer tax purposes.(195) Her estate tax return elected QTIP status with respect to the income interests; as a result, none of her unified credit was used. The Tax Court concluded that her QTIP election was valid and that the family trust property was includible in her husband's estate pursuant to Sec. 2044.

Critique: Mr. Cavenaugh's executor attempted to mitigate the increased transfer taxes generated by the unwise QTIP election. The executor first claimed that the decedent's family trust interest was less than a qualified income interest within the meaning of Sec. 2056(b)(7)(B)(ii). Specifically, the trustee's discretion to make income distributions "at the end of such periods as may be necessary or desirable" was argued to be an authorization to make payments less frequently than annually. The Tax Court disagreed. It stated that Mr. Cavenaugh's description of her husband's interest as a life tenancy indicated an intent that the husband possess the equivalent of a qualified income interest.

Second, the executor argued that the QTIP election was improper, as Mrs. Cavenaugh had expressly directed that her husband not possess an interest that would result in the inclusion of trust principal in his gross estate. Again, the Tax Court disagreed. It noted that Mrs. Cavenaugh's will was executed in 1980, one year before the enactment of the QTIP provisions. The Tax Court concluded that the language's intent was to reinforce Mrs. Cavenaugh's wish that her husband's interest be limited to a life tenancy--an interest that would qualify for the marital deduction at the time of will execution only if coupled with a general power of appointment. The court found that the QTIP election was valid, since it did not expand Mr. Cavenaugh's interest beyond a life tenancy, and that the property was includible in his estate pursuant to Sec. 2044.

* Gift tax statute of limitations no bar to estate tax valuation

In Evanson,(196) the Eighth Circuit reversed a district court and held that the tolling of the Sec. 2504(c) statute of limitations for gift tax purposes does not bar the IRS from changing the adjusted gift base for estate tax purposes. The earlier gift tax return used the unified transfer tax credit and no gift tax was paid. Following prior court rulings, the Eighth Circuit noted that, by its own terms, Sec. 2504(c) applies to valuation for gift tax purposes and does not toll the statute of limitations for estate tax purposes.(197)

(112)IRS Letter Ruling 9333028 (5/21/93).

(113)Janet M. Frane, 998 F2d 567 (8th Cir. 1993)(72 AFTR2d 93-5268, 93-2 USTC [paragraph]50,386), aff'g in part and rev'g in part 98 TC 341 (1992).

(114)See S. Rep. No. 96-1000, 96th Cong. 2d Sess. 25 (1980).

(115)IRS Letter Ruling 9326043 (4/2/93).

(116)See Sec. 167(a)(1) and Regs. Sec. 1.167(a)-3.

(117)Rev. Ruls. 54-409, 1954-2 CB 174; 60-226, 1960-1 CB 26.

(118)IRS Letter Ruling 9325029 (3/25/93).

(119)Rev. Rul. 71-265, 1971-1 CB 223.

(120)IRS Letter Ruling 9319005 (2/4/93).

(121)Rev. Rul. 73-524, 1973-2 CB 307.

(122)IRS Letter Ruling 9338020 (6/24/93).

(123)H.M. Silverstein, 419 F2d 999 (7th Cir. 1969)(24 AFTR2d 69-5972, 70-1 USTC [paragraph]9109), cert. denied.

(124)IRS Letter Ruling 9411033 (12/17/93).

(125)Rev. Rul. 69-486, 1969-2 CB 159.

(126)IRS Letter Ruling (TAM) 9346002 (7/26/93).

(127)Rev. Rul. 70-143, 1970-1 CB 167.

(128)Rev. Rul. 79-335, 1979-2 CB 292.

(129)IRS Letter Ruling 9340043 (7/8/93).

(130)IRS Letter Ruling 9319020 (2/9/93).

(131)IRS Letter Ruling 9315030 (1/19/93).

(132)Rev. Rul. 93-79, 1993-2 CB 269.

(133)American Nurseryman Publishing Co., 75 TC 271 (1980), aff'd in an unpublished opinion, 673 F2d 1333 (7th Cir. 1982). See also M.T. Straight Trust, 24 TC 69 (1955), aff'd, 245 F2d 327 (8th Cir. 1957)(51 AFTR 552, 57-2 USTC [paragraph]9727.

(134)Will Flitcroft, 328 F2d 449 (9th Cir. 1964) (13 AFTR2d 825, 64-1 USTC [paragraph]9294).

(135)Rev. Rul. 93-31, 1993-1 CB 1986.

(136)IRS Letter Ruling 9349009 (9/9/93).

(137)Rev. Rul. 92-84, 1992-2 CB 216.

(138)Rev. Rul. 72-471, 1972-2 CB 201.

(139)See IRS Letter Rulings 9037011 (6/14/90) and 9247024 (8/28/92).

(140)IRS Letter Ruling 9335028 (6/4/93).

(141)IRS Letter Ruling 9352004 (9/24/93).

(142)IRS Letter Ruling 9352007 (9/28/93).

(143)IRS Letter Ruling 9334030 (5/25/93).

(144)IRS Letter Ruling 9352013 (9/30/93).

(145)IRS Letter Ruling 9406033 (11/17/93).

(146)See IRS Letter Rulings 9345018, 9345021, 9345025 and 9345026 (all issued 8/12/93).

(147)IRS Letter Ruling 9335004 (5/18/93).

(148)IRS Letter Ruling 9340027 (6/30/93).

(149)IRS Letter Ruling 9318019 (2/4/93).

(150)IRS Letter Ruling 9348029 (9/3/93).

(151)IRS Letter Ruling 9330031 (5/4/93).

(152)IRS Letter Ruling 9339008 (6/23/93).

(153)IRS Letter Ruling 9324015 (3/19/93).

(154)IRS Letter Ruling 9324014 (3/19/93).

(155)IRS Letter Ruling 9347019 (8/27/93).

(156)IRS Letter Ruling 9404018 (10/27/93).

(157)IRS Letter Ruling 9335027 (6/4/93).

(158)IRS Letter Ruling 9331004 (4/23/93). See also IRS Letter Ruling 9327067 (4/12/93).

(159)IRS Letter Ruling 9317007 (1/15/93).

(160)IRS Letter Ruling 9332011 (5/11/93).

(161)IRS Letter Ruling 9324029 (3/23/93).

(162)IRS Letter Ruling 9321044 (2/25/93).

(163)IRS Letter Ruling 9321045 (2/25/93).

(164)IRS Letter Ruling 9414012 (12/28/93).

(165)IRS Letter Ruling 9427023 (4/11/94).

(166)IRS Letter Ruling 9352012 (9/29/93).

(167)IRS Letter Ruling 9249014 (9/4/92).

(168)Rev. Rul. 70-155, 1970-1 CB 189.

(169)IRS Letter Ruling 9433016 (5/18/94).

(170)IRS Letter Ruling 9343034 (8/3/93).

(171)IRS Letter Ruling 9328040 (4/21/93).

(172)IRS Letter Ruling 9425028 (3/28/94).

(173)IRS Letter Ruling 9315010 (1/13/93).

(174)IRS Letter Ruling 9415007 (1/12/94).

(175)Marian A. Byrum, 408 US 125 (1972) (30 AFTR2d 72-5811, 72-2 USTC [paragraph]12,859).

(176)See, e.g., IRS Letter Rulings 9345035 (8/13/93) and 9402011 (10/8/93).

(177)IRS Letter Ruling 9352004 (9/24/93).

(178)IRS Letter Ruling 9352007 (9/28/93).

(179)IRS Letter Ruling 9351005 (9/16/93).

(180)See the text accompanying notes 140-142.

(181)IRS Letter Ruling 9352017 (9/30/93).

(182)IRS Letter Ruling 9350016 (9/16/93).

(183)IRS Letter Ruling 9352001 (9/3/93). See Nager, Abbin and Carlson, "Significant Recent Developments in Estate Planning (Part I)," 25 The Tax Adviser 587 (Oct. 1994), at 589.

(184)Rev. Rul. 93-12, 1993-1 CB 202.

(185)Thomas L. Stack, DC Minn., 1993 (71 AFTR2d 93-2193, 93-1 USTC [paragraph]60,136), aff'd, 8th Cir., 1994 (73 AFTR2d [paragraph]94-908, 94-1 USTC [paragraph]60,167).

(186)First & American National Bank of Duluth v. Higgins. 293 NW 585 (Minn. 1940), at 594.

(187)IRS Letter Ruling 9338011 (6/22/93).

(188)Burleson v. McCrary, 753 SW2d 349 (Tenn. 1988).

(189)Sondra Rubenstein, 826 F Supp 448 (Fla. 1993) (72 AFTR2d 93-6721, 93-2 USTC [paragraph]60,143).

(190)Gordon Simmons, 346 F2d 213 (5th Cir. 1965) (15 AFTR2d 1430, 65-2 USTC [paragraph]12,321).

(191)Rubenstein, note 189, at 93-2 USTC 90,231, quoting from Simmons, id., at 65-2 USTC 97,113.

(192)Est. of Ethlyn Davis, TC Memo 1993-155.

(193)Est. of Herbert Cavenaugh, 100 TC 407 (1993).

(194)Id. at 411.

(195)Id.

(196)Carroll Evanson, 8th Cir., 1994 (74 AFTR2d 94-5326, 94-2 USTC [paragraph]60,174), rev'g DC N.D.

(197)See, e.g., Marc Alan Levin, 986 F2d 91 (4th Cir. 1993) (71 AFTR2d 93-2167, 93-1 USTC [paragraph]60,128), cert. denied.