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Slap in the face for aggressive tax planning.

The line between an aggressive tax plan and a sham has just become a lot thinner. A mother's attempt to cut her estate taxes by "selling" her home to her son and daughter-in-law while she continued to live there was recently ruled a facade by a federal court (Maxwell vs. Commr).

The facts: * Mrs. Maxwell, then 82 and ill with cancer, sold her home to her son and daughter-in-law for $270,000 in 1984. (She paid no capital gains tax because she opted for the one-time exclusion for the sale of a principal residence). * She forgave $20,000 of the purchase price when she sold the property (a tax-free gift), taking back a mortgage of $250,000 * She forgave an additional $20,000 of the mortgage in each of the two years before her death * She paid a monthly rent of $1,800, which coincidentally was approximately equal to the amount paid to her as interest on the mortgage. The children did, however, pay property taxes and insurance. * She forgave the rest of the mortgage in her will. * After her death in 1986, the children sold the home for $550,000. * In tax court, the children admitted that the intention was that the mortgage not be paid back.

The IRS's position was that because Maxwell lived in the house, she retained "possession and enjoyment" without receiving any valuable for it, and thus the full $550,000 should be included in her taxable estate.

Many tax lawyers believe that while this may have been a sharp strategy, the court should not have considered it a sham. Tax planning is legitimate absent fraud -- even learned judges have concluded that taxpayers have no patriotic duty to increase their taxes.

While it is unclear whether this case is an anomaly or the start of a trend, tax planners may become skittish of some of the most aggressive maneuvers. However, clients who want to dispose of the family homestead or other assets still have options. They should, however, review their estate plan with their tax advisors on how to proceed in light of this case.
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Title Annotation:homeowner loses court case in attempt to reduce estate taxes by selling property to son
Publication:Real Estate Weekly
Date:Oct 6, 1993
Words:350
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