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A close shave with the IRS.

In a recent Tax Court decision, Est. of D'Ambrosio, 105 TC No. 18 (1995), the court ruled that transfers that depend on the "bona fide sale exception" of Sec. 2036(a) must be adequately valued. This was defined as consideration sufficient so that the transferor's gross estate will not be depleted by the transaction.

Vaparo, Inc., a closely held corporation, was successfully recapitalized in 1983. As a result of the recapitalization and subsequent gift, the decedent ended up owning 470 shares of the company's preferred stock. In September 1987, when she was 80 years old, she sold the remainder interest in the shares to Vaparo for a private annuity valued at $1.32 million. The total value of the shares at this time was $2.35 million.

The decedent died in May 1990, after receiving total payments of $592,078. During this time, the decedent neither sold, relinquished nor otherwise disposed of her income interest. The executrix of the estate did not include any value of the stock or remainder interest in the gross estate. The executrix interpreted Sec. 2036(a) to allow for the removal of the entire value of property from an estate due to the sale of the property's remainder interest for a value equal to the remainder interest.

The court concluded that the decedent's transfer of the remainder interest, by an 80-year-old to a family-owned business in return for an annuity whose value was more than $1 million less than the value of the stock, constituted a testamentary transfer rather than a bona fide sale. The decedent did not receive full and adequate consideration for her stock, and the full value of the stock, less the value of the annuity, was includible in her taxable estate.
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Article Details
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Author:Haake, Daniel J.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Dec 1, 1995
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