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Federal gift tax: general.

900. Starting Point--What is the federal gift tax?

The federal gift tax is a tax on the right to transfer property during life. (1)

A gift tax return, if required, must generally be filed by April 15 of the following year. A six month extension for filing is available. Tax is generally due by April 15, but certain extensions for payment may be available. See Q 901.

The Federal Gift Tax Worksheet, below, shows the steps for calculating the gift tax. Calculation starts with determining what a gift for gift tax purposes is (see Q 902). In general, gifts include gratuitous transfers of all kinds. A husband and wife can elect to have all gifts made by either spouse during the year treated as made one-half by each spouse (Q 906). A qualified disclaimer is not treated as a gift (Q 907).

Gifts are generally valued at fair market value on the date of the gift (Q 908). Special rules apply for actuarial valuations of certain interests such as life estates, remainders, and annuities (Q 909), net gifts (Q 910), and Chapter 14 special valuation rules for transfers to family members of certain interests in corporations, partnerships, or trusts (Q 911).

A couple of exclusions are available from gifts. A $13,000 (in 2010) annual exclusion is available for present interest gifts on a per donor/donee basis. An unlimited exclusion is available for qualified transfers for educational and medical purposes. See Q 916.

A couple of deductions are also available. Unlimited marital (Q 919) and charitable (Q 920) deductions are available for certain transfers to the donor's spouse and to charities.

Taxable gifts equals gifts made during the year reduced by all exclusions and deductions.

Tax is imposed on taxable gifts. Tax rates (Appendix G) are generally progressive and tax is based on cumulative taxable transfers during lifetime. To implement this, tax is calculated on total taxable gifts, the sum of the taxable gifts made during the year (current taxable gifts) and prior taxable gifts, and the gift tax that would have been payable on prior taxable gifts (using the current tax rates) is then subtracted out.

The tentative tax is then reduced by the unified credit (Q 921) to produce gift tax payable.

Filing and Payment

901. Who files the return and pays the gift tax, and when? Filing the Return

The donor is responsible for filing the gift tax return (Form 709). A return needs to be filed for any calendar year in which the donor makes any gifts other than (a) those which come within the annual exclusion (Q 916), (b) qualified transfers (Q 916), (c) those which qualify for the marital deduction (Q 919), or (d) gifts to charity of the donor's entire interest in the property transferred where the donor does not (and has not) transferred any interest in the property to a noncharitable beneficiary. (1) Returns must be filed if a married couple elects to split gifts for the year (Q 906). The return is due on or before April 15 following the close of the calendar year, except that an extension of time granted for filing the income tax return serves also as an extension of time for filing the gift tax return. (2) Where the donor's death occurs before the end of the calendar year in which a gift is made, the gift tax return is due at the time (including extensions) the estate tax return is due. (3) However, should the time for filing the estate tax return fall later than the 15th day of April following the close of the calendar year, the time for filing the gift tax return is on or before the 15th day of April following the close of the calendar year, unless an extension (not extending beyond the time for filing the estate tax return) was granted for filing the gift tax return. If no estate tax return is required to be filed, the time for filing the gift tax return is on or before the 15th day of April following the close of the calendar year, unless an extension was given for filing the gift tax return. (4) The IRS is authorized to grant a reasonable extension of time for filing the return. Except in the case of taxpayers who are abroad, no such extension may exceed six months. (5) Regulations permit an automatic six-month extension by filing Form 8892 even if an income tax extension is not obtained. (6)

Paying the Tax

The tax is due and payable by the donor at the time fixed for filing the return (without regard to any extension of time for filing the return). (1) If the tax is not paid when due, the donee is personally liable for the tax to the extent of the value of the gift. (2)

At the request of the donor, an extension of time for payment of the tax may be granted by the district director. The period of extension may not exceed six months, unless the donor is abroad. The time for payment of a gift tax deficiency may be extended up to 18 months if the donor shows that payment on the date fixed would result in undue hardship; in exceptional cases, an additional extension of up to 12 months may be granted. (3) In addition, the Service has been given authority to enter into written agreements to pay taxes in installments when the Service determines that such an agreement will facilitate the payment of taxes. (4) Interest compounded daily is charged on all extensions at an annual rate adjusted quarterly so as to be three percentage points over the short term federal rate. (5) The underpayment rate for the last quarter of 2009 is 4%. (6)

Gifts

902. What kinds of gifts are subject to gift tax?

The tax applies to transfers by way of gift whether in trust or otherwise, whether direct or indirect, and whether the property is real or personal, tangible or intangible. (7) Where property is transferred, the tax is based on the fair market value of the property at the time of the gift. (8) The tax attaches when the transfer occurs, even if the identity of the donee is not then known or ascertainable. (9) Donative intent is not an essential element; for example, a gift made pursuant to state law by a guardian on behalf of an incompetent donor is subject to the gift tax; but the tax is applicable only to a transfer of a beneficial interest in property, not to a transfer of bare legal title to a trustee. (10)

An individual's waiver of a survivor benefit (as described at Q 339) made before the participant's death is not treated as a transfer of property for gift tax purposes. (11)

Where property is transferred for less than full consideration in money or money's worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift. (12) However, a sale or exchange made in the ordinary course of business (an arm's length transaction) is considered to have been made for full consideration in money or money's worth. (13) On the other hand, an intra-family exchange is not considered an ordinary business transaction. (See Q 705.)

The gift tax is imposed only on completed gifts. A gift occurs when the donor parts with dominion and control over the property given. (14) Where two stockholders in a buy-sell agreement set a price for their shares that was $100 a share less than the fair market value of the shares and agreed that a withdrawing shareholder would not sell his shares to a third party without first offering them to the other shareholder at the agreement price, it was ruled that the agreement did not create completed gifts for purposes of the federal gift tax. (1) The gratuitous transfer by the maker of a legally binding promissory note is a completed gift (the transfer of a legally unenforceable promissory note is an incomplete gift); if the note is unpaid at the donor's death, the gift is not treated as an adjusted taxable gift in computing the tentative estate tax (see Q 850), and no deduction is allowable from the gross estate for the promisee's claim with respect to the note (see Q 862). (2)

A transfer of a nonstatutory stock option which was not traded on an established market would be treated as a gift to a family member on the later of (1) the transfer or (2) the time when the donee's right to exercise the option is no longer conditioned on the performance of services by the transferor. (3)

In the case of a gift by check, when is the gift complete, when the check is delivered, or when the check is cashed? In the litigation to date, the courts initially appeared to make a distinction between gifts to charitable donees and gifts to noncharitable donees. In the former case it has been held that at least where there is timely presentment and payment, payment of the check by the bank relates back to the date of delivery for purposes of determining completeness of the gift. (4) In the latter case, the courts have shown less of a willingness to apply the "relation back" doctrine. In Est. of Dillingham v. Comm., (5) the noncharitable donees did not cash the checks until 35 days after their delivery, the donor's death having intervened. The court said that this delay cast doubt as to whether the checks were unconditionally delivered. Since the estate failed to prove unconditional delivery, the court declined to extend the relation back doctrine to the case before it. It then turned to local law to determine whether the decedent had parted with dominion and control upon delivery of the checks. It determined that under applicable local law (Oklahoma), the donor did not part with dominion and control until the checks were cashed. However, in Est. of Gagliardi v. Comm., (6) checks written by a brokerage firm and charged against the decedent's account prior to decedent's death were treated as completed gifts to the noncharitable donees even though some checks were cashed after decedent's death. Also, in Est. of Metzger v. Comm., (7) the relation-back doctrine was applied to gifts made by check to noncharitable beneficiaries where the taxpayer was able to establish: (1) the donor's intent to make gifts, (2) unconditional delivery of the checks, (3) presentment of the check during the year for which a gift tax annual exclusion was sought and within a reasonable time after issuance, and (4) that there were sufficient funds to pay the checks at all relevant times. In W. H. Braum Family Partnership v. Comm., (8) the relation-back doctrine was not applied where the taxpayer could not establish either (2) or (4). In response to Metzger, the Service has issued a revenue ruling providing that a gift by check to a noncharitable beneficiary will be considered complete on the earlier of (1) when the donor has so parted with dominion and control under state law such that the donor can no longer change its disposition, or (2) when the donee deposits the check, cashes the check against available funds, or presents the check for payment if the following conditions are met: (a) the check must be paid by the drawee bank when first presented for payment to the drawee bank; (b) the donor must be alive when the check is paid by the drawee bank; (c) the donor must have intended a gift; (d) delivery of the check by the donor must have been unconditional; (e) the check must be deposited, cashed, or presented in the calendar year for which the completed gift tax treatment is sought; and (f) the check must be deposited, cashed, or presented within a reasonable time of issuance. (9)

The placing of title to property in joint names (but generally not between spouses--see Q 919) can create a taxable gift, either immediately or (as in the case of joint bank accounts and United States savings bonds) when the donee reduces some amount to his exclusive possession. (1)

The exercise or lapse of a power of appointment, which results in another's receiving a beneficial interest in the appointive property, may be a gift subject to tax. (2) Similarly, a refusal to accept the transfer of property, which results in another's receiving a beneficial interest in the disclaimed property, may be a taxable gift. (3) (See Q 907.)

Where spouses enter into joint and mutual wills, the surviving spouse may be treated as making a gift of a remainder interest at the other spouse's death. (4)

The transfer of a qualifying income interest for life in qualified terminable interest property (QTIP) for which a marital deduction was allowed (see Q 863, Q 919) will be treated as a transfer of such property for gift tax purposes. (5) If a QTIP trust is severed into Trust A and Trust B and the spouse renounces her interest in Trust A, such renunciation will not cause the spouse to be treated as transferring Trust B under IRC Section 2519. (6)

The spouse is entitled to collect from the donee the gift tax on the transfer of a QTIP interest. The amount treated as a transfer for gift tax purposes is reduced by the amount of the gift tax the spouse is entitled to recover from the donee. Thus, the transfer is treated as a net gift (see Q 910). The failure of a spouse to exercise the right to recover gift tax from the donee is treated as a transfer of the unrecovered amount to the donee when the right to recover is no longer enforceable. If a written waiver of the right of recovery is executed before the right becomes unenforceable, the transfer of the unrecovered gift tax is treated as made on the later of (1) the date of the waiver, or (2) the date the tax is paid by the transferor. Any delay in exercise of the right of recovery is treated as an interest-free loan (see Q 903) for gift tax purposes. (7)

Where a surviving spouse acquires a remainder interest in QTIP marital deduction property in connection with a transfer of property or cash to the holder of the remainder interest, the surviving spouse makes a gift to the remainder person under both IRC Section 2519 (disposition of QTIP interest) and IRC Sections 2511 and 2512 (transfers and valuation of gifts). The amount of the gift is equal to the greater of (1) the value of the remainder interest, or (2) the value of the property or cash transferred to the holder of the remainder interest. (8) On the other hand, children would be treated as making a gift if the children transfer their remainder interest in a QTIP marital deduction trust to the surviving spouse. (9)

Any subsequent transfer by the donor spouse of an interest in property for which a QTIP marital deduction was taken is not treated as a transfer for gift tax purposes, unless the transfer occurs after the donee spouse is treated as having transferred such property under IRC Section 2519 or after such property is includable in the donee spouse's estate under IRC Section 2044 (see Q 852(12)). (10) Also, if property for which a QTIP marital deduction was taken is includable in the estate of the spouse who was given the QTIP interest and the estate of such spouse fails to recover from the person receiving the property any estate tax attributable to the QTIP interest being included in such spouse's estate, such failure is treated as a transfer for gift tax purposes unless (1) such spouse's will waives the right to recovery, or (2) the beneficiaries cannot compel recovery of the taxes (e.g., where the executor is given discretion to waive the right of recovery in such spouse's will). (1)

Transfers of property from a corporation to an individual, or from an individual to a corporation, may be taxable gifts from or to the individual stockholders. (2) (See Q 917.)

Shareholders of nonparticipating preferred stock in profitable family held corporations have been held to have made gifts to the common stockholders (typically descendants of the preferred shareholder) by waiving payment of dividends or simply by failing to exercise conversion rights or other options available to a preferred stockholder to preserve his position. (3) The Tax Court has held that the failure to convert noncumulative preferred stock to cumulative preferred stock did not give rise to a gift, but that thereafter a gift was made each time a dividend would have accumulated. However, the failure to exercise a put option at par plus accumulated dividends plus interest was not treated as a gift of foregone interest. (4)

A transaction involving the nonexercise by a son of an option under a cross-purchase buy-sell agreement followed by the sale of the same stock by the father to a third party when the fair market value of the stock was substantially higher than the option price was treated as a gift from the son to the father. (5) Also, a father indirectly made a gift to his son to the extent that the fair market value of stock exceeded its redemption price when the father failed to exercise his right under a buy-sell agreement to have a corporation redeem all of the available shares held by his brother-in-law's estate and the stock passed to the son. (6)

With respect to a trust, the grantor/income beneficiary may be treated as making additional gifts of remainder interests in each year that the grantor fails to exercise his right to make nonproductive or underproductive property normally productive. (7) A mother made gifts to her children to the extent that the children were paid excessive trustee fees from the marital deduction trust of which the mother was a beneficiary. (8) However, a grantor of a trust does not make a gift to trust beneficiaries by paying the income tax on trust income taxable to the grantor under the grantor trust rules (see Q 844). (9) Where a trust was modified to add adopted persons as beneficiaries, the beneficiaries with trust interests prior to the modification were treated as making gifts to the newly added beneficiaries. (10)

Letter Ruling 9113009 (withdrawn without comment by TAM 9409018) had ruled that a parent who guaranteed loans to his children made a gift to his children because, without the guarantees, the children could not have obtained the loans or, at the very least, would have paid a higher interest rate.

For recapture rules applicable where distributions are not timely made in connection with the transfer of an interest in a corporation or partnership which is subject to the Chapter 14 valuation rules, see Q 912. For deemed transfers upon the lapse of certain voting or liquidation rights in a corporation or partnership, see Q 915.

A gift may be made of foregone interest with respect to interest-free and bargain rate loans (see Q 903).

A United States citizen or resident who receives a covered gift from certain expatriates may owe gift tax on the transfer. (1)

903. Are gifts made of foregone interest with respect to interest-free and bargain rate loans?

An interest-free or low-interest loan within a family or in any other circumstances where the foregone interest is in the nature of a gift results in a gift subject to the federal gift tax. IRC Section 7872 applies in the case of term loans made after June 6, 1984 and demand loans outstanding after that date.

In general, IRC Section 7872 recharacterizes a below-market loan (an interest-free or low-interest loan) as an arm's length transaction in which the lender (1) made a loan to the borrower in exchange for a note requiring the payment of interest at a statutory rate, and (2) made a gift, distributed a dividend, made a contribution to capital, paid compensation, or made another payment to the borrower which, in turn, is used by the borrower to pay the interest. The difference between the statutory rate of interest and the rate (if any) actually charged by the lender, the "foregone interest," is thus either a gift to the borrower or income to him, depending on the circumstances. The income tax aspects of below-market loans are discussed in Q 805. The gift tax aspects of such loans are discussed here.

First, some definitions: The term "gift loan" means any below-market loan where the foregoing of interest is in the nature of a gift. The term "demand loan" means any loan which is payable in full at any time on the demand of the lender. The term "term loan" means any loan which is not a demand loan. The term "applicable federal rate" means: in the case of a demand loan or a term loan of up to three years, the federal short-term rate; in the case of a term loan over three years but not over nine years, the federal mid-term rate; in the case of a term loan over nine years, the federal long-term rate. In the case of a term loan the applicable rate is compounded semiannually. These rates are reset monthly. (2) The "present value" of any payment is determined (a) as of the date of the loan, and (b) by using a discount rate equal to the applicable federal rate. (3) The term "below-market loan" means any loan if (a) in the case of a demand loan, interest is payable on the loan at a rate less than the applicable federal rate, or (b) in the case of a term loan, the amount loaned exceeds the present value of all payments due under the loan. The term "foregone interest" means, with respect to any period during which the loan is outstanding, the excess of (a) the amount of interest that would have been payable on the loan for the period if the interest accrued on the loan at the applicable federal rate and were payable annually on the last day of the appropriate calendar year, over (b) any interest payable on the loan properly allocable to the period.

In the case of a demand gift loan, the foregone interest is treated as transferred from the lender to the borrower and retransferred by the borrower to the lender as interest on the last day of each calendar year the loan is outstanding. In the case of a term gift loan, the lender is treated as having transferred on the date the loan was made, and the borrower is treated as having received on such date, cash in an amount equal to the excess of (a) the amount loaned over (b) the present value of all payments which are required to be made under the terms of the loan. The provisions of the new law do not apply in the case of a gift loan between individuals (a husband and wife are treated as one person) that at no time exceeds $10,000 in the aggregate amount outstanding on all loans, whether below-market or not. The $10,000 de minimus exception does not apply, however, to loans attributable to acquisition of income-producing assets.

IRC Section 7872 does not apply to life insurance policy loans. (1) Neither does IRC Section 7872 apply to loans to a charitable organization if at no time during the taxable year the aggregate outstanding amount of loans by the lender to that organization does not exceed $250,000. (2)

The Tax Court has held that IRC Section 483 and safe harbor interest rates contained therein do not apply for gift tax purposes. Consequently, the value of a promissory note given in exchange for real property was discounted to reflect time value of money concepts under IRC Section 7872 (without benefit of IRC Section 483). (3)

Prior to enactment of IRC Section 7872, the Supreme Court held that, in the case of an interest-free demand loan made within a family, a gift subject to federal gift tax is made of the value of the use of the money lent. (4) The court did not decide how to value such a gift, but implicit in the decision was the assumption that low-interest or interest-free loans within a family context have, since the first federal gift tax statute was enacted in 1924, resulted in gifts. Revenue Procedure 85-46 (5) provided guidance in valuing and reporting gift demand loans not covered by IRC Section 7872.

904. When is a gift made with respect to an education savings account?

Contributions to an education savings account are treated as completed transfers to the beneficiary of a present interest in property which can qualify for the gift tax and generation-skipping transfer (GST) tax annual exclusions. If contributions for a year exceed the annual exclusion, the donor can elect to prorate the gifts over a five year period beginning with such year. A contribution to an education savings account does not qualify for the gift tax or GST tax exclusion for qualified transfers for educational purposes. (6) Distributions from an education savings account are not treated as taxable gifts. Also, if the designated beneficiary of an education savings account is changed, or if funds in an education savings account are rolled over to the account of a new beneficiary, such a transfer is subject to the gift tax or GST tax only if the new beneficiary is a generation below the old beneficiary. (7)

See Q 857 for the estate tax treatment and Q 810 for the income tax treatment of education savings accounts.

905. When is a gift made with respect to a qualified tuition program?

For gift tax and generation-skipping transfer (GST) tax purposes, a contribution to a qualified tuition program on behalf of a designated beneficiary is not treated as a qualified transfer for purposes of the gift tax and GST tax exclusion for educational expenses, but is treated as a completed gift of a present interest to the beneficiary which qualifies for the annual exclusion (see Q 916). If a donor makes contributions to a qualified tuition program in excess of the annual exclusion, the donor may elect to take the donation into account ratably over a five-year period. (8) Distributions from a qualified tuition program are not treated as taxable gifts. Also, if the designated beneficiary of a qualified tuition program is changed, or if funds in a qualified tuition program are rolled over to the account of a new beneficiary, such a transfer is subject to the gift tax or GST tax only if the new beneficiary is a generation below the old beneficiary. (9)

See Q 858 for the estate tax treatment and Q 811 for the income tax treatment of qualified tuition programs.

Split-gifts

906. When is the "split-gift" provision available?

When a husband or wife makes a gift to a third person, it may be treated as having been made one-half by each if the other spouse consents to the gift. (1)

Where spouses elect to use the "split-gift" provision, the consent applies to all gifts made by either spouse to third persons during the calendar year. (2) A technical advice memorandum permitted a taxpayer to elect after his spouse's death to split gifts with his spouse where the gifts were made by the taxpayer shortly before the spouse's death. (3)

Disclaimers

907. If a person refuses to accept a transfer of an interest in property, as a result of which the interest passes to another, is the one who disclaims considered to have made a gift?

Not if he makes a qualified disclaimer. A "qualified disclaimer" means an irrevocable and unqualified refusal to accept an interest in property created in the person disclaiming by a taxable transfer made after 1976. With respect to inter vivos transfers, for the purpose of determining when a timely disclaimer is made (see condition (3) below), a taxable transfer occurs when there is a completed gift for federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift. Thus, gifts qualifying for the gift tax annual exclusion are regarded as taxable transfers for this purpose. (4) Furthermore, a disclaimer of a remainder interest in a trust created prior to the enactment of the federal gift tax was subject to the gift tax where the disclaimer was not timely and the disclaimer occurred after enactment of the gift tax. (5) In order to effectively disclaim property for transfer tax purposes, a disclaimer of property received from a decedent at death should generally be made within nine months of death rather than within nine months of the probate of the decedent's will. (6)

In general, the disclaimer must satisfy these conditions: (1) the disclaimer must be irrevocable and unqualified; (2) the disclaimer must be in writing; (3) the writing must be delivered to the transferor of the interest, his legal representative, the holder of the legal title to the property, or the person in possession of the property, not later than nine months after the later of (a) the day on which the transfer creating the interest is made, or (b) the day on which the disclaimant reaches age 21; (4) the disclaimant must not have accepted the interest disclaimed or any of its benefits; and (5) the interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer. (1) With respect to condition (4), it has been held that a group life insurance beneficiary accepted the benefits of the proceeds by merely filing a completed claim form and death certificate with the employer, as a result of which the insurer established an account in the beneficiary's name and provided her with checks with which she could draw upon the account. (2) Also, a person cannot disclaim a remainder interest in property while retaining a life estate or income interest in the same property. (3)

If a person makes a qualified disclaimer, for purposes of the federal estate, gift, and generation-skipping transfer tax provisions, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Accordingly, a person making a qualified disclaimer is not treated as making a gift. Similarly, the value of a decedent's gross estate for purposes of the federal estate tax does not include the value of property with respect to which the decedent or his executor has made a qualified disclaimer. (4)

In the case of a joint tenancy with rights of survivorship or a tenancy by the entirety, the interest which the donee receives upon creation of the joint interest can generally be disclaimed within nine months of the creation of the interest and the survivorship interest received upon the death of the first joint tenant to die (deemed to be a one-half interest in the property) can be disclaimed within nine months of the death of the first joint tenant to die, without regard to (1) whether either joint tenant can sever unilaterally under local law, (2) the portion of the property attributable to consideration furnished by the disclaimant, or (3) the portion of the property includable in the decedent's gross estate under IRC Section 2040. However, in the case of a creation of a joint tenancy between spouses or tenancy by the entirety created after July 13, 1988 where the donee spouse is not a U.S. citizen, a surviving spouse can make a disclaimer within nine months of the death of the first spouse to die of any portion of the joint interest that is includable in the decedent's estate under IRC Section 2040. Also, in the case of a transfer to a joint bank, brokerage, or other investment account (e.g., mutual fund account) where the transferor can unilaterally withdraw amounts contributed by the transferor, the surviving joint tenant may disclaim amounts contributed by the first joint tenant to die within nine months of the death of the first joint tenant to die. (5)

For purposes of a qualified disclaimer, the mere act of making a surviving spouse's statutory election is not to be treated as an acceptance of an interest in the disclaimed property or any of its benefits. However, the disclaimer of a portion of the property subject to the statutory election must be made within nine months of the decedent spouse's death, rather than within nine months of the surviving spouse's statutory election. (6)

A power with respect to property is treated as an interest in such property. (7) The exercise of a power of appointment to any extent by the donee of the power is an acceptance of its benefits. (8)

A beneficiary who is under 21 years of age has until nine months after his 21st birthday in which to make a qualified disclaimer of his interest in property. Any actions taken with regard to an interest in property by a beneficiary or a custodian prior to the beneficiary's 21st birthday will not be an acceptance by the beneficiary of the interest. (1) This rule holds true even as to custodianship gifts in states which provide that custodianship ends when the donee reaches an age below 21. (2)

If the person disclaiming is given by the instrument of transfer a power to appoint any disclaimed interest to others, his exercise of the power is considered a gift of the interest to the appointee(s) of the power. (3)2

A qualified disclaimer of an IRA can be made by the beneficiary even though the beneficiary receives a required minimum distribution for the year of the IRA owner's death. If the beneficiary accepts the required minimum distribution, the beneficiary cannot disclaim the income attributable to the required minimum distribution. The disclaimer can be with respect to all or a portion of the balance of the IRA, other than the income with respect to the required minimum distribution received by the beneficiary, provided that the disclaimed amount and the income attributable to the disclaimed amount is paid to the beneficiary entitled to the disclaimed amount, or segregated in a separate account for such beneficiary. (4)

A written transfer of the transferor's (disclaimant's) entire interest in property to the person or persons who would otherwise have received the property if an effective disclaimer had been made will be treated as a valid disclaimer for federal estate and gift tax purposes provided the transfer is timely made and the transferor has not accepted any of the interest or any of its benefits. (5)

Valuation

908. How is property valued generally for gift tax purposes?

The valuation of gifts of property is based on the same principles that apply to valuation of property for estate tax purposes (see Q 861). However, there is no alternate valuation date for the gift tax. The valuation is determined at the date of the gift. The value used is fair market value - the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell. (6) Gifts are valued without the benefit of hindsight; later events are generally ignored. (7)

In the case of any taxable gift which is a direct skip within the meaning of the generation-skipping transfer tax (GST tax) (see Q 950), the amount of such gift is increased by the amount of the GST tax imposed on the transfer. (8)

If the IRS makes a determination of the value of any item of property for gift tax purposes, the donor may request that the Service furnish a written statement explaining the basis upon which the valuation was determined. (9)

With respect to gift tax returns, 20% of an underpayment attributable to a substantial gift tax valuation understatement is added to tax. There is a substantial gift tax valuation understatement if (1) the value claimed was 65% or less of the correct amount, and (2) the underpayment exceeds $5,000. If the value claimed was 40% or less of the correct amount (and the underpayment exceeds $5,000), 40% of an underpayment attributable to such a gross gift tax valuation understatement is added to tax. (1) The 20% or 40% penalty is not imposed with respect to any portion of the underpayment for which it is shown that there was reasonable cause and the taxpayer acted in good faith. (2)

A gift which is disclosed on a gift tax return in a manner adequate to apprise the Service of the nature of the item may not be revalued after the statute of limitations (generally, three years after the return is filed) has expired. (3)

909. How are life estates, remainders, and private annuities valued?

Life estates, estates for a term of years, remainder interests, and private annuities are generally valued by use of the government's valuation tables (see below). (4) However, it has been held that the tables are only presumptively correct, that in exceptional cases where there is strong evidence at the date of valuation that the life by which an interest is measured has an expectation of life longer or shorter than the tables indicate, that interest may be valued according to the facts at hand rather than according to the tables. (5) On the other hand, the government tables must be used even though the life tenant or life annuitant is in poor health at the date of valuation if the tenant's or annuitant's time of death is neither predictable nor imminent. (6) Account may not be taken of facts later coming to light but not available at the date of valuation; i.e., the interest may not be valued through the aid of hindsight. (7) Regulations provide that the standard valuation tables are not to be used where the individual who is a measuring life is terminably ill (defined as a person with an incurable illness or other deteriorating physical condition and at least a 50% probability of dying within one year). However, if an individual survives for 18 months after the transaction, the individual is presumed to have not been terminally ill at the time of the transaction unless the contrary is established by clear and convincing evidence. (8)

The estate and gift tax valuation tables are based on an assumed interest rate. Departure from strict application of the tables is permissible in exceptional cases where use of the tables would violate reason and fact: for example, where transferred property may yield no income at all or the income is definitely determinable by other means. (9) However, IRS will not allow such departure on a mere showing that past income yield from trust assets has been substantially lower than the rate assumed in the tables. (10) Nor will departure be allowed simply because the property transferred as a gift in trust is nonincome producing if the trustee has power to convert it to income producing property. (11)

Regulations provide that the standard valuation tables are not to be used to value an annuity, if considering the assumed interest rate the trust is expected to exhaust the fund before the last possible annuity payment is made in full (measuring life survival to age 110 is assumed for this purpose). For a fixed annuity (i.e., annuity amount is payable for a term certain, or for one or two lives) payable annually at the end of the year, the corpus is assumed to be sufficient to make all payments if the assumed interest rate is greater than or equal to the annuity payment percentage (i.e., the amount of the annual annuity payment divided by the initial value of the corpus). If the annuity payment percentage exceeds the assumed interest rate and the annuity is for a term certain, multiple the annual annuity payment by the term certain annuity factor (derived from the Term Certain Remainder Factors Table in Appendix D). If the annuity payment percentage exceeds the assumed interest rate and the annuity is for one or two lives, multiple the annual annuity payment by the term certain annuity factor (derived from the Term Certain Remainder Factors Table in Appendix D) for a term equal to 110 minus the age of the youngest measuring life. If the present value for a term certain annuity derived in either of the two preceding sentences exceeds the fund from which the annuity is to be paid, a special IRC Section 7520 valuation factor may be required to take into account the exhaustion of the fund. Adjustments in the computations described above would be required if payment terms differ from those described. (1)

Example. Donor, age 60, transfers $1,000,000 to a trust. The trust will pay $100,000 a year to charity for the life of donor, with remainder to the donor's child. The IRC Section 7520 interest rate for the transfer is 6.8%. Since the annuity payment percentage of 10% ($100,000 annual payment divided by $1,000,000 initial value of trust fund) exceeds the 6.8% assumed interest rate, it can not be assumed the annuity payments will not exhaust the trust. Therefore, subtract donor's age 60 from 110, resulting in a term of 50 years. The remainder factor for a term of 50 years at 6.8% interest is .037277 (Term Certain Remainder Factors Table in Appendix D). The life income factor equals one minus the remainder factor of .037277, or .962723. The annuity factor equals the life income factor of .96272 3 divided by the assumed interest rate of 6.8%, or 14.1577. The present value of a term certain annuity equals $1,415,770 ($100,000 annual payment multiplied by 14.1577 annuity factor). Since this exceeds the value of the trust fund of $1,000,000, special IRC Section 7520 valuation factors will be required to take into account the exhaustion of the fund. (2)

Regulations provide that the standard valuation tables are not to be used to value an income interest, unless the income beneficiary is given an income interest which in light of the trust, will, or other instrument, or state law, is in accord with an income interest which the principles of the laws of trust would provide consistent with the value of the trust corpus and its preservation. Also, the standard valuation tables are not to be used to value a use interest, unless the beneficiary is given a use interest which in light of the trust, will, or other instrument, or state law, is in accord with an interest given to a life tenant or term holder. Standard valuation tables are not to be used for an income interest if (1) income or other enjoyment can be withheld, diverted, or accumulated for another's use without the consent of the income beneficiary, or (2) corpus can be withdrawn for another's use without the consent of the income beneficiary or accountability to such beneficiary. Thus, special factors may be required in conjunction with unproductive property, if the beneficiary has no right to require that the trustee make the trust income producing, and with Crummey withdrawal powers, if the power permits a diversion of income or principal to a person other than the income beneficiary during the income term. (3)

A remainder or reversionary interest is to be valued using the standard valuation factors only if the preceding interest (e.g., an income or annuity interest) adequately preserves and protects the remainder or reversionary interest (e.g., from erosion, invasion, depletion, or damage) until the interest takes effect. (4)

There is a split in the courts regarding lottery winnings includable in the gross estate as to whether they should be valued as an annuity under the standard valuation tables or whether a discount is available where state law prohibited the assignment of state lottery winnings. (5) Structured settlement payments should be valued as an annuity under the standard valuation tables without discount for lack of marketability. (1) Taxpayers wishing to challenge use of such tables to value lottery winnings will need to establish a market value as an alternative to the tables and that such value departs substantially from Section 7520 tables. (2)

Valuation Tables

Note: New valuation tables were released during 2009. See Appendix D.

Valuation tables using up-to-date interest and mortality factors must be used where the valuation date occurs on or after May 1, 1989. The value of an annuity, an interest for life or term of years, or a reversionary or remainder interest, is determined using tables and an interest rate (rounded to the nearest 2/10ths of 1%) equal to 120% of the federal midterm rate in effect for the month in which the valuation date occurs. (3) An interest rate falling midway between any 2/10ths of a percent is rounded up. (4) However, the valuation tables are not to be used with respect to any of the income tax provisions relating to qualified pension plans (including tax sheltered annuities and IRAs) contained in IRC Sections 401 to 419A. (5) The Section 7520 interest rate for each month is published in Tax Facts News, a National Underwriter publication, as the rate becomes available. It can also be found at www.TaxFactsOnline.com.

See Appendix D for valuation tables (other than two-life factors or unitrust factors) and an explanation of their use. (See Tax Facts on Investments for selected unitrust tables.) IRS Publications 1457 and 1458 contain examples of use of the valuation table and sources for the tables. Where the standard valuation table is to be used but the interest rate or payout rate to be used is between rates in the table, interpolation (an algebraic calculation of a number falling between table factors) is required. (6)

If an income, estate, or gift tax charitable deduction is allowable with respect to the property transferred, the taxpayer can elect to use the interest rate for either of the two months preceding the month in which the valuation date occurs. However, if a transfer of more than one interest in the same property is made with respect to which the taxpayer could use the same interest rate, such interest rate is to be used with respect to each such interest. (7)

910. What effect does it have on gift tax valuation if the donee agrees to pay the gift tax?

If a gift is made subject to the express or implied condition that the gift tax be paid by the donee (or by the trustee if the gift is in trust) the value of the gift is reduced by the amount of tax.8 The computation of the tax requires the use of an algebraic formula, since the amount of the tax is dependent on the value of the gift which in turn is dependent on the amount of the tax.

The formula is

Tentative Tax/1 plus Rate of Tax = True Tax.

Examples illustrating the use of this formula, with the algebraic method, to determine the tax in a net gift situation are contained in IRS Publication 904 (rev. May 1985). Three of the examples show the effect of a state gift tax upon the computation. (See also Q 921.)

Chapter 14 Special Valuation Rules

911. What are the Chapter 14 special valuation rules?

Special valuation rules are contained in Chapter 14 of the Internal Revenue Code. Chapter 14 generally focuses on establishing the value of various interests transferred to family members at the time of the transfer when the transferor retains certain interests in the property being transferred. Special rules apply to certain transfers of interests in corporations and partnerships (see Q 912); to certain transfers of interests in trusts and even remainder and joint purchase transactions (see Q 913); to certain agreements, options, rights or restrictions exercisable at less than fair market value (see Q 914); and to various lapsing rights and restrictions (see Q 915).

912. What special valuation rules apply to the transfer of an interest in a corporation or partnership under Chapter 14?

As a general rule, the value of a transferred residual interest is equal to the value of the transferor's entire interest prior to the transfer reduced by the value of the interest retained by the transferor. For the purpose of determining whether a transfer of an interest in a corporation or partnership to (or for the benefit of) a "member of the transferor's family" is a gift (and the value of the transfer), the value of any "applicable retained interest" that is held by the transferor or an "applicable family member" immediately after the transfer is treated as being zero unless the applicable retained interest is a "distribution right" which consists of the right to receive a "qualified payment." (1) Where an applicable retained interest consists of a distribution right which consists of the right to receive a qualified payment and there are one or more liquidation, put, call, or conversion rights with respect to such interest, the value of all such rights is to be determined by assuming that each such liquidation, put, call, or conversion right is exercised in a manner which results in the lowest value. (2) IRC Section 2701 does not apply to distribution rights with respect to qualified payments where there is no liquidation, put, call, or conversion right with respect to the distribution right. (3) If the transfer subject to these rules is of a junior equity interest in a corporation or partnership, the transfer must be assigned a minimum value under the "junior equity rule." (4)

These rules do not apply if for either the transferred interest or the applicable retained interest market quotations are readily available (as of the date of transfer) on an established securities market. Also, the rules do not apply if the applicable retained interest is of the same class as the transferred interest, or if the applicable retained interest is proportionally the same as the transferred interest (disregarding nonlapsing differences with respect to voting in the case of a corporation, or with respect to management and limitations on liability in the case of a partnership). (5) An exception from the rules is also provided for a transfer of a vertical slice of interests in an entity (defined as a proportionate reduction of each class of equity interest held by the transferor and applicable family members in the aggregate). (6)

Definitions and Rules

Transfers

The rules apply to transfers with respect to new, as well as existing, entities. (1) Transfers may be either direct or indirect. Furthermore, except as provided in regulations, a contribution to capital, a redemption, a recapitalization, or other change in capital structure of a corporation or partnership is treated as a transfer if the taxpayer or an applicable family member receives an applicable retained interest in the transaction, or as provided under regulations, holds such an interest immediately after the transfer. (2) Any termination of an interest is also treated as a transfer. (3)

Applicable Retained Interests

An "applicable retained interest" is any interest in an entity with respect to which there is (1) a distribution right and the transferor and applicable family members control the entity immediately before the transfer, or (2) a liquidation, put, call, or conversion right. (4) (Regulations or rulings may provide that any applicable retained interest be treated as two or more interests. (5)) A "distribution right" is any right to a distribution from a corporation with respect to its stock, or from a partnership with respect to a partner's interest in the partnership, other than (1) a distribution with respect to any interest if such right is junior to the rights of the transferred interest, (2) any right to receive a guaranteed payment of a fixed amount from a partnership under IRC Section 707(c), or (3) a liquidation, put, call, or conversion right. (6)

For these purposes, a liquidation, put, call, or conversion right is treated as a distribution right rather than as a liquidation, put, call, or conversion right if (1) it must be exercised at a specific time and at a specific amount, or (2) the liquidation, put, call, or conversion right: (a) can be converted into a fixed amount or fixed percentage of the same class of shares of stock as the transferred shares; (b) is nonlapsing; (c) is subject to proportionate adjustments for splits, combinations, reclassifications, and similar changes in the capital stock; and (d) is subject to adjustments for accumulated but unpaid distributions. (Similar rules are to apply to liquidation, put, call, or conversion rights in a partnership.) Where a liquidation, put, call, or conversion right is treated as exercised in a manner which produces the lowest value in the general rule above, such a right is treated as a distribution right which must be exercised at a specific time and at a specific amount. (7)

Regulations provide that applicable retained interests consist of (1) extraordinary payment rights, and (2) distribution rights held in a controlled entity. (8) The term "extraordinary payment rights" is used to refer to liquidation, put, call, or conversion rights, the exercise or nonexercise of which affects the value of the transferred interests. (9) The following are treated as neither extraordinary payment rights nor distribution rights: (1) mandatory fixed payment rights; (2) liquidation participation rights (other than ones in which the transferor, members of the transferor's family, and applicable family members have the ability to compel liquidation); and (3) non-lapsing conversion rights subject to proportionate adjustments for changes in equity and to adjustments to take account of accumulated but unpaid qualified payments. (10)

Qualified Payments

A "qualified payment" means any dividend payable on a periodic basis at a fixed rate (including rates tied to specific market rates) on any cumulative preferred stock (or comparable payment with respect to a partnership). With respect to the transferor, an otherwise qualified payment is to be treated as such unless the transferor elects otherwise. With respect to applicable family members, an otherwise qualified payment is not to be treated as such unless the applicable family member so elects. A transferor or an applicable family member can make an irrevocable election to treat any distribution right (which is otherwise not a qualified payment) as a qualified payment, payable at such times and in such amounts as provided in the election (such times and amounts not to be inconsistent with any underlying legal instruments creating such rights). (1) The value assigned a right for which an election is made cannot exceed fair market (determined without regard to IRC Section 2701). (2)

Attribution

A "member of the transferor's family" includes the transferor's spouse, lineal descendants of the transferor or transferor's spouse, and the spouse of any such descendant. (3) An "applicable family member" with respect to a transferor includes the transferor's spouse, an ancestor of the transferor or transferor's spouse, and the spouse of any such ancestor. (4) An individual is treated as holding interests held indirectly through a corporation, partnership, trust, or other entity. (5) In the case of a corporation, "control" means 50% ownership (by vote or value) of the stock. In the case of a partnership, "control" means 50% ownership of the capital or profits interests, or in the case of a limited partnership, the ownership of any interest as a general partner. (6) When determining control, an individual is treated as holding any interest held by an applicable family member (see above), including (for this purpose) any lineal descendant of any parent of the transferor or the transferor's spouse. (7) The application of IRC Section 2701 to transfers involving an ESOP will be determined by looking at the eligible beneficiaries of the ESOP. (8)

Minimum Value/Junior Equity Rule

If the transfer subject to these rules is of a junior equity interest in a corporation or partnership, the value of the transferred interest cannot be less than the amount which would be determined if the total value of all junior equity interests in the entity were equal to 10% of the sum of (1) the total value of the equity interests in the entity, and (2) the total amount of debt owed the transferor or an applicable family member by the entity. (9) For this purpose, indebtedness does not include (1) short term indebtedness incurred for the current conduct of trade or business, (2) indebtedness owed to a third party solely because it is guaranteed by the transferor or an applicable family member, and (3) amounts set aside for qualified deferred compensation to the extent such amounts are not available to the entity. While a properly structured lease is not treated as indebtedness, arrearages with respect to a lease are indebtedness. (10)

Valuation Method

For purposes of IRC Section 2701, the amount of a gift is determined as follows: (1) determine the fair market value of all family-held equity interests in the entity (treat as if held by one individual); (2) subtract out the sum of (a) the fair market value of all family-held senior equity interests in the entity other than applicable retained interests (treat as if held by one individual) and (b) the value of applicable retained interests as valued under IRC Section 2701; (3) allocate the remaining value among the transferred interests and other family-held subordinate interests; (4) reduce the value allocated to the transferred interests to adjust for a minority or similar discount or for consideration received for the transferred interest. (1)

Recapture

If "qualified payments" are valued under these rules, additional estate or gift tax may be due at the time of a later taxable event to reflect cumulative but unpaid distributions. The amount of an increase in estate or gift tax is equal to the excess (if any) of (1) the value of the qualified payments as if each payment had been timely made during the period beginning with the transfer subject to these rules and ending with the taxable event and each payment were reinvested at the (capitalization or discount) interest rate used to value the applicable retained transfer at the time of the transfer, over (2) the value of the qualified payments actually made adjusted to reflect reinvestment as in (1). For this purpose, any payment made within four years of its due date is treated as made on its due date. (2) The due date is the date specified in the governing instrument as the date on which the payment is to be made (or if no date is specified, the last day of each calendar year). (3) A transfer of a debt obligation bearing compound interest at a rate not less than the appropriate IRC Section 7520 discount rate from the due date of the payment and with a term of no more than four years is treated as payment. (4)

Regulations limit the amount of the increase in gift or estate tax attributable to recapture in order to prevent double inclusion of the same transfer in the transfer tax system. The mitigation provisions include reduction of the amount recaptured by the sum of (1) the portion of the fair market value of the qualified payment interest which is attributable to cumulative but unpaid distributions; (2) to the extent held by the individual at the time of a taxable event, the fair market value of any equity interest received by the individual in lieu of qualified payments; and (3) the amount by which the individual's aggregate taxable gifts were increased to reflect failure of the individual to enforce his rights to qualified payments. (5)

As an overall limitation, the amount of any increase in tax due to cumulative but unpaid distributions will not exceed the applicable percentage of the excess (if any) of (1) the value (determined as of the date of the taxable event) of all equity interests in the entity which are junior to the applicable retained interest, over (2) the value of such interests (determined as of the date of the earlier transfer subject to these rules). The numerator of the applicable percentage is equal to the number of shares in the corporation held (as of the date of the taxable event) by the transferor which are applicable retained interests of the same class. The denominator of the applicable percentage is equal to the total number of shares in the corporation (as of the date of the taxable event) which are of the same class as the shares used in the numerator. (A similar rule applies to partnerships.) (6) The applicable percentage equals the largest ownership percentage interest in any preferred interest held by the interest holder. (7) The appreciation limitation does not apply if the interest holder elects to treat the late payment of a qualified payment as a taxable event (see below). (8)

For purposes of an increase in tax due to cumulative but unpaid distributions, a "taxable event" includes (1) the death of the transferor if the applicable retained interest is included in the transferor's estate, (2) the transfer of an applicable retained interest, and (3) at the election of the taxpayer, the payment of a qualified payment which is made after its four-year grace period.1 Also, a termination of a qualified payment interest is treated as a taxable event. Thus, a taxable event occurs with respect to an individual indirectly holding a qualified payment interest held by a trust on the earlier of (1) the termination of the individual's interest in the trust, or (2) the termination of the trust's interest in the qualified payment interest. However, if the value of the qualified payment interest would be included in the individual's federal gross estate if the individual were to die immediately after the termination, the taxable transfer does not occur until the earlier of (1) the time the interest would no longer be includable in the individual's estate (other than by reason of the gifts within three years of death rule of IRC Section 2035), or (2) such individual's death. (2)

A "taxable event" does not include an applicable retained interest includable in the transferor's estate and passing under the marital deduction. Nor does a "taxable event" include a lifetime gift to a spouse which does not result in a taxable gift because the marital deduction is taken, or the spouse pays consideration for the transfer. However, such a spouse is thereafter treated in the same manner as the transferor. (3)

An applicable family member is treated the same as the transferor with respect to any applicable retained interest retained by such family member. Also, if the transferor transfers an applicable retained interest to an applicable family member (other than the transferor's spouse), the applicable family member is treated the same as the transferor with respect to distributions accumulating after the time of the taxable event. In the case of a transfer of an applicable retained interest from an applicable family member to the transferor, IRC Section 2701 continues to apply as long as the transferor holds the interest. (4)

Adjustment to Mitigate Double Taxation

As provided in regulations, if there is a later transfer or inclusion in the gross estate of property which was subject to IRC Section 2701, adjustments are to be made for gift, estate, and generation-skipping transfer tax purposes to reflect any increase in valuation of a prior taxable gift or any recapture under IRC Section 2701. (5)

IRC Section 2701 interests transferred after May 4, 1994. An individual (the initial transferor) who has previously made a transfer subject to IRC Section 2701 (the initial transfer) may be permitted a reduction in his taxable gifts for gift tax purposes or adjusted taxable gifts for estate tax purposes. If the holder of the IRC Section 2701 interest (i.e., the applicable retained interest, see above) transfers the interest to an individual other than the initial transferor or an applicable family member of the initial transferor in a transfer subject to estate or gift tax during the lifetime of the initial transferor, then the initial transferor can reduce the amount upon which his tentative tax is calculated for gift tax purposes in the year of the transfer. The amount of the reduction is generally equal to the lesser of (1) the amount by which the initial transferor's taxable gifts were increased by reason of IRC Section 2701, or (2) the amount by which the value of the IRC Section 2701 interest at the time of the subsequent transfer exceeds its value at the time of the initial transfer (the duplicated amount). Any unused reduction can be carried over and applied in succeeding years; any reduction remaining at death can be applied in the initial transferor's estate. The amount upon which the initial transferor's tentative tax is calculated for estate tax purposes may also be reduced (generally occurs if the IRC Section 2701 interest is retained until the initial transferor's death or if there is a carryover of any unused reduction). If the holder of the IRC Section 2701 interest transfers the interest to an individual other than the initial transferor or an applicable family member of the initial transferor in an exchange for consideration during the lifetime of the initial transferor, then the reduction is taken by the initial transferor's estate and calculated as if the value of the consideration were included in the estate at its value at the time of the exchange. Property received in a nonrecognition exchange for an IRC Section 2701 interest is thereafter treated as the IRC Section 2701 interest for adjustment purposes. Reductions are calculated separately for each class of IRC Section 2701 interests. If spouses elected to treat the initial transfer as a split gift (see Q 906), then (1) each spouse may be entitled to reductions if there is a transfer of the IRC Section 2701 interest during their joint lives; and (2) if there is a transfer of the IRC Section 2701 interest at or after the death of either spouse, then (a) the donor spouse's estate may be entitled to reductions; and (b) the consenting spouse's aggregate sum of taxable gifts and gift tax payable on prior gifts are reduced to eliminate any remaining effect of IRC Section 2701 if the consenting spouse survives the donor spouse. In any event, no reduction is available to the extent that double taxation has otherwise been avoided. (1)

IRC Section 2701 interests transferred before May 5, 1994. The initial transferor can use the final regulations (see above), the proposed regulations (see below), or any other reasonable interpretation of the statute. (2)

A person who has previously made a transfer subject to IRC Section 2701 is permitted a reduction in his adjusted taxable gifts for estate tax purposes. Whether a person is a transferor is determined without regard to the split-gift provisions for spouses (see Q 906). If any portion of the transferor's IRC Section 2701 interest is transferred to the transferor's spouse in a nontaxable event (e.g., the marital deduction), any reduction in adjusted taxable gifts is taken by such spouse rather than the transferor. (3)

The amount of the reduction is equal to the lesser of (1) the amount by which the transferor's taxable gifts were increased by reason of IRC Section 2701, or (2) the amount of the excess estate tax value of such interest multiplied by a fraction. The excess estate tax value equals the estate value of the IRC Section 2701 interest reduced by the value of such interest under IRC Section 2701 at the time of the transfer. In the case of an IRC Section 2701 interest transferred during life, the estate tax value equals the sum of (1) the increase in taxable gifts resulting from the transfer of the IRC Section 2701 interest, and (2) consideration received in exchange for the transfer. The numerator of the fraction above equals the value allocated under step 3 of the "Valuation Method" (see heading above); the numerator of the fraction equals the value allocated under step 2 of the "Valuation Method." (4) However, no reduction is available to the extent that double taxation has otherwise been avoided. (5)

Miscellaneous

These provisions apply to transfers after October 8, 1990. However, with respect to property transferred before October 9, 1990, any failure to exercise a right of conversion, to pay dividends, or to exercise other rights to be specified in regulations, is not to be treated as a subsequent transfer. (6)

With respect to gifts made after October 8, 1990, the gift tax statute of limitations on a transfer subject to these provisions does not run unless the transaction is disclosed on a gift tax return in a manner adequate to apprise the IRS of the nature of the retained and transferred interests. (7)

Effect on Corporate and Partnership Transactions

Recapitalizations and Transfers of Stock

If a parent recapitalizes a corporation into common and preferred stock and gives the common stock to his children, the value of the common stock is determined by subtracting from the value of the entire corporation the value of the preferred stock as determined under IRC Section 2701. If the parent treats the preferred stock's right to dividends as qualified payments, the right to such payments is assigned a present value. However, the value assigned to the common stock must be at least equal to the value determined under the junior equity rule above. If the parent does not receive the preferred dividends within four years of their due dates, the parent may be treated as making additional transfers of the accumulated, but undistributed dividends, at the time of a subsequent transfer of the preferred stock. On the other hand, if the parent does not treat the right to dividends as qualified payments, such a right is assigned a value of zero.

Similarly, if a parent owns 80% of a corporation and a child owns 20% of the same corporation and the parent's common stock is exchanged for preferred stock, the value of what the parent has transferred and what the parent has retained are determined under IRC Section 2701.

Even if the child pays consideration for the common stock, whether the parent has made a transfer (and the value of such transfer) is determined under IRC Section 2701.

If a parent and a child each contributes to the start up of a new business and the parent receives preferred stock while the child receives common stock, the parent is treated as if he received common stock and preferred stock and then exchanged the common stock for the balance of the preferred stock. The value of what the parent has transferred and what the parent has retained are determined under IRC Section 2701.

However, a gift or a sale of stock to a child is not subject to IRC Section 2701 if the stock is of the same class as that retained by the parent. Also, a gift or a sale of stock to a child is not subject to IRC Section 2701 if the stock is proportionately the same as that retained by the parent (e.g., retained stock is entitled to $2 of dividends for every $1 of dividends paid to transferred stock), without regard to nonlapsing voting rights (i.e., parent can retain control with nonlapsing voting right).

If applicable family members receive or retain applicable retained interests at the time of a gift or a sale of stock to a child, the transaction may be subject to IRC Section 2701 even though the parent is willing to terminate his equity relationship with the corporation.

IRC Section 2701 could be avoided by selling the common stock to a nonfamily member, such as a valuable employee. Proceeds of the sale could then be distributed to the children.

Of course, IRC Section 2701 does not apply if either the transferred interest (common stock) or retained interest (preferred stock) is publicly traded. Also, with regard to retained distribution rights, IRC Section 2701 does not apply if the transferor and applicable family members do not control the corporation immediately before the transfer. However, with regard to liquidation, put, call, or conversion rights (other than those treated as distribution rights, see above), IRC Section 2701 can apply even if the transferor and applicable family members do not control the corporation.

If the typical recapitalization is reversed (i.e., the parent retains the common stock and transfers the preferred stock), IRC Section 2701 should not apply (assuming no retention of applicable retained interests by parent or applicable family members).

Partnership Freezes

The traditional partnership freeze worked similarly to the traditional estate freeze recapitalization. It too is caught by the IRC Section 2701 special valuation rules. Most of the techniques employed to reduce the effect of, or to avoid, the valuation rules with respect to a recapitalization will also work with a partnership. Examination of the partnership agreement will be required to determine which partners hold which rights. Note that in the case of a limited partnership, "control" includes the holding of any interest as a general partner. Also, any right to receive a guaranteed payment of a fixed amount from a partnership under IRC Section 707(c) is not treated as a distribution right.

Other Changes in Capital Structure

Other changes in capital structure may also be caught by the IRC Section 2701 special valuation rules. Except as provided in regulations, a contribution to capital, a redemption, a recapitalization, or other change in capital structure of a corporation or partnership is treated as a transfer if the taxpayer or an applicable family member receives an applicable retained interest in the transaction, or as provided under regulations, holds such an interest immediately after the transfer.

Nonequity Interests

The IRC Section 2701 special valuation rules apply only to equity interests. Thus, for purposes of IRC Section 2701, none of the following should be treated as a retained interest: an installment sale of an interest in a corporation or partnership, an exchange of an interest in a corporation or partnership for a private annuity, an employment contract or deferred compensation, or debt owed by a corporation or partnership to a transferor or applicable family member. (1) However, the total amount of debt owed the transferor or an applicable family member by the entity is a factor in the junior equity rule above.

913. What special valuation rules apply to the transfer of an interest in trust, or to certain remainder or joint purchase transactions, under Chapter 14?

As a general rule, the value of a transferred remainder interest is equal to the value of the transferor's entire interest prior to the transfer reduced by the value of the interest retained by the transferor. For the purpose of determining whether a transfer of an interest in a trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of the transfer), the value of any interest retained by the transferor or an applicable family member is treated as being zero unless the retained interest is a qualified interest. This rule does not apply to an incomplete gift (a transfer that would not be treated as a gift whether or not consideration was received), to a transfer to a trust if the only property to be held by the trust is a residence to be used as a personal residence by persons holding term interests in the trust (see below), or to the extent that regulations provide that a transfer is not inconsistent with IRC Section 2702. (2) Also, IRC Section 2702 does not apply to (1) certain charitable remainder trusts, (2) a pooled income fund, (3) a charitable lead trust in which the only interest in the trust other than the remainder interest or a qualified annuity or unitrust interest is the charitable lead interest, (4) the assignment of a remainder interest if the only interest retained by the transferor or an applicable family member is as a permissible recipient of income in the sole discretion of an independent trustee, and (5) a transfer in trust to a spouse for full and adequate consideration in connection with a divorce if any remaining interests in the trust are retained by the other spouse. (3) For transfers to a trust made after May 18, 1997, regulations exempt charitable remainder unitrusts (CRUTs) from IRC Section 2702 only if the trust provides for simple unitrust payments, or in the case of a CRUT with a lesser of trust income or the unitrust amount provision, the grantor and/or the grantor's spouse (who is a citizen of the U.S.) are the only noncharitable beneficiaries. (4) Modified rules apply to certain qualified tangible property, see below.

For these purposes, a transfer in trust does not include (1) the exercise, release, or lapse of a power of appointment over trust property that would not be a transfer for gift tax purposes, or (2) the exercise of a qualified disclaimer. An interest in trust includes a power with respect to a trust which would cause any portion of the transfer to be incomplete for gift tax purposes. (1)

Retained Interests

Retained is defined as the same person holds an interest both before and after the transfer in trust. Thus, a transfer of an income interest for life in trust to an applicable family member in conjunction with the transfer of a remainder interest in trust to a member of the transferor's family is not subject to IRC Section 2702. However, with respect to the creation of a term interest (e.g., a joint purchase creating a term and remainder interest), any interest held by the transferor immediately after the transfer is treated as held both before and after the transfer. (2) A negotiable note received in exchange for publicly traded stock sold to a trust was not treated as a retained interest in a trust. (3)

Qualified Interests

A "qualified interest" is an annuity or unitrust interest, or, if all other interests in the trust are annuity or unitrust interests, a noncontingent remainder interest. A qualified annuity interest means a right to receive fixed amounts (or a fixed fraction or percentage of the property transferred to the trust) not less frequently than annually. A qualified unitrust interest means a right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually). (4) A qualified annuity interest can provide for an annuity amount (or fixed fraction or percentage) which increases by not more than 120% of the stated dollar amount (or fixed fraction or percentage) payable in the preceding year. (5) A qualified unitrust interest can provide for a unitrust percentage which increases by not more than 120% of the fixed percentage payable in the preceding year. (6)

The retention of a power to revoke a qualified annuity or unitrust interest of the transferor's spouse is treated as retention of the qualified annuity or unitrust interest. (7) Contingent annuity interests retained by the grantor or given to the grantor's spouse were not qualified interests. (8) Regulations treat an interest with the following characteristics as a qualified interest retained by the grantor: an annuity or unitrust interest that is (1) given to the spouse of the grantor; and (2) contingent only on (a) the spouse surviving, or (b) that the grantor does not revoke the spouse's interest. (9) The grantor makes an additional gift to the remainder person when the spouse's interest is revoked or the grantor survives the trust term without having revoked the interest.

A right to receive each year the lesser of an annuity interest or a unitrust interest is not treated as a qualified interest. The right to receive each year the greater of an annuity interest or a unitrust interest is treated as a qualified interest. However, the qualified interest is valued at the greater of the two interests. (10) A right of withdrawal, whether or not cumulative, is not a qualified annuity or unitrust interest. (11)

A qualified annuity or unitrust interest may permit the payment of income in excess of the annuity or unitrust amount to the transferor or applicable family member with the retained annuity or unitrust interest. However, the annuity or unitrust interest is valued without regard to the right to excess income (which is not a qualified annuity or unitrust interest). (1) Also, a qualified annuity interest may permit the payment of an amount sufficient to reimburse the grantor for any income tax due on income in excess of the annuity amount; the annuity interest is valued without regard to such reimbursement right. (2) Distributions from the trust cannot be made to anyone other than the transferor or applicable family member who holds the qualified annuity or unitrust interest. (3)

The term of the annuity or unitrust interest must be for the life of the transferor or applicable family member, for a specified term of years, or for the shorter of the two periods.4 There is a split of authority as to whether valuation may be based on two lives, or just one life.5 Regulations permit certain revocable spousal interests (see above), but value the retained grantor and spouse's interests separately as for a single life. (6)

An example in the regulations had provided that where a grantor retained the right to annuity payments for 10 years and the payments continued to his estate if he died during the 10-year term, the annuity was valued as for 10 years or until the grantor's prior death (i.e., as a temporary annuity). (7) The Tax Court ruled that the example was invalid, that the annuity should be valued as for 10 years (i.e., as a term annuity). (8) The IRS has changed the regulations so as to follow Walton. (9) Note that if the trust property reverted to grantor's estate if the grantor died during the 10-year term, the annuity is valued as for 10 years or until the grantor's prior death. (10) Similar results should apply likewise to unitrust payments.

The IRS will not issue rulings or determination letters on whether annuity interests are qualified interests under IRC Section 2702 where (1) the amount of the annuity payable annually is more than 50% of the initial fair market value of the property transferred to trust, or (2) the value of the remainder interest is less than 10% of the initial fair market value of the property transferred to trust. For purposes of the 10% test, the value of the remainder interest is determined under IRC Section 7520 without regard to the possibility that the grantor might die during the trust term, or that the trust property might revert to the grantor or the grantor's estate. (11)

Commutation (generally, an actuarially based acceleration or substitution of benefits) of a qualified annuity or unitrust interest is not permitted. (1) Additional contributions are not permitted with qualified annuity interests. (2)

The use of notes, other debt instruments, options or similar financial arrangements in satisfaction of the annuity or unitrust requirements under IRC Section 2702 is prohibited. (3)

A remainder (or reversion) interest is treated as a qualified remainder interest if: (1) all interests in the trust (other than non-contingent remainder interests) are either qualified annuity interests or qualified unitrust interests (thus, an excess income provision is not permitted for this purpose); (2) each remainder interest is entitled to all or a fractional share of the trust property when all or a fractional share of the trust terminates (a transferor's right to receive the original value of the trust property, or a fractional share, would not qualify); and (3) the remainder is payable to the beneficiary or the beneficiary's estate in all events (i.e., it is non-contingent). (4)

A qualified interest is to be valued using the valuation tables prescribed by IRC Section 7520. (5) For valuation rules for certain qualified tangible property, see below.

Qualified Tangible Property

If the nonexercise of rights under a term interest in tangible property would not have a substantial effect on the valuation of the remainder interest, the interest is valued at the amount for which it could be sold to an unrelated third person (i.e., market value is used instead of the valuation tables or zero valuation). (6) Qualified tangible property is tangible property (1) for which a depreciation or depletion allowance would not be allowable if the property were used in a trade or business or held for the production of income, and (2) as to which the nonexercise of any rights under the term interest would not affect the value of the property passing to the remainder-person. A de minimis exception is provided at the time of the transfer to trust for improvements to the property which would be depreciable provided such improvements do not exceed 5% of the fair market value of the entire property. (7)

Term interests in qualified tangible property are valued using actual sales or rentals that are comparable both as to the nature and character of the property and the duration of the term interest. Little weight is given appraisals in the absence of comparables. Tables used in valuing annuity, unitrust, estate, and remainder interests under IRC Section 7520 are not evidence of what a willing buyer would pay a willing seller for an interest in qualified tangible property. (8) If the taxpayer cannot establish the value of the term interest, the interest is valued at zero. (9)

If, during the term, the term interest is converted into property other than qualified tangible property, the conversion is treated as a transfer of the unexpired portion of the term interest (valued as of the time of the original transfer) unless the trust is converted to a qualified annuity interest (see above). (10) If an addition or improvement is made to qualified tangible property such that the property would no longer be treated as qualified tangible property, the property is subject to the conversion rule above. If the addition or improvement would not change the nature of the qualified tangible property, the addition or improvement is treated as an additional transfer subject to IRC Section 2702. (1)

Personal Residences

IRC Section 2702 does not apply to the transfer of an interest in a personal residence trust or a qualified personal residence trust. (2) However, a person is limited to holding a term interest in only two such trusts. (3) A personal residence trust or a qualified personal residence trust which does not meet the requirements in the regulations may be modified (by judicial modification or otherwise, so long as the modification is effective under state law), if the reformation commences within 90 days of the due date (including extensions) for filing the gift tax return and is completed within a reasonable time after commencement. (4)

A personal residence is defined as either (1) the principal residence of the term holder, (2) a residence of the term holder which the term holder uses for personal use during the year for a number of days which exceeds the greater of 14 days or 10% of the days during the year that the residence is rented at fair market value, or (3) an undivided fractional interest in either (1) or (2). A personal residence includes appurtenant residential structures and a reasonable amount of land (taking into account the residence's size and location). Personal property, such as household furnishings, is not included in a personal residence. A personal residence is treated as such as long as it is not occupied by any other person (other than the spouse or a dependent) and is available at all times for use by the term holder as a personal residence. A personal residence can be rented out if the rental use is secondary to the primary use as a personal residence (but see above). Use of the residence as transient lodging is not permitted if substantial services are provided (e.g., a hotel or a bed and breakfast). Spouses may hold interests in the same personal residence or qualified personal residence trust. (5)

A personal residence trust is a trust that is prohibited for the entire term of the trust from holding any property other than one residence to be used as the personal residence of the term holder(s). A personal residence trust cannot permit the personal residence to be sold, transferred, or put to any other use. Expenses of the trust can be paid by the term holder. A personal residence trust can hold proceeds payable as a result of damage to, or destruction or involuntary conversion of, the personal residence for reinvestment in a personal residence within two years of receipt of such proceeds. (6)

A personal residence trust created after May 16, 1996 must be prohibited from selling or transferring, directly or indirectly, the residence to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse, at any time after the original term interest during which the trust is a grantor trust. A distribution upon or after the expiration of the original duration of the trust term to another grantor trust of the grantor or the grantor's spouse pursuant to the trust terms will not be treated as a sale or transfer to the grantor or grantor's spouse if the second trust prohibits sale or transfer of the property to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse. This prohibition against a transfer to the grantor or the grantor's spouse does not apply to a transfer pursuant to the trust document or a power retained by the grantor in the event the grantor dies prior to the expiration of the original duration of the trust term. Nor does this prohibition apply to a distribution (for no consideration) of the residence to the grantor's spouse pursuant to the trust document at the expiration of the original duration of the trust term. (7)

A qualified personal residence trust (QPRT) is generally prohibited for the entire term of the trust from holding any property other than one residence to be used as the personal residence of the term holder(s), but certain exceptions are available. Thus, a qualified personal residence trust is permitted to hold cash in a separate account, but not in excess of the amount needed (1) for payment of trust expenses (including mortgage payments) currently due or expected within the next six months, (2) for improvements to the residence to be paid within the next six months, and (3) for purchase of a personal residence either (a) within three months of the creation of the trust, or (b) within the next three months pursuant to a previously entered into contract to purchase. Improvements to the personal residence that meet the personal residence requirements are permitted. (1)

Generally, sales proceeds (including income thereon) may be held in a qualified personal residence trust in a separate account until the earlier of (1) two years from the date of sale, (2) termination of the term holder's interest, or (3) purchase of a new residence. Insurance proceeds (including, for this purpose, certain amounts received upon an involuntary conversion) paid to a qualified personal residence trust for damage or destruction to the personal residence may also be held in the trust in a separate account for a similar period of time. (2)

A qualified personal residence trust created after May 16, 1996 must be prohibited from selling or transferring, directly or indirectly, the residence to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse, during the original trust term and at any time after the original term interest during which the trust is a grantor trust. A distribution upon or after the expiration of the original duration of the trust term to another grantor trust of the grantor or the grantor's spouse pursuant to the trust terms will not be treated as a sale or transfer to the grantor or grantor's spouse if the second trust prohibits sale or transfer of the property to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse. This prohibition against a transfer to the grantor or the grantor's spouse does not apply to a transfer pursuant to the trust document or a power retained by the grantor in the event the grantor dies prior to the expiration of the original duration of the trust term. Nor does this prohibition apply to a distribution (for no consideration) of the residence to the grantor's spouse pursuant to the trust document at the expiration of the original duration of the trust term. (3)

Cash held by a qualified personal residence trust in excess of the amounts permitted above must be distributed to the term holder at least quarterly. Furthermore, upon termination of the term holder's interest, any cash held by a qualified personal residence trust for payment of trust expenses must be distributed to the term holder within 30 days. (4)

The qualified personal residence trust must provide that any trust income be distributed at least annually to the term holder. (5) Distributions from a qualified personal residence trust cannot be made to anyone other than the term holder during any term interest. (6) Commutation (generally, an actuarially based acceleration or substitution of benefits) of a qualified personal residence trust is not permitted. (7)

A qualified personal residence trust ceases to be a qualified personal residence trust if the residence ceases to be used or held for use as the personal residence of the term holder. A residence is held by the trust for use as the personal residence of the term holder so long as the residence is not occupied by any other person (other than the spouse or a dependent of the term holder) and is available at all times for use by the term holder. A sale of a personal residence is not treated as a cessation of use as a personal residence if the personal residence is replaced by another within two years of the sale. The trust must provide that if damage to or destruction of the residence renders it unusable as a residence, the trust ceases to be a qualified personal residence trust unless the residence is repaired or replaced within two years. (1)

A qualified personal residence trust must provide that within 30 days of ceasing to be a qualified personal residence trust with respect to any assets, either (1) the assets must be distributed to the term holder; (2) the assets must be put into a separate share of the trust for the balance of the term holder's interest as a qualified annuity interest; or (3) the trustee may elect either (1) or (2). The amount of such an annuity must be no less than the amount determined by dividing the lesser of the original value of all interests retained by the term holder or the value of all the trust assets by an annuity valuation factor reflecting the valuation table rate on the date of the original transfer and the original term of the term holder's interest. If only a portion of the trust continues as a qualified personal residence trust, then the annuity determined in the preceding sentence is reduced in proportion to the ratio that assets which still qualify as a personal residence trust bear to total trust assets. (2)

Remainder Interest Transactions and Joint Purchases

The transfer of an interest in property with respect to which there are one or more term interests (e.g., transfer of a remainder interest) is to be treated as a transfer of an interest in trust. (3) A leasehold interest in property is not treated as a term interest provided a good faith effort is made to set the lease at a fair rental value. (4) If a person acquires a term interest in property in a joint purchase (or series of related transactions) with members of his family, then such person is treated as though he acquired the entire property and then transferred the interests acquired by the other persons in the transaction to such persons in return for consideration furnished by such persons. (5) For this purpose, the amount considered transferred by such individual is not to exceed the amount which such individual furnished for such property. (6) Special rules apply to "qualified tangible property" (see above).

Attribution

A "member of the family" with respect to an individual includes such individual's spouse, any ancestor or lineal descendant of such individual or such individual's spouse, any brother or sister of the individual, and any spouse of the above. (7) An "applicable family member" with respect to a transferor includes the transferor's spouse, an ancestor of the transferor or transferor's spouse, and the spouse of any such ancestor. (8)

Adjustment to Mitigate Double Taxation

A gift tax and estate tax adjustment is provided to mitigate the double taxation ofretained interests previously valued under IRC Section 2702. In the case of a transfer by gift of a retained interest previously valued under IRC Section 2702 using the zero valuation rule or the qualified tangible property rule, a reduction in aggregate taxable gifts is available in calculating gift tax. If a retained interest previously valued under IRC Section 2702 using the zero valuation rule or using the qualified tangible property rule is later included in the gross estate, a reduction in adjusted taxable gifts is available in calculating estate tax. The amount of the reduction in aggregate taxable gifts or adjusted taxable gifts is equal to the lesser of (1) the increase in the taxable gifts resulting from the retained interest being initially valued under the zero valuation rule or the qualified tangible property rule, or (2) the increase in taxable gifts or gross estate resulting from the subsequent transfer of the interest. For purposes of (2), the annual exclusion is applied first to transfers other than the transfer valued under the zero valuation rule or the qualified tangible property rule. One-half of the amount of reduction may be assigned to a consenting spouse if gifts are split under IRC Section 2513. (1)

Miscellaneous

These provisions apply to transfers after October 8, 1990. However, with respect to property transferred before October 9, 1990, any failure to exercise a right of conversion, to pay dividends, or to exercise other rights to be specified in regulations, is not to be treated as a subsequent transfer. (2)

With respect to gifts made after October 8, 1990, the gift tax statute of limitations on a transfer subject to these provisions does not run unless the transaction is disclosed on a gift tax return in a manner adequate to apprise the IRS of the nature of the retained and transferred interests. (3)

Effect on Trust, Remainder Interest, and Joint Purchase Transactions

GRITs, GRATs, and GRUTs

Generally, a grantor retained income trust (GRIT) should no longer be used unless the only property to be held by the trust is a residence to be used as a personal residence by persons holding term interests in the trust. Under IRC Section 2702, the grantor is treated as though he transferred the entire property to the remainderperson at the time of the creation of the GRIT since his retained income interest is valued at zero (except with respect to the personal residence exception or unless the remainderperson is not a member of the transferor's family). (4)

Instead, grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs) can be used to leverage gifts. The retained annuity or unitrust interest is valued using the government valuation tables provided under IRC Section 7520 (see Q 909). Notes, other debt instruments, options or similar financial arrangements cannot be used in satisfaction of the annuity or unitrust requirements. The value of the transferred remainder interest is equal to the value of the entire property reduced by the value of the retained interest. A reversion or general power of appointment retained by the grantor which is contingent upon the grantor dying during the trust term will no longer reduce the value of the transferred property. However, the value of the retained interest is reduced by such a contingency.

Charitable Trusts

Transfers to charitable remainder annuity trusts (CRATs), certain charitable remainder unitrusts (CRUTs), and pooled income funds are not subject to IRC Section 2702. Also, IRC Section 2702 does not apply to a charitable lead trust in which the only interest in the trust other than the remainder interest or a qualified annuity or unitrust interest is the charitable lead interest. For transfers to a trust made after May 18, 1997, regulations exempt CRUTs from IRC Section 2702 only if the trust provides for simple unitrust payments, or in the case of a CRUT with a lesser of trust income or the unitrust amount provision, the grantor and/or the grantor's spouse (who is a citizen of the U.S.) are the only noncharitable beneficiaries. (1)

Irrevocable Life Insurance Trusts

Irrevocable life insurance trusts should not be affected by IRC Section 2702. Generally, the full value of transfers to an irrevocable life insurance trust are already treated as gifts (except to the extent that annual exclusions are available).

Other Trusts

If a term interest (whether for life or term of years) is given to the transferor's spouse, an ancestor of the transferor or transferor's spouse, or the spouse of any such ancestor, and a remainder interest is given to any member of the transferor's family, IRC Section 2702 should not apply because the grantor has not retained a term interest.

Remainder Interest Transaction (RIT)

In general, if a person retains a term interest (whether for life or term of years) in property and sells or gives a remainder interest in the property to another family member, the value of the transferred property will be equal to the full value of the property unless the transferor retained an annuity or unitrust interest in the property (i.e., the value of a retained income interest is valued at zero).

However, if the nonexercise of rights under a term interest in tangible property would not have a substantial effect on the valuation of the remainder interest, the interest is valued at the amount for which it could be sold to an unrelated third person (i.e., market value is used instead of the valuation tables or zero valuation). The Senate Committee Report to OBRA '90 gives a painting, or undeveloped real estate, as examples of such tangible property. Depletable property is given as an example of property which would not qualify for this special rule. See "Qualified Tangible Property," above.

Split Purchases (Splits)

If a person acquires a term interest in property in a joint purchase (or series of related transactions) with members of his family, then such person is treated as though he acquired the entire property and then transferred the interests acquired by the other persons in the transaction to such persons in return for consideration furnished by such persons. Thus, if a father and son purchase rental property and the father receives an interest for life and the son receives a remainder interest, the father is treated as though he sold the remainder interest to his son for the consideration furnished by the son. The transaction is then essentially treated as a sale of a remainder interest (see above).

914. What special valuation rules apply to certain agreements, options, rights, or restrictions exercisable at less than fair market value under Chapter 14?

For estate, gift, and generation-skipping transfer tax purposes, the value of any property is to be determined without regard to any restriction on the right to sell or use such property, or any option, agreement, or other right to acquire or use the property at less than fair market value (determined without regard to such an option, agreement, or right). However, the previous sentence is not to apply if the option, agreement, right, or restriction (1) is a bona fide business arrangement, (2) is not a device to transfer the property to members of the decedent's family for less than full and adequate consideration in money or money's worth, and (3) has terms comparable to those entered into by persons in an arm's length transaction. (2) The three prongs of the test must be independently satisfied. (3) All three prongs of the test are considered met if more than 50% of the value of the property subject to the right or restriction is owned by persons who are not members of the transferor's family or natural objects of the transferor's bounty. The property owned by such other persons must be subject to the right or restriction to the same extent as the property owned by the transferor.1

To determine whether a buy-sell agreement or other restrictive agreement has terms comparable to those entered into by persons in an arm's length transaction, the following factors are to be considered: "the expected term of the agreement, the current fair market value of the property, anticipated changes in value during the term of the agreement, and the adequacy of any consideration given in exchange for the rights granted." (2) The terms of a buy-sell agreement or other restrictive agreement must be comparable to those used as a general practice by unrelated persons under negotiated agreements in the same business. Isolated comparables do not meet this requirement. More than one recognized method may be acceptable. Where comparables are difficult to find because the business is unique, comparables from similar businesses may be used. (3)

In the case of a partnership (or LLC) created on a decedent's deathbed, the IRS has stated that the partnership was the agreement for purposes of IRC Section 2703, and the partnership should be ignored because the partnership was not a valid business arrangement and the partnership was a device to transfer the underlying property to the family members for less than adequate consideration. Even if the partnership was not ignored, the Service stated that it would ignore the restrictions on use of the property contained in the partnership's agreement; such restrictions also would fail IRC Section 2703. (4) A few courts have rejected the idea that the partnership can be ignored for purposes of IRC Section 2703. (5)

The Tax Court has applied IRC Section 2703 to certain gifts of family limited partnership interests. (6)

Certain restrictions on the sale or use of property in a restricted management account (RMA) are disregarded for transfer tax purposes under IRC Section 2703. (7)

For more information on valuing a closely held business interest, see Q 613, Q 706.

Effective Date and Transition Rules

This provision applies to agreements, options, rights, or restrictions entered into or granted after October 8, 1990, and agreements, options, rights, or restrictions substantially modified after October 8, 1990. (8) Any discretionary modification of an agreement that results in other than a de minimis change in the quality, value, or timing of the agreement is a substantial modification. Generally, a modification required by the agreement is not considered a substantial modification. However, if the agreement requires periodic modification, the failure to update the agreement is treated as a substantial modification unless the updating would not have resulted in a substantial modification. The addition of a family member as a party to a right or restriction is treated as a substantial modification unless (1) the addition is mandatory under the terms of the right or restriction or (2) the added family member is in a generation (using the generation-skipping transfer tax definitions of generations) no lower than the lowest generation of any individuals already party to the right or restriction. The modification of a capitalization rate in a manner that bears a fixed relationship to a specified market rate is not treated as a substantial modification. Furthermore, a modification that results in an option price that more closely approximates fair market value is not treated as a substantial modification. (1)

Effect on Options and Buy-sell Agreements

In order to help fix values for estate, gift, and generation-skipping transfer tax purposes, newly executed or substantially modified options and buy-sell agreements exercisable at less than fair market value between persons who are the natural objects of each others' bounty will generally have to meet all three requirements of IRC Section 2703. Otherwise, such agreement will be disregarded in valuing the property. Old options and buy-sell agreements which are not substantially modified after October 8, 1990 are not affected by IRC Section 2703. IRC Section 2703 applies to agreements involving either business or nonbusiness property.

915. What special valuation rules apply to certain lapsing rights and restrictions under Chapter 14?

In general, IRC Section 2704(a) provides that the lapse of certain voting or liquidation rights in a family owned business results in a taxable transfer by the holder of the lapsing right. IRC Section 2704(b) provides generally that certain restrictions on liquidating a family owned business are ignored in valuing a transferred interest. These provisions apply to restrictions or rights (or limitations on rights) created after October 8, 1990. (2)

For more information on valuing a closely held business interest, see Q 613.

Lapse of Certain Rights

For estate, gift, and generation-skipping transfer tax purposes, if there is a lapse of a voting or liquidation right in a corporation or partnership and the individual holding such right (the "holder") immediately before the lapse and members of the holder's family control the entity (both before and after the lapse), then the holder is treated as making a transfer. The value of the transfer is equal to the amount (if any) by which the value of all interests in the entity held by the holder immediately prior to the lapse (determined as if all voting and liquidation rights were nonlapsing) exceeds the sum of (1) the value of such interests immediately after the lapse (determined as if held by one individual), and (2) in the case of a lapse during the holder's life, any consideration in money or money's worth received by the holder with respect to such lapse. (3)

A voting right is defined as a right to vote with respect to any matter of the entity. Also, with respect to a partnership, the right of a general partner to participate in partnership management is treated as a voting right. A liquidation right is the right to compel (including by aggregate voting power) the entity to acquire all or a portion of the holder's equity interest in the entity. (4) A lapse of a voting or liquidation right occurs when a presently exercisable right is restricted or eliminated. (5)

The transfer of an interest which results in the lapse of a liquidation right is not subject to IRC Section 2704(a) if the rights with respect to the transferred interest are not restricted or eliminated. However, a transfer that results in the elimination of the transferor's right to compel the entity to acquire an interest of the transferor which is subordinate to the transferred interest is treated as a lapse of a liquidation right with respect to the subordinate interest. The lapse rule does not apply to the lapse of a liquidation right with respect to (1) a transfer that was previously valued in the hands of the holder as a transfer of an interest in a corporation or partnership under IRC Section 2701 (see Q 912), or (2) the lapse of a liquidation right to the extent that immediately after the lapse the holder (or the holder's estate) and members of the holder's family cannot liquidate an interest that the holder could have liquidated prior to the lapse. Whether an interest can be liquidated immediately after the lapse is determined under state law or, if the governing instruments are less restrictive than the state law which would apply in the absence of such instruments, the governing instruments. For this purpose, any applicable restriction under IRC Section 2704(b) (see below) is disregarded. (1)

If a lapsed right may be restored only upon the occurrence of a future event not within the control of the holder or the holder's family, the lapse is deemed to occur at the time the lapse becomes permanent with respect to the holder (e.g., upon the transfer of the interest). (2)

For attribution rules, see below.

Transfers Subject to Applicable Restrictions

If there is a transfer of an interest in a corporation or partnership to (or for the benefit of) a member of the transferor's family and the transferor and members of transferor's family control the entity (immediately before the transfer), any applicable restriction is to be disregarded in valuing the transferred interest for estate, gift, or generation-skipping transfer tax purposes. (3) If an applicable restriction is disregarded under this rule, the rights of the transferor are valued under the state law that would apply but for the limitation (which is treated as if it did not exist). (4)

"Applicable restriction" means any restriction which effectively limits the ability of the corporation or partnership to liquidate if either (1) the restriction lapses (in whole or in part) after the transfer, or (2) the transferor or any member of the transferor's family, acting alone or collectively, can remove the restriction (in whole or in part) after the transfer. (5) Applicable restriction treatment was avoided where the consent of all parties was required and a charity (a nonfamily member) had become a partner. (6)

However, any restriction imposed or required by any federal or state law is not treated as an applicable restriction. (7) Thus, the definition of an applicable restriction has been limited to a restriction which is more restrictive than the limitations which would apply under state law if there were no restriction. Also, whether there is the ability to remove a restriction is determined under the state law which would apply in the absence of the restrictive provision in the governing instruments. (8)

An applicable restriction does not include any commercially reasonable restriction which arises as part of any financing by the corporation or partnership with a person who is not related to the transferor or transferee, or a member of the family of either. (9) Regulations provide that an applicable restriction does not include any commercially reasonable restriction which arises as a result of any unrelated person providing capital in the form of debt or equity to the corporation or partnership for the entity's trade or business operations. For this purpose, the regulations apply the relationship rules of IRC Section 267(b), except that the term "fiduciary of a trust" under the relationship rules is modified to generally exclude banks, trust companies, and building and loan associations. (10)

Furthermore, an applicable restriction does not include an option, right to use property, or other agreement subject to IRC Section 2703 (see Q 914). (1)

With respect to a partnership (or LLC) created on a decedent's deathbed, the IRS has disregarded restrictions where the partnership provided that a partner could not liquidate his interest, while state law provided a less restrictive provision. (2) A few cases have held that partnership liquidation provisions were no more restrictive than state law and should not be ignored under IRC Section 2704(b). (3)

Attribution

The following attribution rules or definitions generally apply for purposes of the rules which apply to certain lapsing rights and applicable restrictions under IRC Section 2704.

In the case of a corporation, "control" means 50% ownership (by vote or value) of the stock. In the case of a partnership, "control" means 50% ownership of the capital or profits interests, or in the case of a limited partnership, the ownership of any interest as a general partner. (4)

A "member of the family" with respect to an individual includes such individual's spouse, any ancestor or lineal descendant of such individual or such individual's spouse, any brother or sister of the individual, and any spouse of the above. (5)

An individual is treated as holding interests held indirectly through a corporation, partnership, trust, or other entity. (6) Thus, transfers may be either direct or indirect.

Exclusions

916. What gift tax exclusions are available to a donor?

The Annual Exclusion

A donor can give up to $10,000 as indexed ($13,000 in 2010, see Appendix G for amounts in other years) in money or property to each donee in each calendar year free of gift tax using the gift tax annual exclusion. The $10,000 amount is adjusted for inflation, rounded down to the next lowest multiple of $1,000, after 1998. (7) However, the gifts must be outright gifts or gifts of "present interest" to qualify for these annual exclusions (see Q 917). The annual exclusions are available for gifts to any number of donees and for an unlimited number of years. For example, based upon the annual exclusion as indexed for 2010, a parent can give each of his four children $13,000 a year for 10 years (a total of $520,000), and none of the gifts would be subject to tax. The exclusions are not cumulative, however; exclusions unused in one year cannot be carried over and used in a succeeding year. A donor is not required to file a return for (or include in a filed return) outright gifts totaling no more than the annual exclusion ($13,000 in 2010, see Appendix G) to any one person in a calendar year; total gifts in excess of the annual exclusion to one person in one year must be reported, and the donor takes the annual exclusion against the total on his return.

If a donor transfers a specified portion of real property subject to an "adjustment clause" (i.e., under terms that provide that if the IRS subsequently determines that the value of the specified portion exceeds the amount of the annual exclusion, the portion of property given will be reduced accordingly, or the donee will compensate the donor for the excess), the adjustment clause will be disregarded for federal tax purposes. (1)

A married donor can exclude gifts of up to $26,000 a year (2 X $13,000 annual exclusion in 2010) to each donee if his spouse consents to the gifts (see Q 906). Thus, the tax-free gifts to the four children in the example above could be doubled with consent of donor's spouse. However, if, say, the donor has a married brother with children, and the donor and his wife make gifts to his brother's children in exchange for similar gifts from the brother and his wife to the donor's children, the scheme will not effectively again double the exclusion. (2)

In the case of a present interest gift between spouses, the annual exclusion is applied before the gift tax marital deduction is taken, when computing taxable gifts for the calendar year (see Q 900, Q 919). (3)

If the spouse of the donor is not a United States citizen, the annual exclusion for a transfer from the donor spouse to the non-citizen spouse is increased from $10,000 to $100,000 ($134,000 as indexed in 2010, see Appendix G for amounts in other years) (provided the transfer would otherwise qualify for the marital deduction if the donee spouse were a United States citizen). The $100,000 amount is adjusted for inflation, as is the $10,000 amount (see above).4 However, the marital deduction is not available for a transfer to a spouse who is not a United States citizen (see Q 919).

Exclusion for "Qualified Transfers"

A "qualified transfer" is not considered a gift for gift tax purposes. A "qualified transfer" means any amount paid on behalf of an individual--

(A) as tuition to an educational organization5 for the education or training of such individual,

or

(B) to any person who provides medical care (6) with respect to such individual as payment for such medical care. (7) Tuition payments for future years have been treated as qualified transfers where the payments were nonrefundable. (8) See Q 719 regarding qualified transfers and health insurance.

917. What is a gift of a "future interest" that will not qualify for the gift tax annual exclusion?

An outright gift, or gift of a "present interest," will qualify for the gift tax annual exclusion (see Q 916), but the gift of a "future interest" will not. (9) Generally speaking, a "future interest" is a right to use property only in the future. But the mere fact that a bond, note, or insurance policy is payable in the future does not make ownership of it a "future interest." (10) Ordinarily, the future interest question arises in connection with gifts in trust. The income beneficiary usually has a present interest, and the remainder beneficiary a future interest. But if the income is to be accumulated, everyone has a future interest (except in certain circumstances as, for example, where a beneficiary can demand the trust principal (see Q 727), or where a trust for a minor meets the requirements of IRC Section 2503(c) below). If the trust is revocable, the gift is not complete until an actual distribution is made to a beneficiary, at which time the gift is a present interest gift. If the grantor of a revocable trust dies before distribution is made, the value of the trust corpus and accumulated income is included in the grantor's gross estate for estate tax purposes and is not subject to the gift tax.

There is a special provision with respect to gifts to minors--IRC Section 2503(c). If a gift to a minor meets the conditions set forth in IRC Section 2503(c), the gift can qualify for the exclusion even though the income is to be accumulated during the beneficiary's minority. Under IRC Section 2503(c), a gift to a minor will qualify for the exclusion if, under the terms of the trust or other instrument of gift, the property given (1) may be expended by, or for the benefit of, the donee before his attaining age 21, and (2) will to the extent not so expended (a) pass to the donee on his attaining age 21, or (b) if he dies before age 21, be payable to his estate or as he may appoint under a general power of appointment. A gift in trust to a minor is separable for tax purposes. If trust provisions regarding income earned before the donee is age 21 meet the requirements of IRC Section 2503(c), the annual exclusion is available for the value of such income interest even though provisions for interest earned after the donee is 21 (if any) or provisions for disposition of the principal do not allow the interests in post-21 income or principal to qualify for the exclusion. (1)

A gift of an income interest will not qualify for the annual exclusion if the donor is unable to prove that the income interest has any real value. Thus, the exclusion has been denied for gifts of an income interest in close corporation stock which had no dividend paying history and no likelihood of paying dividends in the foreseeable future. (2) Also, a gift of an income interest must be distinguished from a gift of periodic dollar amounts. Thus, for example, a gift of $100,000 to an irrevocable trust which directs the trustee to pay the income annually to B is a present interest gift. But the same gift to a trust which directs the trustee to pay $10,000 annually to B is a gift of a future interest that does not qualify for the exclusion. (3) Annual exclusions were denied for gifts of limited partnership interests where (1) the general partner could retain income for any reason whatsoever, (2) limited partnership interests could not be transferred or assigned without the permission of a supermajority of other partners, and (3) limited partnership interests generally could not withdraw from the partnership or receive a return of capital contributions for many years into the future. (4) Similarly, annual exclusions were denied for gifts of business interests where the beneficiaries were not free to withdraw from the business entity, could not sell their interests, and could not control whether any income would be distributed (and no immediate income was expected). (5)

A gift of property to a corporation is a gift of a future interest in the property to its shareholders and does not qualify for the annual exclusion.6 Also a gift for the benefit of a corporation (transfer of stock to certain key employees) is a gift of a future interest in the property to its shareholders and does not qualify for the annual exclusion. (7) However, gifts made to individual partnership capital accounts have been treated as gifts of a present interest which qualify for the annual exclusion where the partners were free to make immediate withdrawals of the gifts from their capital accounts. (1) Also, a donor's gratuitous payment of the monthly amount due on the mortgage on a house owned in joint tenancy by others has been held a present interest gift to the joint tenants in proportion to their ownership interests. (2)

918. Does a gift to a minor under a state's Uniform Gifts to Minors Act or Uniform Transfers to Minors Act qualify for the gift tax annual exclusion?

Generally, yes. (3) The allowance of the exclusion is not affected by the amendment of a state's Uniform Act lowering the age of majority and thus requiring that property be distributed to the donee at age 18. (4) These rulings base the allowance of the exclusion on the assumption that gifts under the Uniform Act come within the purview of IRC Section 2503(c). Gifts to minors under IRC Section 2503(c) must pass to the donee on his attaining age 21 (see Q 917). If a state statute varies from the UniformAct by providing that under certain conditions custodianship may be extended past the donee's age 21, gifts made under those conditions would not qualify for the exclusion.

Deductions

919. What is the gift tax marital deduction?

It is a deduction allowed for gifts of interests in property (including cash) between spouses in an amount equal to the value of such gifts made after 1981. (5)

Outright gifts to the spouse qualify for the deduction. However, the marital deduction cannot be taken if the gift is of a life estate or other terminable interest unless it meets certain statutory requirements for qualification. In general, these are the same requirements necessary to qualify a terminable interest for the estate tax marital deduction; that is, the donee spouse must have (1) a right to the income from the property for life and a general power of appointment over the principal; or, (2) a "qualifying income interest for life" in "qualified terminable interest property," as to which the donor must make an election (on or before the date, including extensions, for filing a gift tax return with respect to the year in which the transfer was made--see Q 901) to have the marital deduction apply (see Q 863). As to qualifying a joint and survivor annuity for the marital deduction, see Q 732. The marital deduction will also apply to the value of a donee spouse's income interest in a "qualified charitable remainder trust" created by the donor spouse if the donee spouse is the only noncharitable beneficiary of the trust other than certain ESOP remainder beneficiaries (see Q 863). (6) A marital deduction has been disallowed for a transfer to an irrevocable trust where state law provided that the interest given the spouse would be revoked upon divorce and the grantor had not provided in the trust instrument that the trust would not be revoked upon divorce. (7)

If the spouse of the donor is not a United States citizen, the marital deduction is not available for a transfer to such a spouse. However, in such a case, the annual exclusion (see Q 916) for the transfer from the donor spouse to the non-citizen spouse is increased from $10,000 to $100,000 as indexed ($134,000 in 2010, see Appendix G) (provided the transfer would otherwise qualify for the marital deduction if the donee spouse were a United States citizen). The $100,000 amount is adjusted for inflation, as is the $10,000 amount (see Q 916). (8)

920. Is the federal gift tax imposed on gifts to charitable organizations?

No. A deduction is allowed for the value of the gift. However, no deduction is allowed for a lead interest in a trust unless the payments to the charity are in the form of a guaranteed annuity, or a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly). No deduction is allowed for a remainder interest in a trust unless the interest is in the form of a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund (see Q 825). (1) A deduction is allowable for a gift to charity of a legal remainder interest in the donor's personal residence even though the interest conveyed to charity is in the form of a tenancy in common with an individual. (2) If an individual creates a qualified charitable remainder trust in which his spouse is the only noncharitable beneficiary other than certain ESOP remainder beneficiaries (see Q 863), the grantor will receive a charitable contributions deduction for the value of the remainder interest. (3) However, if the property in the trust is "qualified terminable interest property" and the donee spouse's interest is a "qualifying income interest for life" (see Q 863), it would appear that the charitable contributions deduction could be taken by the donee spouse if and when she disposes of her income interest during life, assuming the donor spouse elected to take the marital deduction for the entire value of the property. (4) A gift tax charitable deduction is allowed for a gift to a qualified charity which is made in exchange for an annuity issued by the charity if (1) the value of the gift exceeds the value of the annuity, and (2) the annuity is payable out of the general funds of the charity. The annuity is valued by applying the estate and gift tax valuation tables (see Q 909). (5)

Unified Credit

921. What is the unified credit, and how is it applied against the gift tax?

The unified credit is a dollar amount allotted to each taxpayer that can be applied against the gift tax and the estate tax (but see Q 867). The gift tax unified credit is equal to $330,800 in 2010 which translates into a tentative tax base (or unified credit exemption equivalent or applicable exclusion amount) of $1,000,000 in 2010. See Appendix G for amounts in other years (and estate tax amounts). Application of the credit against the gift tax reduces (by the amount used) the credit that would otherwise be available against future gifts and against any estate tax later imposed on transfers from the donor's estate. (6) With respect to gifts made after September 8, 1976 and before January 1, 1977, if the donor elected to apply any of his $30,000 lifetime exemption to such gifts, the donor's unified credit is reduced by 20% of the amount of the exemption allowed against those gifts (see IRC Section 2505(b), and also Q 867). (7)

The following examples illustrate the application of the unified credit against the gift tax:

Example 1. D made a gift in October 1976. He elected to use $10,000 of his lifetime exemption to reduce the amount of the taxable gift. It was the only gift D made between September 8, 1976 and January 1, 1977, against which he elected to apply any of his lifetime exemption. In April 1977, D made his next taxable gift (the only gift he made in that quarter), on which the gift tax imposed was $5,000. The amount of unified credit allowable was $4,000 ($6,000 reduced by 20% of $10,000, or $2,000).

Example 2. In September 1977, D (same donor) made his next taxable gift (the only taxable gift he made in that quarter), on which the gift tax imposed was $50,000. The amount of unified credit allowable was $24,000 ($30,000 reduced by the sum of $4,000 and $2,000).

Example 3. In June 1980, D (same donor) made his next taxable gift (the only taxable gift he made in that quarter), on which the tax imposed was $10,000. The amount of unified credit allowable is $10,000. ($42,500 reduced by the sum of $24,000, $4,000 and $2,000 is $12,500; but the credit allowable cannot exceed the amount of the tax.)

Example 4. In January 2010, D (same donor) makes his next taxable gift (the only taxable gift he makes in the calendar year), on which the tax imposed is $100,000. The amount of unified credit allowable is $100,000. ($330,800 reduced by the sum of $10,000, $24,000, $4,000 and $2,000 is $290,800; but the credit allowable cannot exceed the amount of the tax.)

Where the donor makes a gift conditioned on the donee's paying the gift tax (see Q 910), it is the donor's unified credit that is applied against the tax, not the donee's. (1) Moreover, use of the unified credit is not optional. That is, in the foregoing situation the donor may not require the donee to forego taking the credit, pay the tax, and thus save the unified credit undiminished for use against the tax on a subsequent gift or against the donor's estate tax; the unified credit must be applied when it is available. (2)

Planning Point: The split-gift provision enables a spouse who owns most of the property to take advantage of the other spouse's annual exclusions (see Q 916) and unified credit (see Q 921). Thus, a spouse, with the other spouse's consent, can give up to $26,000 (2 x $13,000 annual exclusion in 2010, see Appendix G) a year to each donee free of gift tax, and, in addition, may have both their unified credits to apply against gift tax imposed on gifts in excess of the annual exclusion. Moreover, by splitting the gifts between husband and wife, they may fall in lower gift tax brackets.

Planning Point: A grantor retained annuity trust (GRAT) can be zeroed out (i.e., the value of the gift of the remainder reduced to zero) using an annuity payable to the grantor for a term of years with payments continuing to the grantor's estate for the balance of the term of years if the grantor dies during the term. In general, the GRAT is zeroed out if the annuity payment is made to equal the value of the property transferred to the trust divided by the appropriate annuity factor (including adjustments for frequency of payment).

(1.) IRC Sec. 2501.

(1.) IRC Sec. 6019.

(2.) IRC Sec. 6075(b).

(3.) IRC Sec. 6075(b)(3).

(4.) IRC Sec. 6075; Treas. Reg. [section] 25.6075-1(b)(2).

(5.) IRC Sec. 6081(a).

(6.) Treas. Reg. [section] 25.6081-1.

(1.) IRC Secs. 2502(c), 6151(a).

(2.) IRC Sec. 6324(b); Comm. v. Chase Manhattan Bank, 259 F.2d 231 (5th Cir. 1958).

(3.) IRC Sec. 6161.

(4.) IRC Sec. 6159.

(5.) IRC Secs. 6601(a), 6621(a)(2).

(6.) Rev. Rul. 2009-27, 2009-39 IRB 404.

(7.) Treas. Reg. [section] 25.2511-1(a).

(8.) Treas. Reg. [section] 25.2512-1.

(9.) Treas. Reg. [section] 25.2511-2(a).

(10.) Treas. Reg. [section] 25.2511-1(g)(1); Let. Rul. 7838112; Millard v. U.S., 84-2 USTC [paragraph] 3,597 (S.D. Ill. 1984); Let. Rul. 7921017.

(11.) IRC Sec. 2503(f).

(12.) IRC Sec. 2512(b).

(13.) Treas. Reg. [section] 25.2512-8.

(14.) Treas. Reg. [section] 25.2511-2.

(1.) Let. Rul. 8140016.

(2.) Rev. Rul. 84-25, 1984-1 CB 191.

(3.) Rev. Rul. 98-21, 1998-1 CB 975.

(4.) Est. of Spiegel v. Comm., 12 TC 524 (1942).

(5.) 90-1 USTC [paragraph] 60,021 (10th Cir. 1990).

(6.) 89 TC [paragraph] 207 (1987).

(7.) 94-2 USTC [paragraph] 60,179 (4th Cir. 1994), aff'g 100 TC 204 (1993).

(8.) TC Memo 1993-434.

(9.) Rev. Rul. 96-56, 1996-2 CB 161.

(1.) Treas. Reg. [section] 25.2511-1(h).

(2.) IRC Sec. 2514.

(3.) IRC Sec. 2518.

(4.) Grimes v. Comm., 88-2 USTC [paragraph] 3,774 (7th Cir. 1988).

(5.) IRC Sec. 2519.

(6.) Let. Ruls. 200116006, 200122036.

(7.) Treas. Regs. [subsection] 25.2207A-1(b), 25.2519-1(c)(4).

(8.) Rev. Rul. 98-8, 1998-1 CB 541.

(9.) Let. Rul. 199908033.

(10.) IRC Sec. 2523(f)(5).

(1.) Treas. Reg. [section] 20.2207A-1(a).

(2.) Treas. Reg. [section] 25.2511-1(h)(1); Let. Rul. 8351137.

(3.) TAMs 8723007, 8726005.

(4.) Snyder v. Comm., 93 TC 529 (1989).

(5.) Let. Rul. 9117035.

(6.) TAM 9315005.

(7.) Let. Rul. 8945006.

(8.) TAM 200014004.

(9.) Rev. Rul. 2004-64, 2004-27 IRB 7.

(10.) Let. Rul. 200917004.

(1.) IRC Sec. 280I.

(2.) IRC Sec. 1274(d).

(3.) See Prop. Treas. Reg. [section] 1.7872-14.

(1.) Prop. Treas. Reg. [section] 1.7872-5(b)(4).

(2.) Temp. Treas. Reg. [section] 1.7872-5T(b)(9).

(3.) Frazee v. Comm., 98 TC 554 (1992).

(4.) Dickman v. Comm., 104 S. Ct. 1086 (1984).

(5.) 1985-2 CB 507.

(6.) IRC Secs. 530(d)(3), 529(c)(2).

(7.) IRC Secs. 530(d)(3), 529(c)(5).

(8.) IRC Sec. 529(c)(2).

(9.) IRC Sec. 529(d)(5)(B).

(1.) IRC Sec. 2513; Treas. Reg. [section] 25.2513-1.

(2.) IRC Sec. 2513(a)(2).

(3.) TAM 9404023.

(4.) Treas. Reg. [section] 25.2518-2(c)(3).

(5.) U.S. v. Irvine, 94-1 USTC [paragraph] 60,163 (U.S. 1994).

(6.) Est. of Fleming v. Comm., 92-2 USTC [paragraph] 60,113 (7th Cir. 1992).

(1.) IRC Sec. 2518(b); Treas. Reg. [section] 25.2518-2(a).

(2.) Let. Rul. 8702024.

(3.) Walshire v. Comm., 2002-1 USTC [paragraph] 60,439 (8th Cir. 2002).

(4.) Treas. Reg. [section] 25.2518-1(b).

(5.) Treas. Reg. [section] 25.2518-2(c)(4).

(6.) Rev. Rul. 90-45, 1990-1 CB 176.

(7.) IRC Sec. 2518(c)(2).

(8.) Treas. Reg. [section] 25.2518-2(d)(1); Let. Rul. 8142008.

(1.) Treas. Reg. [section] 25.2518-2(d)(3).

(2.) Treas. Reg. [section] 25.2518-2(d)(4), Example 11.

(3.) Rev. Rul. 76-156, 1976-1 CB 292; IRC Sec. 2518(c)(2).

(4.) Rev. Rul. 2005-36, 2005-26 IRB 1368.

(5.) IRC Sec. 2518(c)(3).

(6.) IRC Sec. 2512(a); Treas. Reg. [section] 25.2512-1.

(7.) Okerlundv. U.S.,2004-1 USTC [paragraph] 60,481 (Fed. Cir. 2004).

(8.) IRC Sec. 2515.

(9.) IRC Sec. 7517.

(1.) IRC Sec. 6662.

(2.) IRC Sec. 6664(c)(1).

(3.) IRC Sec. 6501(c)(9).

(4.) Fehrs v. U.S., 79-2 USTC [paragraph] 3,324 (Ct. Cl. 1979).

(5.) Est. of Carter v. U.S., 91-1 USTC [paragraph] 60,054 (5th Cir. 1991); Dunigan v. U.S., 434 F.2d 892 (5th Cir. 1970); Est. of Hoelzel v. Comm., 28 TC 384 (1957), acq. 1957-2 CB 5; Est. of Jennings v. Comm., 10 TC 323 (1948), acq. 1953-1 CB 5; Ellis Sarasota Bank & Trust Co. v. U.S., 77-2 USTC [paragraph] 3,204 (M.D. Fla. 1977); Rev. Rul. 66-307, 1966-2 CB 429.

(6.) Miami Beach First Natl Bank v. U.S., 443 F.2d 116 (5th Cir. 1971); Est. of Bell v. U.S., 46 AFTR 2d [paragraph] 48,406 (E.D. Wash. 1980); Bank ofCal. (Est. of Manning) v. U.S., 82-1 USTC [paragraph] 3,461 (C.D. Cal. 1980); Est. of Fabric v. Comm., 83 TC 932 (1984).

(7.) U.S. v. Provident Trust Co., 291 U.S. 272 (1934); Est. of Van Horne v. Comm., 83-2 USTC [paragraph] 3,548 (9th Cir. 1983), aff'g 78 TC 728 (1982), cert. den.

(8.) Treas. Regs. [subsection] 1.7520-3(b)(3), 20.7520-3(b)(3), 25.7520-3(b)(3).

(9.) Morgan v. Comm., 42 TC [paragraph] 080 (1964), aff'd 353 F.2d 209 (4th Cir. 1965); Hanley v. U.S., 63 F. Supp. 73 (Ct. Cl. 1945).

(10.) Rev. Rul. 77-195, 1977-1 CB 295.

(11.) Rev. Rul. 79-280, 1979-2 CB 340.

(1.) Treas. Regs. [subsection] 1.7520-3(b)(2)(i), 20.7520-3(b)(2)(i), 25.7520-3(b)(2)(i).

(2.) See Treas. Reg. [section] 25.7520-3(b)(2)(v)(Ex. 5).

(3.) Treas. Regs. [subsection] 1.7520-3(b)(2)(ii), 20.7520-3(b)(2)(ii), 25.7520-3(b)(2)(ii).

(4.) Treas. Regs. [subsection] 1.7520-3(b)(2)(iii), 20.7520-3(b)(2)(iii), 25.7520-3(b)(2)(iii).

(5.) Est. of Shackelford v. U.S., 2001-2 USTC [paragraph] 60,417 (9th Cir. 2001), aff'g 99-2 USTC [paragraph] 60,356 (E.D. Calif. 1999); Est. of Cook v. Comm., 2003-2 USTC [paragraph] 60,471 (5th Cir. 2003), aff'g TC Memo 2001-170; Est. of Gribauskas v. Comm., 2003-2 USTC [paragraph]60,466 (2nd Cir. 2003), rev'g 116 TC [paragraph] 42 (2001); Est. of Donovan v. Comm., 2005-1 USTC [paragraph] 60,500 (DC Mass. 2005); Negron v. U.S., 2009-1 USTC [paragraph] 60,571 (6th Cir. 2009), rev'g 2007-1 USTC [paragraph] 60,541 (ND OH 2007).

(1.) Est. of Anthony v. U.S., 2008-1 USTC [paragraph] 60,558 (5th Cir. 2008), aff'g 2005-1 USTC [paragraph] 60,504 (M.D. La. 2005).

(2.) Davis v. U.S., 2007-1 USTC [paragraph] 60,542 (DC NH 2007).

(3.) IRC Sec. 7520(a).

(4.) Treas. Reg. [section] 20.7520-1(b)(1).

(5.) IRC Sec. 7520(b).

(6.) Treas. Regs. [subsection] 1.642(c)-6(e)(4), 1.664-4(e).

(7.) IRC Sec. 7520(a).

(8.) Rev. Rul. 75-72, 1975-1 CB 310; Lingo v. Comm., 13 TCM 436 (1959); Harrison v. Comm., 17 TC [paragraph] 350 (1952), acq. 1952-2 CB 2.

(1.) IRC Secs. 2701(a)(1), 2701(a)(3)(A).

(2.) IRC Sec. 2701(a)(3)(B).

(3.) IRC Sec. 2701(a)(3)(C).

(4.) IRC Sec. 2701(a)(4).

(5.) IRC Sec. 2701(a)(2).

(6.) Treas. Reg. [section] 25.2701-1(c)(4).

(1.) Treas. Reg. [section] 25.2701-1(b)(2)(i).

(2.) IRC Sec. 2701(e)(5).

(3.) IRC Sec. 2701(d)(5).

(4.) IRC Sec. 2701(b).

(5.) IRC Sec. 2701(e)(7); Treas. Reg. [section] 25.2701-7.

(6.) IRC Sec. 2701(c)(1).

(7.) IRC Sec. 2701(c)(2).

(8.) Treas. Reg. [section] 25.2701-2(b)(1).

(9.) Treas. Reg. [section] 25.2701-2(b)(2).

(10.) Treas. Reg. [section] 25.2701-2(b)(4).

(1.) IRC Sec. 2701(c)(3).

(2.) Treas. Reg. [section] 25.2701-2(c)(2).

(3.) IRC Sec. 2701(e)(1).

(4.) IRC Sec. 2701(e)(2).

(5.) IRC Sec. 2701(e)(3).

(6.) IRC Sec. 2701(b)(2).

(7.) IRC Sec. 2701(b)(2)(C).

(8.) Let. Rul. 9253018.

(9.) IRC Sec. 2701(a)(4).

(10.) Treas. Reg. [section] 25.2701-3.

(1.) Treas. Reg. [section] 25.2701-3(b).

(2.) IRC Sec. 2701(d).

(3.) Treas. Reg. [section] 25.2701-4(c)(2).

(4.) Treas. Reg. [section] 25.2701-4(c)(5).

(5.) Treas. Reg. [section] 25.2701-4(c)(1).

(6.) IRC Sec. 2701(d)(2)(B).

(7.) Treas. Reg. [section] 25.2701-4(c)(6)(iii).

(8.) Treas. Reg. [section] 25.2701-4(d)(2).

(1.) IRC Sec. 2701(d)(3)(A).

(2.) Treas. Regs. [subsection] 25.2701-4(b)(1); 25.2701-4(b)(2).

(3.) IRC Sec. 2701(d)(3)(B).

(4.) IRC Sec. 2701(d)(4).

(5.) IRC Sec. 2701(e)(6).

(1.) Treas. Reg. [section] 25.2701-5.

(2.) Treas. Reg. [section] 25.2701-5(h).

(3.) Prop. Treas. Reg. [section] 25.2701-5(a).

(4.) Prop. Treas. Reg. [section] 25.2701-5(b).

(5.) Prop. Treas. Reg. [section] 25.2701-5(c).

(6.) OBRA '90, Sec. 11602(e)(1).

(7.) IRC Sec. 6501(c)(9); OBRA '90, Sec. 11602(e)(2).

(1.) See TAM 9436006.

(2.) IRC Sec. 2702(a).

(3.) Treas. Reg. [section] 25.2702-1(c).

(4.) Treas. Reg. [section] 25.2702-1(c)(3).

(1.) Treas. Reg. [section] 25.2702-2(a).

(2.) Treas. Reg. [section] 25.2702-2(a)(3).

(3.) TAM 9436006.

(4.) IRC Sec. 2702(b).

(5.) Treas. Reg. [section] 25.2702-3(b)(1)(ii).

(6.) Treas. Reg. [section] 25.2702-3(c)(1)(ii).

(7.) Treas. Reg. [section] 25.2702-2(a)(5).

(8.) TAMs 9707001, 9717008, 9741001; Cook v. Comm., 2001-2 USTC [paragraph] 60,422 (7th Cir. 2001), aff'g 115 TC [paragraph] 5 (2000).

(9.) Treas. Reg. [section] 25.2702-3(d)(2).

(10.) Treas. Reg. [section] 25.2702-3(d)(1).

(11.) Treas. Regs. [subsection] 25.2702-3(b)(1)(i); 25.2702-3(c)(1)(i).

(1.) Treas. Regs. [subsection] 25.2702-3(b)(1)(iii); 25.2702-3(c)(1)(iii).

(2.) Let. Ruls. 9441031, 9345035.

(3.) Treas. Reg. [section] 25.2702-3(d)(2).

(4.) Treas. Reg. [section] 25.2702-3(d)(3).

(5.) Schott v. Comm., 2003-1 USTC [paragraph] 60,457 (9th Cir. 2003), rev'g TC Memo 2001-110; Cook v. Comm., 2001-2 USTC 160,422 (7th Cir. 2001), aff'g 115 TC [paragraph] 5 (2000).

(6.) Treas. Reg. [section] 25.2702-3(e)(Ex. 8).

(7.) Former Treas. Reg. [section] 25.2702-3(e)(Ex. 5).

(8.) Walton v. Comm., 115 TC 589 (2000).

(9.) Treas. Reg. [section] 25.2702-3(e)(Ex. 5).

(10.) Treas. Reg. [section] 25.2702-3(e)(Ex. 1).

(11.) Rev. Proc. 2009-3, Sec. 4.51, 2009-1 IRB 107.

(1.) Treas. Reg. [section] 25.2702-3(d)(4).

(2.) Treas. Reg. [section] 25.2702-3(b)(4).

(3.) Treas. Reg. [section] 25.2702-3.

(4.) Treas. Reg. [section] 25.2702-3(f).

(5.) IRC Sec. 2702(a)(2)(B).

(6.) IRC Sec. 2702(c)(4).

(7.) Treas. Reg. [section] 25.2702-2(c)(2).

(8.) Treas. Reg. [section] 25.2702-2(c)(3).

(9.) Treas. Reg. [section] 25.2702-2(c)(1).

(10.) Treas. Reg. [section] 25.2702-2(c)(4).

(1.) Treas. Reg. [section] 25.2702-2(c)(5).

(2.) IRC Sec. 2702(a)(3)(A)(ii); Treas. Reg. [section] 25.2702-5(a).

(3.) Treas. Reg. [section] 25.2702-5(a).

(4.) Treas. Reg. [section] 25.2702-5(a)(2).

(5.) Treas. Regs. [subsection] 25.2702-5(b); 25.2702-5(c)(2).

(6.) Treas. Reg. [section] 25.2702-5(b).

(7.) Treas. Regs. [subsection] 25.2702-5(b)(1), 25.2702-7.

(1.) Treas. Reg. [section] 25.2702-5(c)(5).

(2.) Treas. Regs. [subsection] 25.2702-5(c)(5)(ii); 25.2702-5(c)(7).

(3.) Treas. Regs. [subsection] 25.2702-5(c)(9), 25.2702-7.

(4.) Treas. Reg. [section] 25.2702-5(c)(5)(ii)(A)(2).

(5.) Treas. Reg. [section] 25.2702-5(c)(3).

(6.) Treas. Reg. [section] 25.2702-5(c)(4).

(7.) Treas. Reg. [section] 25.2702-5(c)(6).

(1.) Treas. Reg. [section] 25.2702-5(c)(7).

(2.) Treas. Reg. [section] 25.2702-5(c)(8).

(3.) IRC Sec. 2702(c)(1).

(4.) Treas. Reg. [section] 25.2702-4(b).

(5.) IRC Sec. 2702(c)(2).

(6.) Treas. Reg. [section] 25.2702-4(c).

(7.) IRC Sec. 2702(e).

(8.) IRC Secs. 2702(a)(1), 2701(e)(2).

(1.) Treas. Reg. [section] 25.2702-6.

(2.) OBRA '90, Sec. 11602(e)(1).

(3.) IRC Sec. 6501(c)(9); OBRA '90, Sec. 11602(e)(2).

(4.) See Let. Rul. 9109033.

(1.) Treas. Reg. [section] 25.2702-1(c)(3).

(2.) IRC Sec. 2703.

(3.) Treas. Reg. [section] 25.2703-1(b)(2).

(1.) Treas. Reg. [section] 25.2703-1(b)(3).

(2.) Treas. Reg. [section] 25.2703-1(b)(4)(i).

(3.) Treas. Reg. [section] 25.2703-1(b)(4)(ii).

(4.) TAMs 9723009, 9725002, 9730004, 9735003, 9736004, 9842003.

(5.) Est. of Strangi v. Comm., 2002 USTC [paragraph] 60,441 (5th Cir. 2002), aff'g 115 TC 478 (2000); Church v. U.S., 2000-1 USTC [paragraph] 60,369 (W.D. Tex. 2000).

(6.) Holman v. Comm.., 130 TC [paragraph] 70 (2008).

(7.) Rev. Rul. 2008-35, 2008-29 IRB 116.

(8.) OBRA '90, Sec. 11602(e)(1)((A)(ii).

(1.) Treas. Reg. [section] 25.2703-1(c).

(2.) OBRA '90, Sec. 11602(e)(1)(A)(iii).

(3.) IRC Sec. 2704(a); Treas. Regs. [subsection] 25.2704-1(a), 25.2704-1(d).

(4.) Treas. Reg. [section] 25.2704-1(a)(2).

(5.) Treas. Regs. [subsection] 25.2704-1(b), 25.2704-1(c)(1).

(1.) Treas. Reg. [section] 25.2704-1(c).

(2.) Treas. Reg. [section] 25.2704-1(a)(3).

(3.) IRC Sec. 2704(b)(1).

(4.) Treas. Reg. [section] 25.2704-2(c).

(5.) IRC Sec. 2704(b)(2).

(6.) Kerr v. Comm., 2002-1 USTC [paragraph] 60,440 (5th Cir. 2002).

(7.) IRC Sec. 2704(b)(3)(B).

(8.) Treas. Reg. [section] 25.2704-2(b).

(9.) IRC Sec. 2704(b)(3)(A).

(10.) Treas. Reg. [section] 25.2704-2(b).

(1.) Treas. Reg. [section] 25.2704-2(b).

(2.) TAMs 9723009, 9725002, 9730004, 9735003, 9736004, 9842003.

(3.) Kerr v. Comm., 113 TC 449 (1999); Knight v. Comm., 115 TC 506 (2000).

(4.) IRC Secs. 2704(c)(1), 2701(b)(2).

(5.) IRC Sec. 2704(c)(2).

(6.) IRC Secs. 2704(c)(3), 2701(e)(3).

(7.) IRC Sec. 2503(b).

(1.) Rev. Rul. 86-41, 1986-1 CB 300.

(2.) TAM 8717003; Sather v. Comm., 2001-1 USTC [paragraph] 60,409 (8th Cir. 2001); Schuler v. Comm., 2002-1 USTC [paragraph] 60,432 (8th Cir. 2002).

(3.) IRC Sec. 2503(b).

(4.) IRC Sec. 2523(i).

(5.) Described in IRC Section 170(b)(1)(A)(ii).

(6.) As defined in IRC Section 213(d).

(7.) IRC Sec. 2503(e); Rev. Rul. 82-98, 1982-1 CB 141.

(8.) Let. Rul. 200602002, TAM 199941013.

(9.) IRC Sec. 2503(b).

(10.) Treas. Reg. [section] 25.2503-3(a).

(1.) Herr v. Comm., 35 TC 732 (1961), aff'd 303 F.2d 780 (3rd Cir. 1962), acq. 1968-2 CB 2; Konner v. Comm., 35 TC 727 (1961), acq. 1968-2 CB 2; Weller v. Comm., 38 TC 790 (1962), acq. 1968-2 CB 3; Rollman v. U.S., 342 F.2d 62 (Ct. Cl. 1965); Thebaut v. Comm.,TC Memo 1964-102, aff'd in part, rev'd in part 361 F.2d 428 (5th Cir. 1966); Pettus v. Comm., 54 TC [paragraph] 0 (1970); Est. of Levine v. Comm., 526 F.2d 717 (2nd Cir. 1976), rev'g 63 TC [paragraph] 36, nonacq. 1978-2 CB 3; Rev. Rul. 68-670, 1968-2 CB 413.

(2.) Stark v. U.S., 477 F.2d 131 (8th Cir. 1973), aff'g 345 F. Supp. 1263 (W.D. Mo. 1972), cert. den. 94 S. Ct. 290; Berzon v. Comm., 534 F.2d 528 (2nd Cir. 1976), aff'g 63 TC 601.

(3.) Est. of Kolker v. Comm., 80 TC [paragraph] 082 (1983).

(4.) TAM 9751003.

(5.) Hackl v. Comm., 2003-2 1USTC 60,465 (7th Cir. 2003), aff'g 118 TC 279 (2002).

(6.) Rev. Rul. 71-443, 1971-2 CB 337; Treas. Reg. [section] 25.2511-1(h)(1); Stinson v. U.S., 2000-1 USTC [paragraph] 60,377 (7th Cir. 2000); Hollingsworth v. Comm., 86 TC 91 (1986).

(7.) Let. Rul. 9114023.

(1.) Wooley v. U.S., 90-1 USTC [paragraph] 60,013 (S.D. Ind. 1990).

(2.) Rev. Rul. 82-98, 1982-1 CB 141.

(3.) Rev. Rul. 56-86, 1956-1 CB 449; Rev. Rul. 59-357, 1959-2 CB 212; Let. Rul. 8327060.

(4.) Rev. Rul. 73-287, 1973-2 CB 321.

(5.) IRC Sec. 2523(a).

(6.) IRC Sec. 2523(e)-(g).

(7.) TAM 9127005.

(8.) IRC Sec. 2523(i).

(1.) IRC Sec. 2522.

(2.) Rev. Rul. 87-37, 1987-1 CB 295, revoking Rev. Rul. 76-544, 1976-2 CB 288.

(3.) IRC Sec. 2522(c)(2).

(4.) H. Rep. 97-201, p. 162, n. 4.

(5.) Rev. Rul. 84-162, 1984-2 CB 200.

(6.) See IRC Sections 2505(a), 2001(b).

(7.) IRC Sec. 2505.

(1.) Let. Rul. 7842068.

(2.) Rev. Rul. 79-398, 1979-2 CB 338; Let. Rul. 8132011.
Federal Gift Tax Worksheet

Current Year                              Q 902
Current Gifts
- Annual Exclusions               Q 916
- Qualified Transfers Exclusion   Q 916
- Marital Deduction               Q 919
- Charitable Deduction            Q 920
- Total Reductions
Current Taxable Gifts
+ Prior Taxable Gifts
Total Taxable Gifts
Tax on Total Taxable Gifts                Appendix G
- Tax on Prior Taxable Gifts              Appendix G
Tentative Tax                             Appendix G
- Unified Credit                          Q 921
Federal Gift Tax
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Title Annotation:PART V: FEDERAL INCOME TAX GENERAL
Publication:Tax Facts on Insurance and Employee Benefits
Date:Jan 1, 2010
Words:25359
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