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IRS extends the Dickman doctrine.

In Letter Ruling 9113009, the IRS held that the mere guarantee of a family member's debt was a donative transfer subject to gift tax, regardless of whether the guarantor ever actually makes a payment in satisfaction of the debt. Of greater concern was the Service's position that if there is even a remote possibility under the guarantor's estate plan that such a guarantee could be satisfied from qualified terminable interest property (QTIP), the entire QTIP trust would not qualify for the marital deduction under Sec. 2056. The ruling did not address the issue of how to value the gift, nor did it distinguish family guarantees from business guarantees for the purposes of satisfying QTIP requirements.

One way to avoid this problem would be to have the parent/guarantor borrow funds from a bank and loan them to the child or business. Alternatively, the marital deduction problem may be prevented by having both spouses act as co-guarantors of the debt. We understand the Treasury has decided to review this ruling from a tax policy perspective. A published ruling may be issued to provide further guidance to taxpayers.

In IRS Letter Ruling 9117035, a father and son owned 100% of a corporation that established an ESOP. A cross-purchase agreement gave each the right of first refusal over the other's shares at their "current value." The father planned to sell his shares to the ESOP at a time when the "current value" was about 25% of the stock's true fair market value (FMV). To this end, the son intended to waive his right of first refusal to his father's shares, thereby giving up his opportunity to buy the stock at about 25% of its true FMV. The Service held that because the son was legally entitled to, and financially capable of, exercising his options, his failure to do so conferred a benefit on the father equal to the difference between the option price and the shares' FMV. The son's waiver of his right to purchase his father's shares at the option price therefore was a taxable gift from son to father.

Rulings such as Letter Ruling 9117035 indicate the IRS's intention to continue extending the principles of Dickman, 465 US 330 (1984). While one may question the strategy of the taxpayers who accepted the issuance of these adverse rulings, they now provide warning of the IRS's position on these issues.
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Title Annotation:gift tax
Author:Coplan, Robert B.
Publication:The Tax Adviser
Date:Jan 1, 1992
Previous Article:Inventory planning.
Next Article:Social Security benefit planning.

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