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Transfer of home ineffective for estate tax.

Lydia Maxwell sold her home to her son in 1984 for $270,000. The son and his wife gave back a $250,000 mortgage note, on which the son paid yearly interest of 9%, but no principal. Maxwell forgave the remaining $20,000 of the purchase price in 1984, and in each of the next two years forgave $20,000 of the mortgage principal amount. Her will forgave the balance of the mortgate remaining at her death.

Maxwell continued to live in the home until her death in 1986. At the time of the conveyance, she had signed a five-year lease at a monthly rent of $1,800--which about equaled her son's interest payments. Maxwell paid the agreed rent until her death.

The estate tax return reported the mortgage note, valued at $210,000, as an asset, but did not include the value of the residence itself. The IRS claimed the property should be included in Maxwell's gross estate--at its 1986 fair market value of $550,000--under IRC section 2036.

Under section 2036, when a decedent makes a property transfer--except in the case of a bona fide sale for adequate consideration, under which the decedent keeps possession or use of the property until death--the value of the entire property is included in the gross estate.

The Tax Court hled, in the IRS's favor, that the sale was in fact a section 2036 transfer and was not a bona fide sale. The case was appealed to the Second Circuit Court of Appeals.

Result: For the IRS. Section 2036 applies to the transfer and the home must be included in the gross estate. Regardless of the form given to the transaction, in substance Maxwell transferred her home to her only their with the implied understanding that she could live in it until her death. The transfer was not a bona fide sale. The mortgage note had no value, since the parties did not intend for it to be paid. Further, the lease was merely part of the attempt to make the sale appear bona fide.

* Maxwell Est. (2nd Cir., 1993), aff'g 98 TC No. 39.
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Title Annotation:Estate of Maxwell
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Nov 1, 1993
Words:353
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