Reference(s): Code Sec. 2511;
Private Letter Ruling 8030074
Code Sec. 2511 GIFT TAX -- transfers in general -- transfers subject to gift tax.
When A transfers his 100% of the stock of X to C and D, his children in return for an unsecured annuity for him for life and on his death for B, his wife, for life, the transaction is a presently taxable gift from A to C and D to the extent the fair market value of the stock exceeds the present value of the annuity. The gifts will be eligible for gift-splitting by A and B. They will qualify for the annual exclusion as they give C and D an unrestricted right to the immediate enjoyment of property. IRS furnishes the factor to be used in valuing that gift. Computation is based on Table LT6 with interest at 6%. Finally, the gift of the survivor annuity to B will qualify for the gift tax marital deduction.
Copyright 1980, Tax Analysts.
This is in response to your letter of ... in which you request income tax rulings, gift tax rulings, and a special factor on behalf of the above named taxpayers concerning a proposed transaction.
A and B are husband and wife and the parents of C and D. A is the owner of 100 per cent of the stock of X. A is the founder of the business and now desires to retire. C and D are active in the management of X, and it is the intention of all parties to retain control of the corporation within the family. A also desires to assure continuing support for B after his death.
To accomplish these purposes, the parties have proposed a transfer by A to C and D of all of A's stock in X in return for an unsecured annuity for him during his lifetime and, upon his death, for his wife during her lifetime. A proposed form of the agreement was attached to the ruling request.
Under the terms of the proposed agreement, C and D agree to purchase from their father, in equal portions, all of his stock in the corporation. In consideration for such purchase, each son agrees to pay to A during the full term of the joint lives of A and B, and to the survivor thereof during the full term of his or her natural life, the sum of ... annually in equal monthly installments, commencing ... A will retain no security interest or other lien in the stock nor in any other property of C and D.
You have requested that we provide the following rulings with respect to the proposed transaction:
1) No gain or loss will be recognized by A at the time of the transfer, but will be reported ratably as annuity payments are received over the lives of both annuitants until reported in full.
2) The exclusion ratio for each payment will be determined based on the expected return on the annuity over the lives of both annuitants.
3) To the extent that the estate tax deduction under section 691(d) of the Internal Revenue Code becomes applicable to payments received by B after A's death, such deduction would apply against the ordinary income portion of such payments after application of the exclusion ratio.
4) The proposed transaction will constitute a presently taxable gift from A to C and D only to the extent that the fair market value of the property transferred exceeds the present value of the annuity computed with respect to both A and B's lives.
5) The gift described in 4 (above) will qualify for gift-splitting and for the annual exclusion.
6) The proposed transaction will not constitute a presently taxable gift from A to B.
7) If it is determined that there is a presently taxable gift from A to B, it will qualify for the gift tax marital deduction.
You have also requested that we compute the factor to be used in presently valuing the annuity.
Income Tax Rulings
Request #1. Recognition of gain or loss. Gain or loss is not recognized immediately upon the transfer of the stock, but the gain is recognized ratably as annuity payments are received.
Revenue Ruling 69-74, 1969-1 C.B. 43, provides that the gain is reported ratably over the years represented by the annuitant's life expectancy. In this case, the annuity will be a joint and survivor annuity, so that the capital gain will be recovered over the period of the joint life expectancies of the taxpayer and his wife.
This conclusion applies only if the annuity is unsecured at all times. If any security is provided by the two sons to secure the annuity payments, the decision of ESTATE OF BELL V. COMMISSIONER, 60 T.C. 469 (1973), indicates that gain must be fully recognized at the time of the transfer.
Request #2. Exclusion ratio,
Section 72(b) of the Internal Revenue Code provides that the exclusion ratio for each annuity payment is the ratio that the investment in the contract bears to the expected return under the contract. Revenue Ruling 69-74 states that the investment in the contract is the transferor's basis in the property transferred.
The expected return for an annuity in which the husband receives payments for life, then the wife (if she survives him) receives the same payments, is determined under section 1.72-5(b)(1) of the Income Tax Regulations. Under that section, the expected return is computed by multiplying the amount paid annually by the multiplier given in Table II of section 1.72-9 of the regulations.
Request #3. Section 691(d) issue.
Section 4.02(2) of Revenue Procedure 79-14, 1979-1 C.B. 496, provides that the Service will not ordinarily issue rulings concerning the tax effect of any transaction to be consummated at some indefinite future time. Pursuant to section 4.02 of Rev. Proc. 79-14, we are unable to issue a ruling at this time regarding the application of section 691(d) to payments to be received by B after A's death.
Gift Tax Rulings:
Section 2512(b) of the Code, provides that, where property is transferred for less than full and adequate consideration, the amount by which the value of the property exceeds the value of the consideration shall be deemed a gift.
Estate Tax Regulation section 25.2512-8 provides, in part, that transfers reached by the gift tax are not confined to only those in accord with the common law concept of gifts but include sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor.
The excess of the fair market value of property transferred in an intra-family private annuity transaction over the present value of the annuity acquired constitutes a gift. Rev. Rul. 69-74, 1961-1 C.B. 43.
Thus, the proposed transaction will constitute a presently taxable gift from A to C and D to the extent that a fair market value of the property transferred exceeds the present value of the joint and survivor annuity.
Section 2513(a)(1) states that, for purposes of Chapter 12 of the Code, a transfer by one spouse to a person other than his spouse may be treated as though made one-half by each spouse. The gifts to C and D fall within this provision of the Code and will be eligible for gift-splitting by A and B.
Section 2503(b) of the Code authorizes an annual exclusion of $3,000 per donee for gifts of present interests by each donor. Gifts of future interests do not qualify for the annual exclusion. Section 25.2503-3 of the regulations defines the nature of both present and future interests. Gifts of present interests convey the right of immediate enjoyment, while gifts of future interests convey no immediate rights. The focus of attention is on the rights received by the donee, not the control surrendered by the donor.
Section 25.2503-3(b) provides that an unrestricted right to the immediate use, possession, or enjoyment of property is a present interest in property. C and D will receive such an unrestricted right upon the execution of the proposed agreement. Accordingly, the gifts to C and D will qualify for the annual exclusion.
You have asked us to rule that the proposed transaction will not constitute a presently taxable gift from A to B. We cannot so rule.
Section 25.2511-1(h)(2) of the regulations provides that the transfer of property to M, if there is imposed on M the obligation of paying a commensurate annuity to N, is a gift to N. Section 25.2511-1(c) states that the gift tax applies to gifts indirectly made.
The focus for determining when a gift has occurred is the degree to which the donor has departed with dominion and control of the subject property. Section 25.2511-2(b) states that, as to any property or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.
Upon the execution of the proposed agreement, A will have parted with dominion and control over the annuity that B will receive if she survives him. The fact that her interest is a contingent interest is material only for valuation purposes, not in determining whether a gift has been made.
Based upon Tables LT superior 6 and A(1) with interest at 6 per cent, the factor for the present worth of an annuity of ... annually payable at the beginning of each month for such time as a woman aged ... survives a man aged ... is .... To compute the value of the gift from A to B, this factor should be multiplied by the value of the annuity ... payable to B should she survive A.
Section 2523(b) disallows the deduction if the gift consists of a “terminable interest,” which is, in substance, an interest in the same property passing to another person upon the termination of the spouse's interest.
Since the survivor annuity, in this case, will terminate on B's death and no interest in the annuity will pass to another person, the gift of the survivor annuity will qualify for the gift tax marital deduction under section 2523 of the Code.
You have requested that we compute the factor to be used in presently valuing the annuity.
Based upon Table LT superior 6, with interest at 6 percent, the factor for the present worth of an annuity of $1.00 per annum, payable in equal installments at the beginning of each month, until the death of the survivor of a male aged ... and a female aged ... is ....
It is important that a copy of this letter be attached to the gift tax return, when filed.
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