Attorney-at-Law

TRANSFERRED PART MEANS TRANSFERRED ALL

In Uncategorized on 10/25/2013 at 18:00

Indefatigable readers of my blog will remember the Unsinkable Virginia V. Kite, star of 2013 T. C. Memo. 43, filed 2/7/13, whose annuity sale to her three kids got a stellar review from Judge Elizabeth Crewson Paris; see my blogpost “No’ Deid Yet”, 2/7/13, for more about the canny Virginia’s unloading of the income interest from her late husband Petroleum Jim’s QTIP trust to the three Kite Kids.

But while the Kite Kids were celebrating their win, along comes IRS and rains on the victory parade with a Section 2519 gift tax assessment on the remainder, triggering $816K of gift tax due. You remember my blogpost abovecited ended as follows: “The Estate does owe some tax on whatever wasn’t an income interest, but that’s for the technicians and a Rule 155 beancount.”

Well, came the beancounters, and IRS comes in with the $816K for the non-income interest, while the Kite Kids claim zero. They claim Judge Paris decided that Virginia got paid for whatever she relinquished.

No, says IRS, and “no” says Judge Elizabeth Crewson Paris, in Estate of Virginia V. Kite, Donor, Deceased, Bank Of Oklahoma, N.A., Executor/Trustee, Docket No. 6772-08, a designated hitter filed 10/25/13.

Section 2519 says if the donee of a QTIP trust relinquishes all or any part of their interest in the trust, they relinquish all. And Virginia couldn’t sell the remainder interest, which is what the non-income interest is, because it didn’t belong to her. And it wasn’t a gift from Petroleum Jim to the remainder beneficiaries when created, because it was a future interest. Therefore, it only gets taxed at the time the donee spouse’s estate is taxed, because the spousal “exemption” from estate tax is not really an exemption, but a deferral. First spouse to die can bequeath property in trust or directly to survivor, but when survivor dies, the property gets taxed.

Allowing the sale deal here takes the non-income property out of the survivor’s estate, so it never gets taxed, and that doesn’t go.

IRS claims you can’t raise these issues in a Rule 155 beancount, and Judge Elizabeth Crewson Paris agrees. But “Respondent [IRS] argues that petitioner’s objections are all new issues and are therefore waived. Notwithstanding respondent’s position, the Court will address petitioner’s objections without making a determination as to whether petitioner raised new issues in order to resolve any misunderstanding of the Memorandum Findings of Fact and Opinion.” Order, at p. 5, footnote 4.

But just to make sure, and notwithstanding the foregoing, Judge Elizabeth Crewson Paris drives the lesson home: “Generally, new issues may not be raised in a Rule 155 proceeding. Rule 155(c); Harris v. Commissioner, 99 T.C. 121, 123 (1992), aff’d, 16 F.3d 75 (5th Cir. 1994). Rather, issues raised in a Rule 155 proceeding are limited to ‘purely mathematically generated computational items’. Id. (quoting The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988), aff’d, 875 F.2d 377 (2d Cir 1989)). The Court has considered the parties’ arguments and, to the extent the parties raised new issues, the Court finds that they are precluded by Rule 155(c).” Order, at p. 11.

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