Attorney-at-Law

METAMORPHOSES

In Uncategorized on 06/01/2020 at 17:55

Perhaps Estate of Mary P. Bolles, Deceased, John T. Bolles, Executor, 2020 T.C. Memo. 71, filed 6/12/20, might have been assigned to Judge Patrick J. (“Scholar Pat”) Urda, or his equally scholarly colleague Judge Albert G (“Scholar Al”) Lauber, but now the mantle of Publius Ovidius Naso (to say nothing of the carapace of Franz Kafka) falls upon Judge Goeke.

The late Mary wanted to split the not-inconsiderable loot she and late husband (“late” as in both divorced and dead) accumulated among their five (count ‘em, five) offpsring. So the late Mary, before she became the late Mary, created a loan structure, with advances and repayments within the annual exclusion and lifetime exemption limitations.

We’ve all worked on those; rarely is it rocket science. Except Pete.

Pete was Number One Son. He inherited late father’s architectural talents but not his business acumen. So Mary transferred from the family trust she controlled better than $1 million to Pete over a 22-year span. Pete did make some repayments the first couple years (hi, Judge Holmes), but never thereafter.

Mary next created a self-settled trust, cutting Pete out of everything, and then engaged Karen Hawkins, Esq., to straighten matters out with Pete, and recast the loan-gift situation. I wonder if this was the same Karen Hawkins who later became chief of OPR while Chair-Elect of the ABA Tax Section (to which august body I do not belong), and as OPR chief ran the revision of Circular 230. She had practiced on the Left Coast when Mary was dealing with Pete. Since Judge Goeke names her specifically, that’s strong evidence.

She amended Mary’s trust to recharacterize the advances to Pete as loans, and papered accordingly. But being a good lawyer, she left herself a out, namely, that if IRS held the note Pete gave was adjudged worthless, they were all gifts. IRS drops the worthless note argument.

The ex’r claims loans, IRS claims gifts, and Judge Goeke decides metamorphoses.

First, IRS drops interest on the gifts; it was never in the SNOD or the Answer, nor did IRS amend. Second, BoP. The ex’r claims IRS has it.

“While petitioner’s position has merit, we do not need to resolve the issue because the evidence in this case permits a resolution on the record of trial, and we do not rely on the burden of proof to decide this case.” 2020 T. C. Memo. 71, at p. 9.

If anyone remembers the last time IRS lost on BoP, other than a Graev lapse in Boss Hossery, please raise your hand. You’re better than I.

But, spoiler alert, the loans are gifts. At least mostly.

“While Mary recorded the advances to Peter as loans and kept track of interest, there were no loan agreements or attempts to force repayment. Respondent focuses on the lack of security for the loans to Peter. We agree that the reasonable possibility of repayment is an objective measure of Mary’s intent. The estate maintains that during her life Mary always considered these advances as loans. We cannot reconcile this argument with the deterioration of Peter’s financial situation and the ultimate failure of his practice in San Francisco and later in Las Vegas.” 2020 T. C. Memo. 71, at p. 10.

So there came a metamorphosis.

“Peter’s creativity as an architect and his ability to attract clients likely impressed Mary. We find she expected him to make a success of the practice as his father had, and she was slow to lose that expectation. However, it is clear she realized he was very unlikely to repay her loans by October 27, 1989, when her trust provided for a specific block of Peter’s receipt of assets at the time of her death. Accordingly, in 1990 the ‘loans’ lost that characterization for tax purposes and became advances on Peter’s inheritance from Mary. In conclusion, we find the advances to Peter were loans through 1989 but after that were gifts. We have considered whether she forgave any of the prior loans in 1989, but we find that she did not forgive the loans but rather accepted they could not be repaid on the basis of Peter’s financial distress.” 2020 T. C. Memo. 71, at pp. 10-11.

In intrafamily loans, reasonable possibility of repayment is a big deal.

 

 

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