No income or generation-skipping tax on trust partition

Article Abstract:

The IRS's Letter Ruling 9737017 establishes that no income or generation-skipping transfer tax consequences (GST) were generated by the division of a GST tax-exempt trust into three separate trusts. The case involves a decedent whose trust provided that it be divided into three different trusts for the benefit of each of his three children after his death, while his spouse was still alive and after all of their children have turned 35. No additions were made to the decedent's trust until Aug 25, 1985, before the three-way partition. The IRS ruled that the division did not trigger the recognition of income or gain or loss, but was exempt from GST tax under Reg 26.2601-1(b). Furthermore, the trust and any generation-skipping transfers from the three new trusts will continue to enjoy the GST exemption for as long as no additions are made to the trust.

Generation-skipping transfer tax, Tax exemption, Tax exemptions, Generation-skipping trusts

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Gain recognized on excess debt through liability unchanged

Article Abstract:

An S corporation in TAM 9640001 acquired a building from its 98% shareholder in exchange for additional shares of stock under Sec. 351(a). The transfer of the building, which was subject to debts in excess of its basis, resulted in the recognition of gain and a zero basis for the stock despite the fact that the transaction did not affect the obligations of the shareholder or the corporation that made loans to both of them. The shareholder argued that Sec. 357(c), which requires the transferor to recognize gain equal to the excess of liabilities from the basis of the property, did not apply because of the parties' unchanged obligations. The IRS countered that personal or primary liability was irrelevant because any debt incurred by the building was considered a liability covered by Sec. 357(c).

S corporations, Transfer (Law)

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Partnership cannot replace property sold by partnership

Article Abstract:

The partnership in TAM 9645005 distributed among its partners property that it had agreed to sell under threat of condemnation. Despite the distribution, which was implemented the day before the sale, the IRS continued to attribute the property to the partnership. Consequently, the Service disallowed the partner's election to defer gain by replacing the property under Sec. 1033. While this rule allows taxpayers compelled to sell property under threat of condemnation to elect to defer gain by substituting it with property with similar service or use, the IRS argued that the election in TAM 9645005 was invalid because it must be made by the general partnership since, in substance, it was the one that made the sale.

Laws, regulations and rules, Tax elections, Partnership distributions

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