TAM 9504004

TAM 9504004

Story posted in Technical Advice Memoranda on 25 October 1999
audience: PGDC Network | last updated: 15 June 2011
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IRS Overturns Use of Mortality Tables in Deathbed Transfer to Charitable Lead Trust

Reference:

Section 2511 -- Gift Tax
UIL Number(s) 2511.00-00, 2512.00-00, 2522.00-00

Full Text:

Date: October 20, 1994
Control No.: TR-32-64-94

Taxpayer's Name = * * *
Taxpayer's Address = * * *
Taxpayer's I.D. No. = * * *

LEGEND:
Donor = * * *
Child A = * * *
Child B = * * *
Child C = * * *
Family Member = * * *
Corporation = * * *
Foundation = * * *
Unitrust A = * * *
Unitrust B = * * *

Dear * * *

ISSUE 1:

Under the facts presented, are the actuarial tables prescribed in section 25.2512-5 of the Gift Tax Regulations applicable in determining: i) the value of the lifetime annuity received by the donor in exchange for the transfer of stock and ii) the value of the charitable guaranteed annuities payable for the donor's life?

ISSUE 2:

Did the sale of 30 percent of the stock in a close corporation to the donor's child, who already owned 20 percent of the corporate stock, and a simultaneous redemption by the donor of another 30 percent of the stock of that corporation constitute a single transfer to the child of a controlling interest in the corporation?

FACTS:

BACKGROUND

The donor died on June 19, 1990 at the age of 70. She was survived by her three adult children, Child A, Child B, and Child C. The cause of the donor's death, as stated on her death certificate, was pulmonary arrest lasting over a six-hour interval that was due to uremia resulting from cancer of the lung.

In January 1990, the donor was diagnosed as having a malignant adenocarcinoma of the right lung with moderate involvement of the mediastinum. She was not considered a candidate for surgery. Although her condition was relatively good, the overall prognosis was poor. There was no other known metastases at that time. Over the months, beginning in January, the donor underwent several courses of chemotherapy and radiation therapy. However, her cancer condition did not go into remission. By March 1990, an examination revealed that the cancer had spread to her spine. On May 18, 1990, the donor was admitted to the hospital for labored breathing that had become progressively worse over the preceding ten-day period. She remained in the hospital until May 25th, when she was discharged with prescribed round-the-clock nasal oxygen support, medication to help alleviate her back pain, and canes to assist her walking. A nurse was required to be in attendance at the donor's home.

During the May 18th to May 25th hospitalization, the donor was once again diagnosed as having an adenocarcinoma of the right lung extending out to the anterior chest wall and into the mediastinum. She was also diagnosed as having metastases to the thoracic spine and to the lumbar spine. Other secondary areas of metastasis were suspected. It was noted that she was quite weak. Her prognosis was stated to be poor. Hospital records stated her condition to be "terminal".

By May 31, 1990, the donor's disease had progressed and metastasized in secondary areas, including several areas of her spine.

The statement of facts submitted by the representative opines that, on May 31st, when the transactions (discussed below) were executed, the donor's family members did not know of the seriousness of her condition. The representative states that when the donor's cancer was first diagnosed in late December 1989 or early January 1990, (almost six months before the transaction), the donor's children met with the donor's oncologist and asked for an honest and realistic assessment of her prognosis, and the oncologist advised them that the cancer had not spread to any other part of the donor's body, and that the issue was treatment rather than time.

THE MAY 31, 1990 TRANSACTIONS

I. SALE AND REDEMPTION OF CORPORATE STOCK

Corporation is a closely held corporation with a single class of stock. The donor owned 248 shares of Corporation, representing 60 percent of the Corporation votes. Child A owned 82.66 shares, representing 20 percent of the Corporation votes. Child B and Child C each owned 41.33 shares, representing a total of 20 percent of the Corporation votes. On May 31, 1990, the donor disposed of her entire controlling interest in Corporation in a simultaneous sale of some of her shares and a redemption of her remaining shares, as follows.

THE TRANSFER OF 124 SHARES TO CHILD A

On May 31, 1990, the donor executed a "Stock Sale Agreement," in which she transferred 124 Corporation shares (one-half of the donor's 60 percent of all the voting shares) to Child A. The purchase price for the shares was stated to be $7.425 million. The $7.425 million purchase price was to be paid to the donor in the form of an annuity of $99,843 per month for the rest of her life. On the donor's death, the annuity was to terminate, and Child A's obligation to pay any further part of the $7.425 million purchase price was to be cancelled.

The amount of the annuity payment was determined by dividing the $7.425 million purchase price by 6.19717, the single life annuity factor for a person aged 70, assuming a discount rate of 10.6 percent (IRS Publication 1456, Table S (10.6)) into the $7.425 million purchase price. An adjustment was then made to reflect the fact that the annuity payments were to be made in monthly instead of annual installments.

The first monthly annuity payment of $99,843 was made on June 1, 1990. The donor died on June 19th, and her right to any additional payments terminated at her death. Thus, the donor received only $99,843 in payment of the $7.425 million stated price for her shares transferred under the "Stock Sale Agreement."

THE REDEMPTION OF THE REMAINING 124 SHARES

In conjunction with and simultaneous to the execution of the "Stock Sale Agreement," the donor caused Corporation to redeem her remaining 124 shares. Under the redemption, the purchase price paid by Corporation for the 124 shares was $7.425 million, the same purchase price stated in the "Stock Sale Agreement" for the donor's transfer of her other 124 shares. The $7.425 million was paid to the donor in cash and notes. In setting the purchase price for each of the 30 percent blocks of stock, the donor treated the blocks as separate minority blocks rather than as a single 60 percent majority block.

THE EFFECT OF THE SIMULTANEOUS TRANSFER AND REDEMPTION

Before the donor's simultaneous transfer and redemption, the interests of Corporation's shareholders was as follows.

                                  Percentage of
            Number of shares       total votes
            ________________      _____________
  Donor           248 shares       60  percent
  Child A      82.666 shares       20  percent
  Child B      41.333 shares       10  percent
  Child C      41.333 shares       10  percent
              ______________      ____________
  Total       413.332 shares      100  percent
    After the donor's stock sale transferring 124 shares
to Child A, ownership of the corporation was as follows.
                                   Percentage of     Increase or
                                    total votes      decrease in
             Number of shares        then held       total votes
             _______________       _____________     ___________
  Donor           124 shares       30  percent      -[30 percent]
  Child A     206.666 shares       50  percent      + 30 percent
  Child B      41.333 shares       10  percent         no change
  Child C      41.333 shares       10  percent         no change
              ______________      ____________     ______________
  Total       413.332 shares      100  percent     -/+ 30 percent
    After the redemption of the donor's other 124 shares,
ownership of the corporation was as follows.
                                  Percentage of       Increase or
                                   total votes        decrease in
              Number of shares      then held         total votes
              ________________    _____________       ___________
  Donor            - 0  -              -  0 -       - 30 percent
  Child A     206.666  shares      71.4  percent    + 21.4  percent
  Child B      41.333  shares      14.3  percent    +  4.3  percent
  Child C      41.333  shares      14.3  percent    +  4.3  percent
              _______________      _____________
  Total       289.332 shares       100   percent
     Accordingly, the results of the sale and redemption may be
summarized as follows.
                                  Percentage of       Increase or
                                   total votes        decrease in
             Number of shares     of Corporation      total votes
             ________________     ______________      ____________
  Donor            - 0 -               - 0 -         (- 60  percent)
  Child A     206.666  shares      71.4  percent    + 51.4  percent
  Child B      41.333  shares      14.3  percent    +  4.3  percent
  Child C      41.333  shares      14.3  percent    +  4.3  percent
  Total       289.332  shares      100  percent


Thus, prior to the stock sale and redemption, the donor owned a controlling 60 percent interest in the corporation. After the sale and redemption, the decedent held no interest in the corporation and Child A held a 71.4 percent controlling interest.

II. CREATION OF LEAD CHARITABLE ANNUITY TRUSTS

Foundation, a private family foundation, was formed on the date of the transaction, May 31, 1990, and the Foundation trust agreement was executed on that date. Child A was designated as the Foundation trustee.

On May 31, 1990, the donor also transferred the redemption payment (i.e., the $7.425 million in cash and notes) received from Corporation to two newly created unitrusts, Unitrust A and Unitrust B.

The donor transferred $1.425 million to Unitrust A and $6 million to Unitrust B. Under the terms of both unitrusts, a unitrust amount equal to 10 percent of the value of the unitrust, valued annually, was to be paid in quarterly installments to a charitable foundation for so long as the donor lived. On the donor's death, the remaining corpus of Unitrust A was to be distributed to or for the benefit of Child C, and the remaining corpus of Unitrust B was to be divided equally between Child B and Child C.

The transfer of the property to the two unitrusts was reported on the donor's 1990 Federal Gift Tax Return as follows:

                Gift of lead charitable      Gift of remainder
                _______________________      _________________
                    income interest             to children
                    _______________             ___________
     Unitrust A       $  931,685                 $  493.135
     Unitrust B       $3,944,907                 $2,055,093


However, only two payments were actually made to the foundation; $7,417, was paid from Unitrust A and $31,232, was paid from Unitrust B.

THE DONOR'S WILL

Three days later, on June 2, 1990, the donor executed a new will. The will provides for pecuniary bequests to Child B and Child C. The total bequest for the two children is stated in terms of a formula amount equal to $6 million less any annuity payments received by the donor from Child A. This formula amount is to be divided equally between Child B and Child C. The residue of the donor's estate is to be divided equally among Child A, Child B, and Child C.

LAW AND ANALYSIS

ISSUE 1

Section 2501 imposes a tax on the transfer of property by gift. Section 2511(a) provides that the gift tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 25.2511-(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to the gift tax. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.

Section 2512(b) provides that where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift. Section 25.2512-1 provides that if a gift is made in property, its value at the date of the gift shall be considered the amount of the gift. The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.

Section 25.2512-5 provides that the fair market value of annuities and remainders is their present value determined under actuarial tables contained in that section.

Section 2522(a) provides that there shall be allowed as a deduction the amount of gifts made to or for the use of charity. Section 7520(a) provides that the value of any annuity, any interest for life or a term of years, or any remainder shall be determined under tables prescribed by the Secretary. Section 7520(b) provides that section 7520 shall not apply for purposes of any provision specified in regulations.

Under the donor's overall estate plan, Child B and Child C each received a total of approximately $6 million (from the unitrusts and the specific bequests) before sharing the residue with Child A. Thus, Child B and Child C each received nearly $6 million in addition to their rights to the residue.

In contrast, there was no unitrust remainder set aside for Child A. Nor did the donor's will provide a specific cash bequest to Child A. Thus, absent the cancellation of Child A's $7.425 annuity obligation upon the donor's death, the donor's estate plan would have favored Child B and Child C by giving them each substantial amounts in addition to their residuary bequests. Were it not for the cancellation of Child A's debt, all that Child A would have received was a right to share equally -- with his siblings -- in the estate residue.

The question presented in Issue 1 with respect to the "sale" of stock to Child A concerns the value of the lifetime annuity received by the donor in payment of the stated price of $7.425 million. For the consideration payable by Child A to be equal to the stated price, the present value (as of May 31, 1990) of the annuity receivable by the donor must be equal to $7.425 million.

A similar valuation question is raised with respect to the donor's transfer of a total of $7.425 million to the two lead charitable unitrusts. In establishing these trusts, the donor transferred two separate interests for gift tax purposes. First, she transferred a lead charitable annuity interest for Foundation, for which a gift tax charitable deduction may be allowed under section 2522(c)(2). Second, she established remainder interests for Child B and Child C, which represent gifts to her children under section 2511. In general, the donor made a transfer totalling $7.425 million. In computing the donor's taxable gifts, a deduction is allowed equal to the present value of the charitable lead interests payable for the donor's life.

The actuarial tables contained in the estate and gift tax regulations take into account that the health of any particular person may be somewhat better or worse than the health of an average person of the same age. However, it is a longstanding position of the courts and the Service that, because the actuarial tables are compiled from statistical data of the general population, the tables are not intended to apply to a case in which the measuring life is an individual who is afflicted with an advanced state of an incurable disease such that the individual's death is imminent. Rev. Rul. 80-80, 1980-1 C.B. 194; Rev. Rul. 66-307, 1966-2 C.B. 429.

In Estate of McLendon v. Commissioner, T.C. Memo. 1993-459, the decedent was afflicted with progressive cancer. Treatment with radiation therapy and chemotherapy was not successful. When his death was predictably foreseeable, the decedent transferred a remainder interest in his assets to family members in exchange for a lifetime annuity.

In Estate of McLendon, the court stated that departure from the actuarial tables is justified when established facts show that the result under the tables is unrealistic or unreasonable. The court concluded that the proper inquiry is whether the individual's life expectancy is so "exceptional" that a departure from the actuarial tables is justified. The court defined the term "exceptional" to mean that there is proof that either 1) death is predictable to a reasonable certainty within one year, or 2) death is imminent. The court concluded that, in light of the decedent's diminished actual life expectancy when the private annuity agreement was executed in that case, it was improper for the decedent to compute the annuity and remainder based on the actuarial tables. Rather, the value of the private annuity and remainder interests were to be determined based on the decedent's actual life expectancy.

Thus, in the present case, if the donor was, on May 31, 1990, afflicted with a fatal and incurable disease, and it was predictable to a reasonable certainty that her life expectancy was one year or less, then departure from the valuation tables would be required in valuing the annuities to be measured by the duration of the donor's life. Continental Illinois National Bank and Trust Company v. United States, 504 F.2d 586 (11th Cir. 1974): Miami Beach First National Bank v. United States, 443 F.2d 116 (5th Cir. 1971); Estate of Fabric v. Commissioner, 83 T.C. 932 (1984); Estate of Jennings v. Commissioner, 10 T.C. 323 (1948); Rev. Rul. 80-80, 1980-1 C.B. 194. See also, O'Reilly v. Commissioner, 973 F.2d 1403 (8th Cir. 1992).

In the present case, on the date of the transaction, the donor's cancer had metastasized to various sites of her spine and chest, and the cancer in her lung had become massive with complications. Other cancer sites were suspected. The donor's condition had so deteriorated that her condition was classified as "terminal." It was clear that the metastases would inevitably directly or indirectly result in her death within a short time. At the time of the transaction, the donor was on round-the-clock oxygen support. She was suffering from pain. She was using canes to assist her walking. She had required nursing assistance.

Finally, the donor died nineteen days after the date of the transaction.

We believe that the following conclusion of the court, in Estate of McLendon, supra, is applicable here.

[T]he record as a whole paints a picture of an increasingly sick [person] suffering from a virtually incurable disease. Although [the decedent's] physical condition fluctuated from day to day, the overall trend was one of fairly rapid deterioration. Under the circumstances, we conclude that it was evident to all involved that [the decedent] was not likely to survive more than 1 year.

The court continued:

[W]hen a disease has progressed to such an extent as was present in the instant case, it becomes evident to those familiar with the physical condition of that patient that a cure cannot be expected and that death will inevitably follow.

In the present case, it was unavoidable for the donor's family members, including Child A, to have knowledge of the donor's deteriorated condition and impending death. We note that Family Member is a physician who was involved with the donor's May hospitalization. Surely, he knew of the donor's deteriorating condition. Further, Child A was very much involved with the donor's hospitalization and medical treatment and, by his own account, he participated in her visits to her Medical Oncologist. Finally, it was known to everyone that the donor's chemotherapy and radiation therapy had not been successful and, rather, the donor's cancer had rapidly progressed.

The facts in this case are so compelling that we can only conclude that, on May 31, 1990, the date of the transaction, the donor's impending death was clearly apparent, and family members, such as Child A, who were in close proximity to the donor and who were closely involved with her medical treatment during this time, would inevitably have known of the terminal nature of the donor's illness. Thus, we can only conclude that it was obvious to everyone that the donor was not likely to survive more than a year from May 31, 1990.

We conclude that, in the present case, the donor's life expectancy was "exceptional." That is, her death within one year was clearly predictable with a reasonable certainty. Consequently, it was improper for the taxpayer to value the various annuities (which were to be paid for the duration of the donor's life) and the remainders (under the unitrusts) based on the actuarial tables referred to in section 7520 and section 25.2512-5. Rather, the annuities and the remainders are to be valued based on the donor's actual life expectancy on May 31, 1990.

CONCLUSION ISSUE 1

For purposes of section 2512, in computing the value of the annual annuity amount to be paid to the donor for her life, as the consideration for her transfer of stock, the donor's physical condition at the time of the transfer requires departure from the actuarial tables. The annuity payable to the donor is to be valued based on the donor's actual life expectancy.

For purposes of section 2512, in computing the value of the annual annuities payable to charity for the donor's life, and the value of the trust remainders payable at her death, the donor's physical condition at the time of the transfer requires departure from the actuarial tables. The charitable lead annuities and the remainders to the donor's children are to be valued based on the donor's actual life expectancy.

ISSUE 2:

Section 25.2511-1(c)(1) provides that the gift tax applies to gifts indirectly made. Thus, any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.

Section 25.2512-1 provides that the value of property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both have reasonable knowledge of the facts. Section 25.2512-3 provides that the fair market value of any interest in a business is the net amount which a willing purchaser would pay for the interest to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.

Rev. Rul. 59-60, 1959-1 C.B. 237, provides guidelines for valuing closely-held stock. Rev. Rul. 59-60 states that the size of a block of stock is a factor to be considered in determining fair market value. The revenue ruling also holds that all relevant factors must be considered. In general, however, transfers within a family group are subject to special scrutiny, and the presumption is that the transfer is a gift. Harwood v. Commissioner, 82 T.C. 239 (1984).

For purposes of determining the value of closely-held stock under section 2512, a block of stock with enough voting power to control a closely-held corporation -- i.e., a block of more than 50 percent of the voting rights -- possesses a significant and valuable feature. By reason of the control component, the controlling shareholder has the power to elect the board of directors, influence corporate policy, and directly affect corporate decision-making. For this reason, the valuation of an interest transferring the component of control usually warrants a premium. Ahmanson Foundation v. United States, 674 F.761 (9th Cir. 1982); Estate of Curry v. United States, 706 F.2d 1424; Estate of Chenoweth v. Commissioner, 88 T.C. 1577 (1987); Estate of Salsbury v. Commissioner, T.C.M. 1973-333; Estate of Oman v. Commissioner, T.C. Memo. 1987-71. See section 25.2512- 2(f). In the present case, as summarized in the recitation of facts, above, by reason of the transaction, Child A acquired an additional 51.4 percent of the total Corporation voting rights. (See Issue 1 above.) This acquisition was the result of 1) the donor's direct transfer to Child A of 124 shares, representing 30 percent of the then existing voting rights, and 2) the donor's simultaneous redemption of her remaining shares which resulted in an 8.5 percent (of total Corporation votes) incremental increase in the voting rights of the 82.666 shares previously acquired by Child A and a 12.9 percent (of total Corporation votes) incremental increase in the voting rights of his newly acquired 124 shares.

The issue presented here is whether the "Stock Sale Agreement" and redemption are considered a single integrated transaction in which the donor transferred a controlling interest in Corporation to Child A.

The estate's representative contends that the transfers were not integrated and, rather, donor transferred two separate interests of 124 shares each, one of which was transferred to Child A and the other of which was transferred to Corporation. The representative contends that, even if the "Stock Sale Agreement" and redemption are integrated, the interest transferred to Child A is only a minority interest of 42.86 percent (by reason of his newly acquired 124 shares) of the total outstanding shares after the redemption.

The representative agrees that 1) the principal (if not the sole) purpose of the transaction was to transfer the donor's control of Corporation to Child A, and 2) this was accomplished through both the "Stock Sale Agreement" and the redemption. But the representative seeks to isolate from the donor's transfer the incremental 8.54 percent of corporate votes acquired by Child A (by reason of the 82.666 shares previously acquired by him) upon the redemption.

The representative contends that Rev. Rul. 93-12, 1993-1 C.B. 202, is applicable to require that the donor's control before the transaction be disregarded. In Rev. Rul. 93-12, a sole shareholder transferred 20 percent interests in a closely-held corporation to five separate children. The ruling concludes that the factor of corporate control in the family is not considered in valuing each transferred interest for purposes of section 2512.

However, as discussed below, we disagree with the estate's characterization of the transaction.

The concept of a "transfer," for transfer tax purposes, has been, and continues to be, broadly interpreted. See Dickman v. Commissioner, 465 U.S. 330 (1983), in which the Court indicated that the term "transfer," as used in section 2501, includes all transactions whereby property or a property right is conferred upon another, "regardless of the means or device employed in its accomplishment." 465 U.S. at 334. Thus, a direct transfer to one individual may be an indirect gift to another individual. Rev. Rul. 89-3, 1989-1 C.B. 278. See Tilton v. Commissioner, 88 T.C. 590 (1987); duPont v. Commissioner, T.C. Memo. 1978-16; Bolton v. Commissioner, 1 T.C. 717 (1943). See also, United States v. Grace, 395 U.S. 316.

In this regard, the substance, rather than the form of the transaction, controls. See Commissioner v. Court Holding Co., 324 U.S. 331 (1945) wherein the Court held:

The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise . . . are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant . . . To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.

324 U.S. at 334. See also, Helvering v. Hallock, 309 U.S. 106 (1940); Rev. Rul. 77-299, 1977-2 C.B. 343; United States v. Grace, supra.

In Estate of Bruce v. Commissioner, T.C. Memo 1993-24, the court considered the gift tax consequences of a part transfer/part redemption of a taxpayer's controlling interest in a closely held corporation. In Estate of Bruce, the taxpayer owned all of the 54 outstanding corporate shares. She transferred two shares to her child and his spouse. On the same date and as part of the same plan, the taxpayer entered into an agreement with the corporation for the redemption of her remaining shares. Because the taxpayer received consideration that exceeded the value of the entire corporation, the court concluded that the taxpayer did not make a taxable gift as a result of the transaction. Nevertheless, and of significance here, the court held that the sale and redemption constituted a single transaction in which the taxpayer transferred the corporation to her child and his spouse.

In Estate of Murphy v. Commissioner, T.C. Memo. 1990-472, the decedent was the controlling shareholder of a closely held corporation. Eighteen days before her death, the decedent bifurcated her controlling stock interest into two minority blocks. She thereupon transferred one minority block to her children. On her death, the other minority block passed to her children under the transfer of her will. The purpose of the bifurcation was to obtain a minority discount in valuing the lifetime gift and the transfer at death. The court denied a minority discount in both instances and, rather, valued the two fragmented parts as a single controlling block. The court stated:

The only purpose for the [bifurcation] was the anticipated tax benefit. Decedent was attempting to avoid Federal transfer taxes on the premium value of the controlling interest . . . She attempted to do so by fragmenting her control block with the transfers.

The court further stated:

We hold that a minority discount is not applicable to the . . . stock in these cases. Courts have rejected attempts to avoid taxation of the control value of stock holdings through bifurcation of the blocks.

In the present case, the donor's transfer of her corporate control to Child A was the principal (if not the only) purpose of the "Stock Sale Agreement" and redemption. It was the substance of the transaction. The facts of this case (including those in the representative's submission) demonstrate that the transaction was designed as a simultaneous two-step process to obtain a minority discount in the valuation of a single transfer of control. Although additional shares were transferred to Child A under the "Stock Sale Agreement," that was preparatory to the transfer of control. The control itself was transferred in the redemption. Consequently, the "Stock Sale Agreement" and the redemption must be viewed as a single integrated transfer for purposes of the gift tax. Estate of Murphy v. Commissioner, supra. See Estate of Bruce v. Commissioner, supra. See also, United States v. Grace, supra.

In the first step of the transfer, the "Stock Sale Agreement," the donor transferred 124 shares to Child A and thereby gave him an additional 30 percent of the Corporation voting rights.

Altogether, Child A then held 206.666 shares (consisting of the 124 shares he had just acquired plus the 82.666 shares he already held). Considering his entire stock interest, Child A possessed only 50 percent of the Corporation voting rights. He did not yet possess control.

When the donor redeemed her remaining 124 shares, she indirectly increased the proportionate voting interests of each of the shareholders. Because Child A owned a 50 percent voting interest at the time of the redemption, the redemption resulted in an increment of 21.4 percent to Child A's voting interest. Thus, the donor indirectly transferred to Child A an additional 21.4 percent of the Corporation voting rights. Child A thereupon owned a 71.4 percent voting interest.

Because Child A's 50 percent voting interest AS A WHOLE was proportionately increased by 21.4 percent on the redemption, the actual facts dispute the conclusion, urged by the representative, that a 12.86 percent increase attributable to the 124 shares obtained in the "Stock Sale Agreement" was the sole element of control transferred by the donor to Child A on the redemption. Rather, by executing the redemption, the donor made a transfer to Child A of a total of 21.4 percent of the Corporation voting rights.

In summary, in the two-step transaction in which the donor transferred a controlling interest in Corporation to Child A, she transferred a combined total of 51.4 percent of the Corporation voting rights (30 percent of which was transferred under the "Stock Sale Agreement" and 21.4 percent of which was transferred in the redemption). Therefore, for purposes of sections 2511 and 2512, based upon the facts of this case, we conclude that the simultaneous "sale" and redemption constituted a single transfer from the donor to Child A of a 51.4 percent controlling interest. Estate of Bruce v. Commissioner, supra.; Estate of Murphy v. Commissioner, supra.; See also, United States v. Grace, supra. Rev. Rul. 93-12, supra, is inapplicable here because, in this case, in contrast to the five transferees considered in Rev. Rul. 93-12, Child A is the sole transferee of the controlling interest transferred by the donor.

CONCLUSION ISSUE 2:

For purposes of section 2512, the sale of stock to Child A and the simultaneous redemption of the donor's remaining shares is viewed as a single integrated transfer of a controlling interest in Corporation (51.49 percent) to Child A. The value of the donor's transfer to her child includes the value of the component of corporate control.

A copy of this Technical Advice Memorandum should be given to the taxpayer. Section 6110(j) provides that it may not be used or cited as precedent.

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