In McDougall v. Commissioner, the Tax Courtroom held that commutation of a certified terminable curiosity property (QTIP) belief resulted within the kids (as the rest beneficiaries of the QTIP belief) making gratuitous transfers and topic to reward tax beneath Inner Income Code Sections 2501 and 2511.
QTIP Belief Commuted
The decedent died in 2011, and her surviving husband, as consultant of the decedent’s property, made a QTIP election beneath IRC Part 2056(b)(7) to deal with a $54 million residuary belief as a QTIP belief. In 2016, the husband and the couple’s two surviving kids agreed to commute the QTIP belief and distribute the whole thing of its property to the husband. The husband bought among the property obtained to new trusts for the advantage of the couple’s kids in change for promissory notes.
Commutation Resulted in Items to Husband
The husband and every of the kids filed reward tax returns for 2016 reporting no taxable items made due to offsetting reciprocal items made to at least one one other, and the Inner Income Service issued a discover of deficiency claiming: (1) the commutation of the QTIP belief resulted in items from husband to the kids beneath IRC Part 2519 and (2) the settlement resulted in items from the kids to the husband of the rest pursuits within the QTIP belief beneath IRC Part 2511. The Tax Courtroom rejected the previous declare however agreed with the latter and held that the settlement to commute the QTIP belief resulted in items from the kids to the husband beneath Part 2511.
Anenberg Precedent Utilized
The court docket expressly acknowledged that it was making use of the holding within the latest case of Property of Anenberg v. Commissioner, No. 856-21, 162 T.C. (Could 20, 2024) to succeed in its determination that surviving husband didn’t make a present because of commutation of the QTIP belief as a result of he was put in the identical place he had been if the property of the belief been distributed outright to him at his spouse’s dying fairly than to the QTIP belief. Nonetheless, the court docket held that the kids made items to the husband by giving up their the rest pursuits within the residuary QTIP belief and receiving nothing in return.
The court docket disagreed with the husband’s argument that no reward occurred as a result of the entire events have been in the identical financial place earlier than and after the transactions in query. The court docket identified that the kids’s the rest pursuits within the belief would have been includible of their estates had they not agreed to the commutation, a special financial place that’s illustrative of the switch by reward they every made when the QTIP belief terminated wholly in favor of the surviving husband.