Mary was in the habit of advancing funds to her children as loans, then forgiving a portion of such loans each year in the amount of the gift tax annual exclusion. However, her advancements to her oldest son, Peter, were substantially larger, in order to help him establish his architecture practice. After some initial successes, Peter suffered some financial reverses and was not able to pay the interest on his loans.

In 1995, Mary had a legal document drafted which acknowledged that Peter owed her $771,628, that he would not be able to repay it, and that this amount would be considered an advancement of his inheritance. Peter signed the document.

After Mary died in 2010, that transaction became an estate-tax issue. At first the IRS contended that the document was effectively a note whose value must be included in the estate. That issue was conceded, and the Service argued in the alternative that it was a taxable gift to be taken into consideration when calculating the estate tax.

The Tax Court agreed with the IRS that a gift occurred, but in looking at the entire record, the Court concludes that the gifts really began in 1990. That was when Peter’s financial difficulties became severe enough that Mary must have realized his loans would never be repaid [Estate of Mary P. Bolles et. al. v. Comm’r, T.C. Memo 2020-71].

In a per curiam opinion, this year the Ninth Circuit Court of Appeals affirmed the Tax Court decision.  The Court also affirmed the denial of a deduction for litigation costs associated with the case, because the IRS substantially prevailed.

Do you have a question concerning loans or estates? Call us at 920-563-6616 ext. 3070, or email wealth@bankwithpremier.com.