IRS extends the Dickman doctrine.

• Author: Coplan, Robert B.
• Position: Gift tax

In Letter Ruling 9113009, the IRS held that the mere guarantee of a family member's debt was a donative transfer subject to gift tax, regardless of whether the guarantor ever actually makes a payment in satisfaction of the debt. Of greater concern was the Service's position that if there is even a remote possibility under the guarantor's estate plan that such a guarantee could be satisfied from qualified terminable interest property (QTIP), the entire QTIP trust would not qualify for the marital deduction under Sec. 2056. The ruling did not address the issue of how to value the gift, nor did it distinguish family guarantees from business guarantees for the purposes of satisfying QTIP requirements.

One way to avoid this problem would be to have the parent/guarantor borrow funds from a bank and loan them to the child or business. Alternatively, the marital deduction problem may be prevented by having both spouses act as co-guarantors of the debt. We understand the Treasury has decided to review this ruling from a tax policy perspective. A published ruling may be issued to provide further guidance to taxpayers.

In IRS Letter Ruling 9117035, a father and son owned 100% of a corporation that established an ESOP. A cross-purchase agreement gave each the right of first refusal over the...