Rev. Rul. 84-42
1984-1 C.B. 194, 1984-12 I.R.B. 8.
Internal Revenue Service
Revenue Ruling
TRANSFERS; RETAINED LIFE ESTATE; TRANSFEREE'S LOAN SECURED BY MORTGAGE ON
TRANSFERRED PROPERTY
Published: March 19, 1984
Section 2036. - -Transfers With Retained Life Estate, 26 CFR 20.2036-1: Transfers with retained life estate.
Section 2053. - -Expenses, Indebtedness, and Taxes, 26 CFR 20.2053-7: Deduction for unpaid mortgages.
(Also Section 2036: 20.2036-1.)
Transfers; retained life estate; transferee's loan secured by mortgage on transferred property. Property in which a decedent retained a life estate is includible in the decedent's gross estate without an offset or deduction for a mortgage that was contracted for by the remainderman, even though the decedent was surety for the mortgage.
ISSUE
What amount is includible in D's gross estate under section 2036 of the Internal Revenue Code, and what amount is deductible by D's estate under section 2053, if D is guarantor of a loan to A secured by a mortgage on property D previously transferred to A subject to a retained life estate?
FACTS
In 1976, D, a resident of State X, gratuitously conveyed a remainder interest in real estate to A, retaining a life estate.
In 1976, a bank in State X loaned A 100x dollars and as security received a mortgage on the property signed by both A and D. Under the law of State X, D, was a guarantor and, as such, had a right of reimbursement against A, the primary obligor, in the event D was required to pay the loan directly or if D's life estate was sold in foreclosure. A was solvent at the time of the loan transaction, and D had a reasonable expectation of reimbursement from A in the event D was required to pay the loan for A. At and after D's death, A remained solvent and was expected to continue paying the loan.
D died in 1981. Because D retained a life estate in the transferred property, the value of property was subject to inclusion in D's gross estate under section 2036 of the Code. The executor of D's estate sought to deduct the mortgage balance alternatively under section 2053(a)(3) or (a)(4) of the Code.
LAW AND ANALYSIS
Section 2036(a)(1) of the Code provides that the gross estate includes the value of all property to the extent of any interest therein of which the decedent has made a transfer under which the decedent retained for life the possession of, enjoyment of, or right to the income from, the property. The statute also provides an exception for bona fide sales for full and adequate consideration in money or money's worth, in which case section 2036 would not be applicable. Section 20.2036-1(a) of the Estate Tax Regulations states that if the decedent retained or reserved an interest or right with respect to all of the transferred property, the entire value of the transferred property is included in the decedent's gross estate.
Section 2053(a)(3) of the Code provides a deduction from the value of the gross estate for claims against the estate. Section 2053(a)(4) provides a deduction for unpaid mortgages on property where the value of the decedent's interest in the property is included in the gross estate.
In Rev. Rul. 76-235, 1976-1 C.B. 277, the decedent gratuitously transferred property in contemplation of death. Subsequent to the transfer and one month prior to the decedent's death, the transferee obtained a loan mortgaging the property to secure the loan. The decedent received no proceeds from the loan, and neither the decedent nor the decedent's estate was liable for the loan.
The ruling holds that the full value of the transferred property is includible in the decedent's gross estate under section 2035 of the Code as in effect prior to amendment by the Tax Reform Act of 1976, and the amount of the mortgage is not deductible from the decedent's gross estate under section 2053 of the Code.
In the present case, the decedent made a transfer described in section 2036 of the full value of the unencumbered remainder interest. The property was encumbered after the transfer, and D received no proceeds from the loan. Furthermore, the encumbrance of the property had no immediate effect on D's continued retention of the lifetime enjoyment of the property. Other than as a guarantor, neither D nor his estate was liable for the loan. Therefore, in accordance with Rev. Rul. 76-235, the entire value of the property is includible in D's gross estate under section 2036 of the Code, and no deduction is allowed for the mortgage under
section 2053(a)(4).
Unlike the situation in Rev. Rul. 76-235, in the present case D participated in the loan transaction as guarantor. However, where the decedent is a guarantor, and there is a right of reimbursement, the amount deductible under section 2053(a)(3) cannot exceed the amount the estate actually pays on the debt and is further limited by any expectation of reimbursement. See Commissioner v. Wragg, 141 F.2d 638, 640 (1st Cir.1944); and Estate of DuVal v. Commissioner, 4 T.C. 722, 726 (1945), aff'd, 152 F.2d 103 (9th Cir.1945), cert. denied 328 U.S. 838 (1945).
If the executor of D's estate is not called upon to pay the indebtedness, the amount of the indebtedness is not deductible as a claim against the estate for purposes of section 2053(a)(3) of the Code. See Rev. Rul. 60-247, 1960-2 C.B. 272. If the executor is called upon and pays the indebtedness, the amount of the indebtedness is not deductible for purposes of section 2053 because A was solvent at that time and D's estate has a right of reimbursement. If, in the situation described above, A became insolvent subsequent to the loan transaction and was delinquent in making the loan payments, D's estate could deduct, under section 2053, the amount paid on the indebtedness reduced by the reasonable value of the right of reimbursement. See Rev. Rul. 60-247 and Commissioner v. Wragg, cited above, at page 640.
HOLDING
If D is guarantor of a loan to A, with a right of reimbursement, and the loan is secured by a mortgage on property D had previously transferred to A subject to a retained life estate, the entire value of the property, unreduced by the mortgage, is includible in D's gross estate under section 2036 of the Code. If D's estate is not called upon to pay the indebtedness, no amount of the indebtedness is deductible under section 2053.
Rev. Rul. 84-42, 1984-1 C.B. 194, 1984-12 I.R.B. 8.