IRS written determination 201432029

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
MAY 13 2014
Uniform Issue List: 408.03-00, 2501.00-00, 4973.00-00, 4974.00-00
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Legend:
Taxpayer A
=
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Decedent 8
=
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Decedent c
=
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Charity D
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Trust
=
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Financial Institution E
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Financial Institution F
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Financial Institution G
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IRAH1
=
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IRAH2
=
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IRA
11
=
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IRAI2
=
* * *
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IRAJ1
=
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IRAJ2
=
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IRAK1
=
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IRAK2
= ***
IRAL1
=
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IRAL2
=
***
IRAM1
=
***
IRAM2
=
***
IRAM3
=
* * *
IRAM4
=
* * *

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IRAN
=
***
IRAQ
=
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Court
=
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Court Order
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State Statute 1
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State Statute 2
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State Statute 3
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Dear***:
This is in response to your request dated December 29, 2010, as supplemented by
correspondence dated November 1, 2012, and November 5, 2013, submitted by your
authorized representative on your behalf,
in which you request a letter ruling under
sections 408(d), 2501, 4973, and 4974
of the Internal Revenue Code (the "Code").
The following facts and representations have been submitted under penalties
of perjury
in support of the rulings requested.
Taxpayer A was a personal friend and business associate
of Decedent B. Decedent B
and Decedent C were
in a long-term relationship, but were not married.
Decedent B established
and owned two IRA accounts, IRA
H1 (a traditional IRA under
Code Section 408) and IRA H2 (a SEP IRA under Code Section 408(k)), with Financial
Institution E as custodian. Decedent B named Decedent
Cas the beneficiary for IRAs
H1 and H2, and named various charities, including Charity D, as contingent
beneficiaries in the event Decedent C pre-deceased Decedent
B. In addition to IRAs
H1 and H2, Decedent B maintained a regular brokerage account with Financial
Institution
E.

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Decedent 8 also established Trust, a revocable living trust. Trust provided that if
Decedent C survived Decedent 8, then Decedent C would take a life income interest
in
Trust and the remainder would pass to several animal welfare charity organizations,
including Charity
D. Decedent 8 was the initial trustee of Trust, and Decedent C was
the first successor trustee, and Taxpayer A was the second successor trustee. A
"Schedule
of Trust Assets" attached to Trust listed, among other assets, Decedent 8's
"Financial Institution E Accounts."
Decedent 8 died
on August 13, 2006, and had not turned 70 %at the time of death.
After Decedent 8's death, Decedent C declined to
be the trustee of Trust, and, pursuant
to the Trust's terms, Taxpayer A became the trustee
of Trust. In reporting the assets of
Trust to the probate court after Decedent 8's death, an initial filing listed IRAs H1 and
H2. Taxpayer A represents that IRAs H1 and H2 were listed as assets of Trust in error
and that the
initial filing, which was never approved by a court, was ultimately
withdrawn. A second filing that excluded IRAs
H1 and H2 from the assets of Trust was
made and approved by the appropriate probate court.
Pursuant to their custodial agreement, IRAs
H1 and H2 were to be distributed to
Decedent C by December
31 of the fifth calendar year after Decedent 8's death unless
Decedent C elected to receive them over a period not greater than the life expectancy
of Decedent C. Decedent C did not make such an election.
Decedent C established two new IRAs for his own benefit, IRA
11 and IRA 12, with
Financial Institution E as custodian. Decedent C named Taxpayer A as beneficiary
of
the two new IRAs. In a trustee-to-trustee transfer in November 2006, Decedent C
transferred the account balances from IRA
H1 to IRA 11 and from IRA H2 to IRA 12.
Decedent C died on April 5, 2007, without taking any distributions from IRA 11 and IRA
12.
After Decedent C's death, Taxpayer A established two new IRAs for her benefit as
beneficiary
of Decedent C, IRA J1 and IRA J2, with Financial Institution E as custodian.
In a trustee-to-trustee transfer in May 2007, Taxpayer A transferred the account
balances from IRA
11 to IRA J1 and from IRA 12 to IRA J2.
For customer service/economic issues, Taxpayer A then established two new IRAs for
her benefit as beneficiary
of Decedent C, IRA K1 and IRA K2, with Financial Institution
F as custodian. In a trustee-to-trustee transfer in May 2007, Taxpayer A transferred the
account balances from IRA
J1 to IRA K1 and from IRA J2 to IRA K2.
In December 2007, Decedent C's estate sued Taxpayer A alleging facts that, if
sustained by Court, would, pursuant to State Statute 1 and State Statute 2, preclude
Taxpayer A from inheriting IRA
11 and IRA 12. In addition, if Court held that Taxpayer A
violated State Statute
1, Taxpayer A would be liable for the payment of the legal fees of
Decedent C's estate, pursuant to State Statute 3. Taxpayer A entered into a tentative

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settlement with Decedent C's estate to divide the account balances of IRA 11 and IRA
12, which were then held in IRA K1 and IRA 1<2, respectively.
In
anticipation
of the tentative settlement being approved by Court, Taxpayer A
established
two new IRAs for her benefit as beneficiary of Decedent C, IRA L 1 and IRA
L2, with Financial Institution F as custodian. In a trustee-to-trustee transfer in
September 2008, Taxpayer A transferred the portion of the account balances that was
to go to Decedent C's estate under the tentative settlement from IRA K1 to IRA L 1 and
from
IRA K2 to IRA L2. The portion of the account balances that was to remain with
Taxpayer A under the tentative settlement remained in IRA K1 and IRA K2.
Before
Taxpayer A and Decedent C could obtain Court's approval of their tentative
settlement, Charity
D, as residuary beneficiary of Trust, filed in Court a "Response and
Objections
of Charity D to First Account and Report of Trustee and Petition for its
Settlement;
Request for Disgorgement of Benefits Obtained by Breach of Trust, and for
Surcharge and Other Relief' ("Objection and Request"). In its Objection and Request,
Charity D
sought to have Court deny the tentative settlement between Taxpayer A and
Decedent C's estate on the grounds that it purported to distribute assets that were the
subject of Charity D's Objection and Request.
After a further year and a half of contested litigation, Taxpayer A, Decedent C's estate,
and
Charity D entered into a final settlement approved by Court Order in
December 2010. Court Order provides, in relevant part, that:
(1)
as of Decedent C's death, a portion of IRAs 11 and 12 were and had
been the property of Decedent C's estate, and the remaining
portion
of IRAs 11 and 12 were and had been the property of Charity
D; and
(2)
IRAs 11 and 12 had never been the property of Taxpayer A.
Due
to ownership changes at Financial Institution F, Financial Institution G became
custodian of all of the IRAs of which Financial Institution F had been custodian. As part
of this change in custodianship, Financial Institution G established IRAs M1, M2, M3,
and M4. In a trustee-to-trustee transfer, Financial Institution G, without
the request or
involvement of Taxpayer A, transferred the account balances of IRA K1 to IRA M1, from
IRA K2 to IRA M2, from IRA L 1 to IRA M3, and from IRA L2 to IRA M4. At this point, all
of the original funds and subsequent earnings from the IRAs 11 and 12 were divided
between
IRAs M1, M2, M3, and M4, and there had not been any distribution from any of
the IRAs.
To implement the final settlement approved by Court Order, Taxpayer A established two
finaiiRAs, IRAN and IRA 0, with Financial Institution Gas custodian. IRAN was
established for the benefit of Decedent C's estate, and IRA 0 was established for the
benefit
of Charity D. In a trustee-to-trustee transfer, Taxpayer A transferred the account
balances from IRAs M1, M2, M3, and M4 to IRAN and IRA 0 based on the final

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settlement proportions. Decedent C's estate received distributions totaling the entire
account balance
of IRA N in December of 2010 and March of 2011. Charity D received
a distribution
of the entire account balance of IRA 0 in December of 2010.
Based
on the facts and representations, you request the following rulings:
(1) that entering into the final settlement agreement approved by Court
Order will not be treated as a section
2501 taxable gift transfer from
Taxpayer A to Decedent C's estate and/or Charity
D;
(2) that Taxpayer A is not subject to income tax on the series of
account balance transfers from IRA 11 and IRA 12 to IRAN and IRA
0;
(3) that Taxpayer A is not subject to income tax on the final
distributions of (i) IRAN to Decedent C's estate, and (ii) IRA 0 to
Charity
D; and
(4) that Taxpayer A will not be subject to Code section 4973
or section
4974 excise taxes with respect to any
of the IRAs listed in this
ruling request.
With respect to your first
ruling request, Section
2501 (a) provides that a tax is imposed
for each calendar year
on the transfer of property by gift during such calendar year.
Section 2511(a) provides that the gift tax applies 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 25.2511-1 (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 tax.
Section 25.2511-1 (g)(1) provides that the gift tax
is not applicable to a transfer for a full
and adequate consideration in money or money's worth, or to ordinary business
transactions.
Section 25.2512-8 provides that a sale, exchange, or other transfer
of property made in
the ordinary course of business (a transaction which is bona fide, at arm's length, and
free from any donative intent) will
be considered as made for an adequate and full
consideration
in money or money's worth.
Generally, transfers pursuant to agreements
in settlement of disputes between adverse
parties are not subject to the gift tax. See Beveridge
v. Commissioner, 1 0 T. C. 915
(1948); Estate
of Noland v. Commissioner, T.C. Memo. 1984-209; Lampert v.
Commissioner, T.C. Memo 1956-226.

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In Ahmanson Found. v. United States, 674 F.2d 761 (9th Cir. 1981), the issue before the
court was whether property received by the spouse pursuant to a settlement qualified
for the estate tax marital deduction. Relying on Commissioner v. Estate of Bosch, 387
U.S. 456 (1967), the court held that, in order for the settlement to be recognized
for
transfer tax purposes, the settlement must be made in good faith, and it must be based
on the spouse's underlying enforceable right under state law properly interpreted.
The
court limited the amount of the marital deduction to the value of the property received
with respect to which the spouse had enforceable rights, notwithstanding that the
spouse received a greater amount under the good faith settlement.
In
this case, whether the final settlement agreement approved by Court Order results in
a transfer subject to gift tax depends on whether the settlement is based on a valid
enforceable claim asserted by the parties. See Ahmanson, 674
F. 2d at 774-75. Thus,
state
law must be examined to
ascertain the
legitimacy
of each party's claim. If it is
determined that each party has a valid claim, the Service must determine that the
distribution under the settlement reflects the result that would apply under state law.
If
there is a difference, it is necessary to consider whether the difference may be justified
because
of the uncertainty of the result if the question were litigated.
The final settlement agreement approved by Court Order is a mediated settlement and
is based on arm's-length negotiations among the parties after years of litigation. Under
applicable State law, if Court had sustained allegations made by Decedent C's estate
and Charity
D, Taxpayer A would have been precluded by State Statute 1 and State
Statute
2 from inheriting IRA
11 and IRA 12. Under the terms of the final settlement
agreement approved by Court Order, it was agreed, in effect, that Taxpayer A did
not
inherit IRA 11 and IRA 12. Thus, we conclude the terms of the final settlement
agreement approved by Court Order represent (i) the resolution
of a bona fide
controversy regarding enforceable claims
of the parties; and (ii) the parties'
assessments
of the relative strengths of their positions. We further conclude that the
final settlement agreement approved by Court Order is within the range
of reasonable
outcomes under the governing instruments and applicable State law.
Therefore, based on the facts submitted and representations made, we conclude that
Taxpayer A did not make
a taxable gift for purposes of the federal gift tax under
section 2501 by entering into the final settlement agreement approved by Court Order.
With respect to your remaining ruling requests, Section 408(d)(1)
of the Code provides
that, except as otherwise provided in section
408(d), any amount paid
or distributed out
of an IRA shall be included in gross income by the payee or distributee, as the case
may be, in the manner provided under section 72 of the Code.
Revenue Ruling 78-406, 1978-2 G.B. 157, ("Rev. Rul. 78-406") states that the direct
transfer
of funds from one' IRA trustee to another does not result in a payment or
distribution of the funds for purposes of section 408(d)(1) of the Code. Rev. Rul. 78-406

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also says this conclusion applies regardless of whether the bank trustee initiates such a
transfer
or the IRA participant directs it.
Section 4973 of the Code imposes an excise tax equal to 6 percent of the amount of
any excess contribution to an IRA. This 6 percent tax applies for each taxable year of
the IRA owner during which such excess contributions remain in such IRA, determined
as
of the end of the taxable year. An excess contribution under section 4973 is defined
as a contribution
in excess of the maximum amount that may be contributed to an IRA.
Section 4974 of the Code provides that if the amount distributed during the taxable year
of the payee under any qualified retirement plan (defined under such section to include
IRAs)
is less than the minimum required distribution for such taxable year, a tax equal to
50%
of the amount by which such minimum required distribution exceeds the actual
amount distributed during the taxable year is imposed and paid by the payee.
With respect to your second ruling request, you have represented that the account
balances
of IRA 11 and IRA 12 have been transferred in a series of trustee-to-trustee
transfers pursuant to Rev. Rul. 78-406 to
IRAN and IRA 0. Therefore, we conclude
that Taxpayer A did not receive a payment or distribution from and is not subject to
income tax on the series of account balance transfers from IRA
11 and IRA 12 to IRAN
and IRA 0.
With respect to your third ruling request, you have represented that Decedent C's estate
received a
complete distribution of
IRAN as the beneficiary of IRAN, and that Charity D
received a complete distribution
of IRA 0 as the beneficiary of IRA 0. Therefore, we
conclude that Taxpayer A was not the payee
or distributee of IRAN or IRA 0 and is not
subject to income tax
on the final distributions of (i) IRAN to Decedent C's estate, and
(ii) IRA 0 to Charity D.
With respect to the first part of your fourth ruling request, because we have concluded
that Taxpayer A did not receive a payment or distribution from any
of the above
mentioned IRAs, we also conclude that Taxpayer A did not make a contribution to any
IRA related to the series of account balance .transfers from IRA 11 and IRA 12 to IRAN
and IRA 0, and is not subject to Code section 4973 excise taxes from the series of
account balance transfers from IRA 11 and IRA 12 to IRAN and IRA 0.
With respect to the second part of your fourth ruling request, because we have
concluded that Taxpayer A did not receive a payment or distribution from the series
of
account balance transfers from IRA 11 and IRA 12 to IRAN and IRA 0 and was not the
payee
or distributee of IRAN or IRA 0, we also conclude that Taxpayer A is not subject
to Code section 4974 excise taxes with respect to any
of the IRAs at issue in this ruling
request.
This
letter assumes that the above IRAs qualify under either section
408 of the Code or
section 408A
of the Code at all relevant times.

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. .
No opinion is expressed as to the tax treatment of the transaction described herein
under the provisions
of any other section of either the Code or regulations which may be
applicable thereto.
This letter is directed only to the taxpayer who requested it. Section
611 O(k)(3) of the
Code provides that it may not be used or cited as precedent.
Pursuant to a power
of attorney on file with this office, a copy of this letter ruling is being
sent to your authorized representative.
If you wish to inquire about this ruling, please
contact*********** at(***) * * *-* * * *. Please address all correspondence to
SE:T:EP:RA:T2.
Enclosures:
Deleted
copy
of ruling letter
Notice
of Intention to Disclose
cc:
* * *