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of interest on municipal bonds received from the estate, we
conclude that Trust C earned $75,722 of nontaxable interest
income, 30 percent of the total municipal bond interest. For the
reasons stated below, we find that Trust C had DNI of $75,722
from interest on municipal bonds, $24,829 from interest on the
loans from the trusts to the estate, and $27,179 mortgage
interest income. Since $52,008, or 41 percent of Trust C's total
DNI of $127,730, consists of taxable (i.e., nonexempt) income,
under the characterization rule, petitioner should include only
$19,111 in his gross income, 41 percent of the $46,936
distribution.
1. Interest on Loans Between the Estate and the Trusts
Respondent determined that the trusts earned $82,763 in
interest on loans from the trusts to the estate. Petitioner
argues that the trusts did not earn interest on any loan from the
trusts to the estate because the estate and the trusts did not
have a valid debtor/creditor relationship.
Petitioner further argues that even if there was a valid
debt, Trust C had no DNI because the estate did not have DNI for
the fiscal year in issue to distribute to Trust C. We agree with
respondent.
A transfer of money will be characterized as a loan for
Federal income tax purposes where, "at the time the funds were
transferred, [there was] an unconditional intention on the part
of the transferee to repay the money, and an unconditional
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