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receive a greater rate of interest than if they had each bought a
CD in the amount of the individual gifts.
Pledging the CD's as security for Jack's guarantee benefited
decedent by lowering her cost of borrowing. When Jack executed
the loan agreement on behalf of decedent, he negotiated the rate
of interest that the bank would charge for the loan with the
bank's representative, Mr. Marshall Wellborn (Wellborn).
Wellborn and Jack were friends, and the bank regarded the Holland
family as a valuable account. Accordingly, the bank accepted
Jack's strategy to make the loan "self-funding" by accepting his
pledge of the CD as security for his guarantee. The interest
rate on a self-funded loan was only 1-� percent above the
interest rate paid on the $120,000 CD. First National did not
require the CD to be pledged for it to make the loan; however,
without the pledge the interest rate on the loan would have been
higher. Therefore, the purpose of pledging the CD as security
for Jack's guarantee of decedent's unsecured loan was to reduce
decedent's cost of borrowing.
Decedent paid the interest on the loans when it became due,
and the donees received the interest paid each month by First
National on the CD's. Each year, Jack issued a Form 1099 to each
donee reporting the amount of interest paid, and each of the
Weinstock Trusts filed Federal and State income tax returns for
1985, 1986, 1987, 1988, and 1989, reporting the interest received
on the CD's.
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