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and cites Example 5 and section 25.2702-3(e), Example (1), Gift
Tax Regs., among others, in support of this position. Example 5
states as follows:
A transfers property to an irrevocable trust, retaining
the right to receive 5 percent of the net fair market
value of the trust property, valued annually, for 10
years. If A dies within the 10-year term, the unitrust
amount is to be paid to A’s estate for the balance of
the term. A’s interest is a qualified unitrust
interest to the extent of the right to receive the
unitrust payment for 10 years or until A’s prior death.
Section 25.2702-3(e), Example (1), Gift Tax Regs., provides:
A transfers property to an irrevocable trust, retaining
the right to receive the greater of $10,000 or the
trust income in each year for a term of 10 years. Upon
expiration of the 10-year term, the trust is to
terminate and the entire trust corpus is to be paid to
A’s child, provided that if A dies within the 10-year
term the trust corpus is to be paid to A’s estate. A’s
annual payment right is a qualified annuity interest to
the extent of the right to receive $10,000 per year for
10 years or until A’s prior death, and is valued under
section 7520 without regard to the right to receive any
income in excess of $10,000 per year. The contingent
reversion is valued at zero. The amount of A’s gift is
the fair market value of the property transferred to
the trust less the value of the qualified annuity
interest.
We agree with respondent that Example 5, if valid, would
preclude the valuation methodology for which petitioner argues.
To say that Example 5 is not on point because it involves a
unitrust rather than an annuity interest would be to rely on a
distinction without a substantive difference. Consequently, we
are faced squarely with the question of this regulation’s
validity.
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