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2. Comparison of Nonannuity and Annuity Characteristics
In seeking to ascertain what might distinguish notes
receivable, leasehold payments, patent rights, and royalties from
the annuities previously examined, we look first at notes
receivable. Furthermore, our review thereof convinces us that
these assets differ from annuities in a fundamental respect. It
is the concept of interest which renders valuation of a note a
very different enterprise from valuation of an annuity. Because
an annuity involves a series of fixed payments which bear no
interest, it is actuarially valued by discounting the stream to
present value. The purpose of doing so is to account for the
time value of money. In contrast, because the vast majority of
notes are interest-bearing, no such calculation is required. The
issue of time value is addressed by charging interest on the face
amount, such that the outstanding principal typically corresponds
to the present value without need for further manipulation. This
idea, in turn, provides the rationale which supports the rule set
forth in section 20.2031-4, Estate Tax Regs., presuming a value
equal to the unpaid principal amount and listing the interest
rate (or, implicitly, lack of a market rate of interest) as a
potential basis for deviation. A similar approach presuming a
value equal to the “face” dollar amount of annuity installments
could not reasonably be suggested.
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