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term prime interest rates were between 7% and 8%),7 and applies
it to the range of Kimberly’s life expectancy, Clyde’s income
interest in the note was likely worth between $190,000 and
$590,000 on the day it was created; if one discounts at 8%, that
worth jumps to a range of $200,000 to $730,000. These values
only increase if one adds in the prospect of payment of the
principal, or computes some nonzero probability of that payment
being accelerated by Kimberly’s need to qualify for Medicaid.
(They also admittedly decrease with the probability that Kimberly
would use the money before then.) This means that the allocation
approved by the Probate Court is not simply an allocation of $1
million to Kimberly. As the Hickses suggest, there was a real
risk that Clyde would predecease Kimberly. If he did, the
present value of the note would become part of his taxable
estate, and these rough calculations strongly hint that that
value would not be negligible.
This strongly suggests that there was real economic
substance here even if we look at the entirety of the allocation,
including the loan. We do agree with the Commissioner that it’s
reasonable to assume that Kimberly’s injuries would shorten her
life, but we find as a fact she was in no danger of imminent
death at the time of the settlement, and so do not see the loan
7 Federal Reserve Statistical Release H.15, Selected
Interest Rates, Historical Data, http://www.federalreserve.gov/
releases/h15/data.htm.
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