Income in Respect of Decedent

[Beersheba]

If you are game for soul-searching this one should give you chills. I hope some of you can comment and/or provide authoritative cites.

A Trust is receiving final reported income for a disposition of all remaining property in 2022. However, to save taxes, the proceeds are spread over 3 years on installment method.

The trust instrument provides that Beneficiary #1 receive the proceeds of the sale of this particular property. For purposes of discussion let's call this property the "Mountain Land." There are three other beneficiaries #2, #3, and #4 which have already received the proceeds of sales of numerous "Valley Land".properties, and this also was provided in the trust instrument.

It gets worse.

Beneficiary #1 is 89, demented, and in a nursing home. The trust will record the sale in 2022, and deliver proceeds to her in 2022, 2023, and 2024 assuming this can be done via Form 6252. Part of the reason for the installment was to avoid swelling her income in 2022 and causing her to cease receiving state assistance.

If Beneficiary #1 dies in 2023 or 2024, the trust instrument provides that the remaining proceeds be sent to not #1, but instead to #2, #3, and #4.

But whoa!! Reporting the sale in 2022 and putting the income on installments creates "income in respect of a decedent" and must therefore be recognized by the descendants of Beneficiary #1.
However, this is in direct violation of the trust instrument, who would divert the final proceeds to #2, #3, and #4.

The question becomes:

• Does the trust instrument prevail?
• Does the IRS doctrine of IRD prevail?

If you've read this far, thank you. If you know an answer, please comment.

[Rapid Robert]

"A Trust is receiving final reported income for a disposition of all remaining property in 2022. ... The trust will record the sale in 2022, and deliver proceeds to her in 2022, 2023, and 2024 assuming this can be done via Form 6252."

You lost me right there. How does this qualify as an "installment sale", if the sale is completed entirely in 2022? The trust has to either distribute the income or pay tax on it, correct? How is the taxable income somehow deferred into future years?

[Beersheba]

RR, thanks for responding. I am notorious for framing questions poorly, and I do the best I can.

Title passes to the new owner in 2022, but payment is received in 2022, 2023, and 2024. I believe Form 6252 requires the reporting of the original sale every year, and the details of the original sale do not change over the course of reporting throughout the years where the payments continue. A percentage of profit is calculated on the sale, and that percentage is applied to the principal as the money is collected.

Present value is calculated to report part of the proceeds as interest, but the interest has nothing to do with the original question.

[TAXNJ]

Here is some reading if you think applicable to your scenario:

IRS Section 453B(c) provides an exception to the rule that the transfer of a promissory note accelerates recognition of gain, if the transfer is on the death of the obligee (lender) and the transfer is to someone other than the obligor (borrower).


? 453B. Gain or loss on disposition of installment obligations

Effective: March 23, 2018

Currentness

(a) General rule.--If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and--

472. Tax Planning for Real Estate Transactions s 19:17, Nonrecognition events for installment obligations-Modifying installment obligations Modifying an installment obligation will not constitute a satisfaction or disposition unless the rights of the seller under the installment sale are substantially changed. The law...

2018

That general execption is tempered by Section 691(a)(5). Section 691 addresses income in respect of the decedent. If the note is transferred to someone other than the obligor then the income is treated as IRD to the recipient of the note and the recipient recognizes gain on the future payments to the extent the lender would have.


26 C.F.R. ? 1.691(a)–5, Treas. Reg. ? 1.691(a)–5

? 1.691(a)–5 Installment obligations acquired from decedent.

Currentness


(a) Section 691(a)(4) has reference to an installment obligation which remains uncollected by a decedent (or a prior decedent) and which was originally acquired in a transaction the income from which was properly reportable by the decedent on the installment method under section 453…………

[Beersheba]

Thanks NJ. Essentially, the transfer of remaining note is authorized and becomes income to the new recipient.

That answers the question. Thank you.

[TAX4US]

In comment fields by TAXNJ #472 modifying rights of seller. Seller want to remove wife from note(medical issues). Attorney required note be paid off then rewrote note without spouse's name. TP took his own $ to attorney to pay off note. Attorney rewrote note and TP got his money back. I believe that the original installment sale just continues on. Am I safe on this? Your thoughts