Academic journal article Journal of Accountancy

Harsh Result for Intra-Family Notes That Cancel at Death

Academic journal article Journal of Accountancy

Harsh Result for Intra-Family Notes That Cancel at Death

Article excerpt

Frane sold stock in his company to each of his four adult children. Each block of stock was worth $140,000. The children signed promissory notes under which the $140,000 principal amount was payable in 20 annual installments, with interest at 12+. The terms of the notes provided they would be "canceled and extinguished as though paid" on Frane's death.

Although Frane's life expectancy at the time of the sale exceeded 20 years, he died less than 3 years later, after two payments had been made on the notes.

Frane had used the installment method to report gain on the stock sale attributable to the two payments he had received. No income from the canceled notes was reported on Frane's final return or the estate's income tax return.

The IRS claimed cancellation of the notes caused recognition of income that had to be reported on Frane's final return.

IRC Section 453B(a) provides: "If an installment obligation is . …

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