ABATax Comment Concerning IRS Notice 2001-10

Section of Taxation
Submission to the Federal Executive Branch

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Comments Concerning IRS Notice 2001–10
April 2001

I.  Characterizing Equity SDAs

  1. Section 7872
     
    1. Gift Tax Implications

      We suggest clarifications regarding how gift taxes might apply to Equity SDAs that are owned by third parties, such as an irrevocable life insurance trust ("ILIT"). Proposed regulations under Section 7872 provide for a loan to a third party to be treated as an indirect loan to the employee, followed by a subsequent transfer by the employee to the third party under certain circumstances. If an Equity SDA is extended to an ILIT established by an employee, will the IRS characterize the arrangement as if the employer made a below-market loan to the employee? If so, will the amount of compensation income taxed to the employee be treated as a taxable gift to the ILIT? Does it make any difference in determining gift tax liability if the ILIT is a grantor trust for income tax purposes?

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