No Gain or Loss Recognized on Sale to Spouse’s Grantor Trust

In PLR 201927003, released on July 5, 2019, the IRS ruled that neither Spouse 1, nor Spouse 1’s grantor trust would recognize gain or loss on the sale of partnership interests to Spouse 2’s grantor trust.

Both Spouse 1 and Spouse 2 created and funded respective grantor trusts.  As to each spouse’s grantor trust, the applicable spouse is treated as the owner of the trust’s assets.  The grantor trust is disregarded as a separate tax entity, and all income is taxed to the grantor spouse. Rev. Rul. 85-13.

Spouse 1 proposed to sell certain limited partnership interests to Spouse 2’s grantor trust.  Further, the trustees of Spouse 1’s grantor trust proposed to sell certain limited partnership interests to Spouse 2’s grantor trust.

Code § 1041(a)(1) provides that no gain or loss shall be recognized on a transfer of property from an individual to such individual’s spouse.  Code § 1041(b) provides that the property transferred will be treated as acquired by the recipient spouse by gift, and the basis of the recipient spouse in the property is the adjusted basis of the transferor spouse.

This private letter ruling provides that transfers by Spouse 1 or Spouse 1’s grantor trust to Spouse 2’s grantor trust will be treated for federal tax purposes as sold by Spouse 1 and received by Spouse 2.

Therefore, pursuant to Code § 1041(a), Spouse 1 will recognize no gain or loss with respect to the proposed transfers, and the basis of the property held by Spouse 2’s grantor trust will be the same as the adjusted basis of the the property in the hands of Spouse 1 and Spouse 1’s grantor trust, as applicable.

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