Aug 1, 2005 12:00 PM, By Laura H. Peebles, director, Deloitte Tax LLP, Washington.

By: By Laura H. Peebles, director, Deloitte Tax LLP, Washington.

Practitioners argue about what the income tax consequences are if the seller in an IDIT transaction¹ (Installment Sale to an Intentionally Defective Grantor Irrevocable Trust) dies before the note is paid off. Some commentators believe that this area is terra incognita, and all answers must be determined by analogy. Others, myself included, believe that existing rules are equal to the task, even though they were not created with IDITs in mind.

The theories so far have fallen generally into two camps regarding collections on the note by the heirs: One says that the note is Income in Respect of Decedent (IRD) property under Internal Revenue Code (IRC) Section 691 and therefore the heirs must report taxable income as collections are received on the note; the other says that because the decedent would not have paid income tax on payments received from a grantor trust, Section 691 does not apply, so the heirs don't pay income tax on the post-mortem collections on the inherited note.²

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