REVENUE AUDIT MEMORANDUM ORDER NO. 1-80

June 5, 1980

REVENUE AUDIT MEMORANDUM ORDER NO. 1-80

SUBJECT              :               Auditing Claims Against the Estate for Estate Tax Purposes.

TO                           :               All Internal Revenue Officers and Others Concerned.

 

A.            NATURE OF CLAIMS AGAINST ESTATE.

The word "claims" as used in the statute is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Claims against the estate or indebtedness in respect of property may arise out of:  

1.             Contract

2.             Tort

3.             Operation of law

B.            PURPOSE OF VERIFICATION.

The determination as to whether a claim against the estate is an allowable deduction involves a proper appreciation of evidence in order that the examiner may fully satisfy himself and the Bureau that:

1.             The liability represents a personal obligation of the deceased existing at the time of his death;

2.             The liability was contracted bona fide and for an adequate and full consideration in money or money's worth;

3.             That the claim is a debt or charge which is valid in law and enforceable against the estate of the deceased.  

C.            AUDIT PROCEDURES.

In the verification of claims against the estate for transfer tax purposes, the following audit procedures must be observed:

1.             Documentation. — The following documents must be scrutinized and certified true copies thereof submitted with the report.

a)             The promissory note or contract of loan signed by the debtor.

b)             In the case of advances made by individuals or corporations to the deceased, copies of vouchers, cancelled checks or other documents evidencing the advances.  

c)             Other documents or evidences relevant to the grant of the loan, i.e. real estate or chattel mortgage, a copy of the Certificate or Title to show annotations thereof, etc.

d)             Certification under oath by the creditor for the exact balance of the liability including accrued interest at the time of death, except balances of bank loans where a mere certification (not under oath) is sufficient, provided that the investigating examiner confirms that it was actually issued by an authorized officer of the bank.

e)             Where the settlement is made thru the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing claims against the estate, or the Court order approving the said claims if already issued.

2.             Verification. —

a)             The financial capacity of the creditor to lend the amount;  

b)             The purpose for which the amount was borrowed and if any portion thereof remained unspent at the time of death;

c)             If the loan was used for investment or for the purchase of an asset, if the asset is included as part of the gross estate;

d)             The relationship between the creditor and debtor to determine whether or not the loan was the result of an arms-length transaction;

e)             Comparison of the signature of the deceased on the promissory note with that on another authentic document to determine the genuineness thereof;

f)              In the case of a business credit, in addition to the foregoing procedures, the examiner should check, if feasible, whether the liability was recorded in the books of accounts and balance sheet of the creditor;  

g)             Where the decedent has a co-maker in the instrument of loan, whether or not the whole proceeds thereof was actually received by the decedent.

RUBEN B. ANCHETA

Acting Commissioner