Estate & Gift Tax Concepts

Question 1

What are the three possible methods of taxing property at death that focus on the decedent?

Answer 1

• Assessing a tax based on the value of all property owned at death.
• Transfer Tax (excise tax on the privilege of transferring property at death)
• Income tax based on the realization of gains at death (not seriously considered)

Question 2

What is an inheritance tax?

Answer 2

A tax imposed on someone who inherits property or money.

Question 3

What is a tax imposed on someone who inherits property or money called?

Answer 3

An inheritance tax.

Question 4

What is an accessions tax?

Answer 4

A tax on ALL lifetime gratuitous receipts (from a decedent OR living person) of an individual above a specified exemption.

Question 5

What is a tax on the combined gratuitous transfers that they received during life (above a certain amount) called?

Answer 5

An accessions tax.

Question 6

What are the three possible methods of taxing property at death that focus on the beneficiary?

Answer 6

• Inheritance tax
• Accessions tax
• Treat all gifts as income

Question 7

What are the different subjects that a tax may target?

Answer 7

Income, property/wealth, and consumption.

Question 8

What is the main goal of the EGT? What are supporting goals?

Answer 8

Raise revenue. Support social and economic aims/norms (EX: redistribution of wealth)

Question 9

Is the estate tax double taxation?

Answer 9

Yes and no – yes for income that was earned but no for any inherited or gifted wealth, or appreciated wealth.

Question 10

What is the mark-to-market tax policy? What are its pros and cons?

Answer 10

Taxing individuals based on gains in their assets’ market value.
Pro(s): increased revenue
Con(s): costly to do annual valuation. Liquidity issues. Money back for years of depreciation(?).

Question 11

Comm. v. Estate of Bosch (Facts, Holding, Reasoning, and Rule)

Answer 11

Problem: How does the US safeguard the tax system’s interest when they’re not a party to the proceeding?
Facts: Decedent’s wife changing a general POA to a special POA was determined invalid by a state court, which allowed for the marital deduction.
Reasoning: Legislative history said “proper regard,” not “finality,” should be given to interpretations by a court.
Rule: when federal estate tax liability turns on the character of a property interest held and transferred by the decedent under state law, proper regard will be given, but federal authorities are NOT BOUND by the determination made of such property interest by a state trial court. If the ruling is by the state supreme court, then the federal government IS BOUND.

Question 12

What case?
Facts: Decedent’s wife changing a general POA to a special POA was determined invalid by a state court, which allowed for the marital deduction.
Reasoning: Legislative history said “proper regard,” not “finality,” should be given to interpretations by a court.
Rule: when federal estate tax liability turns on the character of a property interest held and transferred by the decedent under state law, proper regard will be given, but federal authorities are NOT BOUND by the determination made of such property interest by a state trial court. If the ruling is by the state supreme court, then the federal government IS BOUND.

Answer 12

Comm. v. Estate of Bosch (Facts, Holding, Reasoning, and Rule)

Question 13

When does a gift occur for gift tax purposes?
- How relevant is the donor’s intent?

Answer 13

A gift occurs for gift tax purposes when there is a transfer of property and the donor does not receive adequate and full consideration in money or money’s worth.
- The donor’s intent is irrelevant, except in genuine business transactions.

Question 14

When does a gift occur for income tax purposes?
- How relevant is the donor’s intent?

Answer 14

A gift occurs for income tax purposes when the transfer proceeds from detached and disinterested generosity, or out of affection, respect, admiration, charity, or like impulses.
- The donor’s intent is the primary consideration.

Question 15

What is the IRC section which establishes a tax on gross income?

Answer 15

§61 imposes a tax on gross income. Gross income is all income, derived from any source, unless excluded by law.

Question 16

What is gain? IRC section?

Answer 16

The difference between the amount the TP receives and her adjusted basis. 1001.

Question 17

What is a TP’s (normal) basis? IRC section?

Answer 17

Basis is the TP’s cost, or investment, in the asset. 1012.

Question 18

What IRC section keeps gifts from being income to the recipient?
- What if the donee receives a gift of income?

Answer 18

§102 specifically excludes gifts, bequests, and inheritances from income for purposes of the income tax.
- If it’s a gift of income, such as a distribution of trust income, that must be reported as income. 102(b).

Question 19

When someone receives property that the (living) donor has a gain from, what is their basis? IRC section?

Answer 19

When a donee receives property that the donor has a gain on, the donee takes the donor’s basis in the property. 1015.

Question 20

When someone receives property that the (living) donor has a loss from, what is their basis? IRC section?

Answer 20

When a donee receives property that the donor has a loss on, then (1) if the donor’s basis is greater than the FMV on the date of the gift and the property stays at that price(?) or is lower in value at the time the donee sells it, then the donee’s basis for determining loss is the FMV at the time of the gift (loss = time of gift - time of donee’s sale); (2) if the donor’s basis is greater than the FMV on the date of the gift and if the property’s value becomes greater than the donor’s basis while the donee owns it, then the donee will use the donor’s basis to compute her gain at the time of the sale (gain = FMV - donor’s basis); (3) if the donor’s basis is greater than the FMV on the date of the gift and if the property’s value increases, but not to the level of the donor’s basis, then the donee recognizes neither a gain nor a loss. 1015.

Question 21

How else might a donee increase her basis in gifted property when they have capital gains tax?

Answer 21

To the extent that the gift tax results from appreciation in the value of property while owned by the donor, the donee may increase her basis in the gifted property. 1015(d)(6)

Question 22

What is the holding period ruling regarding basis being determined by reference to another person’s basis?

Answer 22

If basis to the recipient is determined in whole or in part by reference to the basis of another person, the period of time for which that other person has held the property will be included in the TP’s holding period. 1223(2).

Question 23

How is basis determined when someone transfers property upon death?

Answer 23

If property is transferred at death, the recipient has a basis equal to the FMV of the property on the date of the donor’s death. 1014.

Question 24

How is value defined for Estate and Gift Tax purposes?

Answer 24

The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. IRC 2033. The value of every item of property includible in a decedent’s gross estate is its FMV at the time of the decedent’s death, i.e., the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. FMV is not to be determined by a forced sale price. Treas Reg. 20.2031-1(b).

Question 25

What is the definition of FMV?

Answer 25

Fair Market Value (“FMV”) means the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. FMV is not to be determined by a forced sale price.

Question 26

What are the basic methods of valuation?

Answer 26

The market, the capitalization of income, net asset value, and cost methods.

Question 27

Estate of Andrews v. US (Issue, facts, holding, reasoning, rule)

Answer 27

ISSUE: Can a name be an asset, valued as part of an estate?
FACTS: Andrews was a successful author. After her death, her executor continued to publish ghostwritten books. They were successful, and part of the reason for this success was that her name was attached to the books. IRS valued her name, but estate didn’t want to.
HOLDING: Name was a measurable asset–part of the estate.
REASONING: Books achieved the level of success because they bore her name. This is something that has happened with other ghostwritten books, so it’s foreseeable.
RULE: A person’s name can be a measurable asset of that person’s taxable estate.

Question 28

Estate of Curry (Issue, Facts, Holding, Reasoning, Rule)

Answer 28

ISSUE: Should the value of Curry’s interest in contingent legal fees related to pending Indian claims cases be included in his estate?
FACTS: Curry, an attorney, had contracts with Indian tribes for representing them before the Indian Claims Commission on a contingent fee basis. After Curry’s death, 13 cases were still pending.
HOLDING: Includable in estate.
REASONING: Contingent fees are a contractual right. Speculative interests don’t stop assets from being included (the interest in them can be valued).
RULE: Contingent interests are includable in a decedent’s estate.

Question 29

When are gifts valued?

Answer 29

Gifts are valued on the date the gift is complete where donor has given up all power to change beneficial ownership of property. Treas Reg. 25.2511-2.

Question 30

When are estates valued?

Answer 30

Estates are valued at date of death unless electing the alternate valuation date. Treas Reg. 20.2031-1(b).

Question 31

When may a party select an alternate valuation date?

Answer 31

• New date must be within 6 months of the DOD.
• Can only make election if the value of the gross estate AND the amount of the estate tax will decrease as a result of the election. IRC 2032(c).

Question 32

For purposes of valuation, may a subsequent sale be considered?

Answer 32

If a subsequent sale takes place within a reasonable time after death, that can be considered in the evaluation.

Question 33

Cook v. Comm (Issue, Facts, Holding, Reasoning, Rule)

Answer 33

ISSUE: Are lottery winnings a private annuity to be valued according to 7520? Yes.
FACTS: Cook won the lottery. Transferred the interest to a limited partnership. Cook’s estate argued that the partnership’s interest should be valued. IRS said that the 7520 tables should be used.
HOLDING: Use 7520 tables.
REASONING: Winnings not transferable, so properly characterized as a private annuity. IRS preference for standardization over accuracy. Valuation tables account for deferred payment–no marketability discount.
RULE: Annuity tables must be used to value annuities, for estate tax purposes, unless it is shown that result is so unrealistic and unreasonable that either some modification in prescribed method should be made, or complete departure from the method should be taken, and more reasonable and realistic means of determining value is available.
The use of the annuity tables provided by § 7520 is appropriate, reasonable, and preferred over individual expert valuations.

Question 34

How are marketable securities valued?

Answer 34

The FMV of the securities is used, and this would be the mean of the highest and lowest selling prices on valuation date –> if no valuation date, then a weighted average is used.

Question 35

How are municipal bonds valued? What considerations are used?

Answer 35

• Municipal bonds are valued by the mean of highest and lowest selling prices on the valuation date.
• Valued considering the soundness of the security the interest yield and date of maturity and the ask for price.

Question 36

How are insurance policies valued for (1) a decedent beneficiary, and (2) for someone else.

Answer 36

For a decedent beneficiary, the value of insurance policies is the death benefit.
For a decedent who owns an insurance policy on someone else, the value is the replacement cost (ask life insurance company what that is).

Question 37

How are annuities valued?

Answer 37

An annuity’s present value depends on (1) the number of times payments are received and (2) the 7520 interest rate (cook).

Question 38

How are business interests valued?

Answer 38

Business interests are valued according to Revenue Ruling 59-60. Several factors are fundamental in the analysis:
(1) Nature of the business and the history of the enterprise from its inception.
products services operating investment assets capital structure plant facilities sales records and management.
(2) Economic outlook in general and condition and outlook of specific industry in particular – look at price trends; loss of manage or keep players; insurance.
(3) Book value of the tock and the financial condition of business – balance sheet
(4) Earning capacity of the company - income statement
(5) Dividend paying capacity
(6) Whether or not the enterprise has goodwill or other tangible value - usually based on earning capacity
(7) Sales of the stock and the size of the block of stock to be value – look at arm length transaction
(8) Market price of stocks of corps engaged in the same or similar line of business having their stocks actively traded in a free and open market either on an exchange or over the counter

Question 39

How is Real property valued? Who should be used?

Answer 39

Real property is valued according to its highest and best use. It is valued according to comparables (looking at similar properties and adjusting).
- Qualified appraisers are relied on to determine value.

Question 40

What election may be made to reduce the value of real property included in a decedent’s estate? What limitations apply?

Answer 40

Under 2032A, a taxpayer may elect to value real property according to its actual use (not its highest and best use). The value can only be decreased by $750,000, it can’t be sold, and it must be maintained for a certain of period of time with the current use.

Question 41

How are promissory notes valued for Estate and Gift Tax purposes? What might diminish the note’s value?

Answer 41

Promissory notes are valued according to (1) the outstanding principal + (2) the amount of interest accrued to the date of death. The interest rate, the date of maturity (when interest and principal are due), and issues of collectability might diminish value of note.

Question 42

How are household and personal effects valued for Estate and Gift Tax purposes? How are items grouped?

Answer 42

Items worth less than $100 can be grouped. Individual items worth more than $3000 and collections with aggregate value exceeding $10,000 must be appraised.

Question 43

How are money market accounts valued for Estate and Gift Tax purposes?

Answer 43

Money market accounts are valued by the balance in the account on date of death. Interest accrued as of the DOD is included.

Question 44

How are cars and boats valued for Estate and Gift Tax purposes?

Answer 44

Valued by the retail price from a dealer (can get appraised). An expensive asset here would make using an appraiser more appropriate.

Question 45

Estate of O’keeffe v. Commissioner (Issue, Facts, Holding, Reasoning, Rule)

Answer 45

ISSUE: How should blockage discount be determined?
FACTS: O’keeffe was an artist. After her death, had very valuable paintings as part of the estate. Estate and IRS disagreed as to how much blockage discount the paintings should receive.
HOLDING: Value determined by dividing the works into two categories based on quality, uniqueness, and salability. Two categories: likely sold in short term and likely sold in long term. Applied a 75% discount to one category and a 25% discount to the other category (50/50).
REASONING: Usually, FMV would be used. When an artist dies and leaves behind a bunch of art, this is subject to
a blockage discount. This discount depends on the market. The parties’ experts exaggerated the amount that should be discounted.
RULE: The amount of blockage discount applied to the fair market valuation of artwork on which estate tax must be paid depends upon the relevant market in which such artwork is salable.

Question 46

To what degree does the IRS consider ownership of other interests by family members when determining control premiums and minority discounts?

Answer 46

IRS does not attribute ownership by other family members in determining control premiums and minority discounts.

Question 47

When determining discounts for interests, to what degree are they considered together?

Answer 47

Aggregate interests are considered, but each interest needs to be looked at separately. (???)

Question 48

In a situation in which the recipient of the property (receiving a bequest) owns 90% of the property and is receiving the remaining 10% as part of the bequest, will that recipient pay a premium on the 10% because his interest is being made whole?

Answer 48

No, FMV for Estate and Gift (and GST) tax purposes is an objective standard. Even though the recipient, were he offered the 10%, might pay a premium to make his interest whole, this is a subjective consideration and so does not increase the value of the gift that he’s receiving.
- Motivated buyer/seller not considered.

Question 49

How is FMV generally measured?

Answer 49

Fair Market Value is determined in the market where the item is commonly bought and sold.

Question 50

How is capitalization of income used for valuation? What types of assets is it usually used for?

Answer 50

Under the capitalization of income approach, to determine an assets value, one must (1) determine the amount of income that it generates, and (2) capitalize it (how much would you pay for an asset generating that amount of income?).

Question 51

What is the Market Approach (comparables) of valuation?

Answer 51

The Market Approach uses actual recent sales of comparable property and adjusts those properties to the property at issue to determine the value. FMV is applied based on the valuation date.

Question 52

What is the 2512 Definition of Gifts?

Answer 52

“Where (1) property is transferred (2) for less than an adequate and full consideration in money or money’s worth, then (3) the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift.”

Question 53

What is the Business Transactions Exceptions to the Gift Tax?

Answer 53

Genuine business transactions are not subject to the gift tax. To qualify for this exception, it must be shown that the transaction (1) was at arms-length, (2) had bona fide (real) intent, (3) was free from donative intent, and (4) was in the ordinary course of business.

Question 54

Estate of Anderson v. Commissioner (Issue, Facts, Holding, Reasoning, Rule)

Answer 54

ISSUE: Was the transaction made in the ordinary course of business? Yes.
FACTS: TPs were senior executives who gave stock to junior executives as part of a plan to change stockholdings (in common stock) in accordance with management responsibility. Commissioner determined a deficiency because seems that they’re not getting enough back. TP said this is ordinary course of business exception.
HOLDING: Business Transaction Exception applies.
REASONING: Management very important in the cotton industry, so the Senior Executive believed it important that the junior folks have a proprietary interests that would grow in proportion to the company’s success.
RULE: Genuine business transactions are not subject to gift tax.

Question 55

How do buy-sell agreements alter the estate and gift tax?

Answer 55

Buy sell agreement will be ignored unless it is (1) A bona fide business arrangement, (2) Not a device to transfer property to the members of the family at less than full and adequate consideration in money or money’s worth, and (3) Comparable to arrangements made by parties in an arms-length transaction.

Question 56

Commissioner v. Wemyss (Issue, Facts, Holding, Reasoning, Rule)

Answer 56

ISSUE: What to do when a transferor receives something other than money.
FACTS: More was a widow and bene of 2 trusts from her late husband. Income from trusts split between More and her son. If More remarried her share would terminate, and her son would become the sole beneficiary. Wemyss (plaintiff) sought to marry More. More did not want to lose income, so she and Wemyss entered into an agreement whereby he would transfer to her a block of shares, and she would marry him.
HOLDING: This was a gift.
REASONING: the Estate and Gift Tax uses an objective standard. Congress hasn’t enacted anything saying that a promise to marry is adequate consideration (as they have in contract law). So, a promise to marry is not money or a money equivalent.
RULE: Transfers of property are subject to the gift tax whenever they are not made in exchange for money or something of monetary value.

Question 57

What is the rule regarding a promise/agreement for being adequate and full consideration?

Answer 57

A promise or agreement must be supported by adequate and full consideration in money or money’s worth.

Question 58

Merrill v. Fahs (Issue, Facts, Holding, Reasoning, Rule)

Answer 58

ISSUE: If a person transfers property in exchange for the recipient giving up marital rights in the person’s property, is the transfer still a gift that is subject to the gift tax? Yes.
FACTS: Merrill and Kinta Desmare entered into a prenup where Merrill agreed to set up a $300,000 trust for Desmare after the marriage and to add provisions to his will creating additional trusts for Desmare and any children they might have. In exchange, Desmare agreed to give up most of her state-law rights to Merrill’s other property that she would otherwise acquire once she was Merrill’s wife. After the marriage, Merrill created the $300,000 trust as promised.
HOLDING: The 300K transfer was a gift.
REASONING: If a person gives up marital rights to a spouse’s property, the person’s lost right is a detriment that can be consideration to support a contractual agreement. However, tax laws are concerned with whether the donor’s estate gains anything—not whether the recipient has given up something. Because a recipient’s agreement to give up marital property rights does not give money or a money equivalent back to the donor’s estate (estate-tax laws state that giving up marital rights to a spouse’s property is not money or a money equivalent), it is not monetary consideration. Also, not a business transaction.
RULE: If a person transfers property in exchange for the recipient giving up marital rights in the person’s property, the transfer is a gift that is subject to the gift tax.

Question 59

When is a gift made pursuant to a legally enforceable antenuptial agreement effective?

Answer 59

Effective on the date of marriage (Revenue Ruling 69-347). This is because a gift becomes taxable in the year in which the obligation became binding and not when discharging payments were made. Antenuptial agreement in 69-347 binding only on the parties’ marriage.

Question 60

What is the result when a recipient pays the transferor’s gift tax resulting from the transfer?

Answer 60

The recipient’s payment is considered a benefit flowing to the transferor. Part sale / part gift for income tax purposes (transferor realized income). 2035(b).

Question 61

When a transferor requires the recipient to pay the gift tax resulting from the transfer, the gift is reduced according to the amount the recipient paid–but this reduces the gift and thus reduces the gift tax. How is the true value of the “net gift” determined (the gift tax due)?

Answer 61

Gift tax is equal to the tentative tax (the amount before being reduced by the recipient’s payment, computed on the full FMV of the property transferred) divided by one plus the rate of tax (Revenue Ruling 75-72).
X / 1.[rate of tax]
EX: gift of $2M. Tax of $800K (paid by recipient). This would be 800K / 1.4 = $571,429.

Question 62

Steinberg v. Commissioner (Issue, Facts, Holding, Reasoning, Rule)

Answer 62

ISSUE: May a donee’s promise to pay any increase in estate tax be reduced to a monetary value and netted against the value of that gift for the purposes of calculating the donor’s gift-tax liability? Yes.
FACTS: Steinberg and her daughters negotiated a gift agreement whereby Steinberg agreed to gift her daughters ~$110 million. Steinberg was 89 years old at the time. In exchange for the gift, the daughters agreed to pay both (1) Steinberg’s gift-tax liability resulting from the transfer and (2) any increase in Steinberg’s estate tax that could result from the transfer. The second liability would arise only if Steinberg died within three years of making the gift. In such an event, § 2035(b) of the Internal Revenue Code would increase Steinberg’s gross estate by an amount equal to the gift tax the transfer had been subject to. That increased gross estate would increase Steinberg’s overall estate-tax liability. Steinberg calculated the value of her daughters’ assumption of the contingent increase in estate-tax liability to be approximately $5.8 million. On her gift tax return, Steinberg reduced the value of the gift for the purposes of calculating the estate-tax liability by that amount. The IRS determined that the reduction was improper and assessed a gift-tax deficiency. Steinberg challenged the IRS’s assessment in tax court.
HOLDING: Steinberg’s valuation was reasonable.
REASONING: A net gift results if, as a condition of receiving a gift, a donee agrees to pay the donor’s gift-tax liability on the transfer. If the donee further promises to pay any § 2035(b) estate tax that could result from the transfer, the value of that promise may also be netted against the gift. The value of the promise is the extent to which the promise is a detriment to the donee and a benefit to the donor. Steinberg’s daughters’ promise to pay any § 2035(b) estate-tax liability has discernible value under this standard. Because of Steinberg’s advanced age, § 2035(b) has a reasonable chance of applying to the transfer, and so the daughters have a reasonable likelihood of having to pay the resulting tax. That contingent liability is a detriment to the daughters. For the same reason, the daughters’ assumption confers a benefit on Steinberg: her estate will be relieved of the obligation to pay taxes it would otherwise be liable for. Steinberg’s valuation of her daughters’ promise at $5.8 million is reasonable, and her reduction of the value of the gift for the purposes of calculating the gift tax was proper. Judgment is entered in favor of Steinberg.
RULE: A donee’s promise to pay any increase in estate tax that could result from the application of § 2035(b) of the Internal Revenue Code to a gift may be reduced to a monetary value and netted against the value of that gift for the purposes of calculating the donor’s gift-tax liability.

Question 63

Must a parent pay gift tax on things provided to minor children?

Answer 63

No.

Question 64

If one spouse receives greater property than the other in a divorce, is that excess subject to the gift tax?

Answer 64

No (Harris v. Commissioner)

Question 65

Spruance v. Commissioner (Facts, Holding, Reasoning, Rule)

Answer 65

FACTS: H/W entered into 2 agreements; operated as the couple’s property-settlement agreement for divorce. H transferred $1 mil. in stock into a trust for W and 4 children. The income would be used to provide support and maintenance for W and the 3 children who were still minors. The remainder would be distributed to all four children. $550,000 of the $1 million was transferred to settle W’s marital-rights and property-rights claims and to provide support for the three minor children.
HOLDING: The remaining $450,000 of that transfer is essentially a property transfer to the adult child and three minor children for reasons other than the minor children’s support.
REASONING: There’s no reliable evidence that wife bargained away any of her personal marital rights in exchange for this portion of the transfer. Thus, $450,000 of the money transferred to the trust is not protected by § 2516 and is a taxable gift.
RULE: A transfer that is made pursuant to a divorce agreement is a gift unless the transfer is either to settle a spouse’s marital-rights or property-rights claims or to provide support for the couple’s minor children (2516).

Question 66

Where is the gift tax exclusion amount found in the code?

Answer 66

2503(b).

Question 67

Where is the education/medical exclusion section in the code?

Answer 67

2503(e)

Question 68

Dickman v. Commissioner (Issue, Facts, Holding, Reasoning, Rule)

Answer 68

ISSUE: Does an interest-free loan constitute a taxable gift to the recipient equal to the value of the interest that would otherwise be generated by the loaned funds? Yes.
FACTS: H & W loaned large amounts of money to their son Lyle and the family business. Most of the loans were memorialized in interest-free demand notes. H died in 1976, leaving a sizable estate. The IRS determined that the loans were gifts subject to taxation. The commissioner did not seek to tax the loan principal itself but rather the reasonable value of the use of the money loaned and issued tax-deficiency notices to H & W. The Tax Court held that interest-free family loans do not result in taxable gifts, and the Eleventh Circuit reversed.
HOLDING: The would-be interest on the loan should be taxed.
REASONING: An interest-free loan confers a valuable property interest on the recipient (because they don’t need to pay the customary interest on the loan), similar to borrowing land or buildings from a property owner rent-free. The value of the property interest can easily be measured by looking to the banking sector for current interest rates. The $10,000 exclusion still applies, so this won’t harm genuine interfamily gratuitous transfers.
RULE: An interest-free loan constitutes a taxable gift to the recipient equal to the value of the interest that would otherwise be generated by the loaned funds.

Question 69

For purposes of the gift tax, is a transfer of personal services a transfer of property?

Answer 69

No. For purposes of the gift tax, a transfer of personal services is not a transfer of property.

Question 70

Commissioner v. Hogle (Issue, Facts, Holding, Reasoning, Rule)

Answer 70

ISSUE: For purposes of the gift tax, is a transfer of personal services a transfer of property? No.
FACTS: Hogle set up irrevocable trusts for his three minor children. The trusts were managed by an independent trustee and funded by the profits from a stock-trading account operated by Hogle. Hogle could choose whether to make trades. But if Hogle made trades and those trades made a profit, Hogle had no choice about where the profits went; the profits always went directly into the trusts. Hogle believed that these profits were being earned by the trusts and should be taxed at the trusts’ lower income-tax rate. However, the IRS determined that Hogle, not the trusts, had earned the trading profits and owed income taxes on those profits. IRS also thought that because Hogle had earned the profits, he must have temporarily owned the profits and, therefore, owed gift taxes on the transfer of those profits to the trusts.
HOLDING: Not a transfer of property.
REASONING: Property transfers considered gifts under § 2501 may lead to federal gift tax liabilities based on the gift’s value, such as when income is given away. While personal services are exempt from the gift tax, the provider might still be liable for income tax on any earnings from those services. In the specific case of Hogle, he provided personal services, but had no authority over the profits earned from them, and thus, the gift was limited to his controllable personal services rather than the gained income.
RULE: For purposes of the gift tax, a transfer of personal services is not a transfer of property.

Question 71

When is a gift complete for purposes of the gift tax?

Answer 71

A gift is complete when (1) the donor has so parted with dominion and control (2) as to leave in him no power to change its disposition whether for his own benefit or the benefit of another (Treas. Regs. 25.2511-2(b)).

Question 72

What is the fundamental purpose of the gift tax?

Answer 72

To backstop the estate tax.

Question 73

When is the delivery of a check a completed gift?

Answer 73

Delivery of check a completed gift on the EARLIER of
(1) The date on which the donor has so departed with dominion and control under local law as to leave the donor with no power to change its disposition, (when it comes out of his account) OR
(2) The date on which the donee deposits the check for payment, IF it is established that:
(i) The check was paid by the drawee bank when first presented to the drawee bank for payment;
(ii) The donor was alive when the check was paid by the drawee bank;
(iii) The donor intended to make a gift;
(iv) Delivery of the check by the donor was unconditional; AND
(v) The check was deposited, cashed, or presented in calendar year for which completed gift treatment is sought and within reasonable time of issuance.
(Rev. Ruling 96-56)

Question 74

If a promissory note is a mere promise to pay, is it a completed gift?

Answer 74

No. If it’s a mere promise to pay then it’s not a completed gift until the note is paid or transferred for value.
Also a completed gift when the promissory note creates a legally enforceable agreement that has a determinable value–completed on the date it’s signed.

Question 75

When is a promise to pay a debt a gift?

Answer 75

A promise to pay someone’s debt in the future is a gift only if the promisor intends to actually part with money to pay the debt.

Question 76

When is a gift in a contract completed?

Answer 76

Gifts in contracts are complete when the contract legally enforceable.

Question 77

If a grantor can only exercise their power to revoke a gift in conjunction with another person, are they still deemed to have power over the trust property? What if the other person has an interest in the trust that is both substantial and adverse?

Answer 77

Yes. In the latter case, they aren’t considered to have retained a power and the gift is considered complete. Treas. Regs. 25.2511-2(e).

Question 78

What does a grantor need in order to retain control over trust property and still have the gift be considered complete (out of the estate)?

Answer 78

A grantor may complete a gift and still retain control over trust property as long as that control is a fiduciary power and is limited by fixed or ascertainable standard, and as long as the grantor retains no beneficial interest (Treas. Regs. 25.2511-2(g)).

Question 79

What is an ascertainable standard?

Answer 79

An ascertainable standard is an objective, external standard that a beneficiary can force the trustee to exercise. It’s HEMS or a standard designed to maintain the beneficiary’s accustomed standard of living.

Question 80

If a grantor’s power is over principal and is limited by an ascertainable standard, what is the effect for income tax purposes?

Answer 80

If the grantor’s power is over principal and is limited by an ascertainable standard, then the grantor is no longer taxed as the owner for income tax purposes (IRC 674(b)(5)(A). The trust beneficiaries will be taxed on the trust income.

Question 81

In the case of installment sales and loans, how is it determined whether the transfer is a gift or a sale? If a gift, when is it complete?

Answer 81

The intent to forgive the installment sale or loan needs to be determined. A prearranged plan to forgive notes that were received in return for land is a gift rather than bona fide sale. If this is the case, then the gift is complete at the date of inception. If there is no prearranged plan but the notes are forgiven as they come due, each forgiven note will be a completed gift when they’re forgiven.

Question 82

Does a taxpayer need to report gifts that qualify for the annual exclusion? Why or why not does this support the section’s policy?

Answer 82

No (IRC 6019(a). If it were otherwise, the policy of avoiding problems with recordkeeping and governmental intrusion would not be avoided.

Question 83

What is the Present Interest Requirement?

Answer 83

The annual exclusion is only available for gifts of present interests. Present interests are those interests that give the recipient the unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property (Regs. 25.2503-3(b)).

Question 84

Is a remainder interest a present interest?

Answer 84

A remainder interest, without a Crummey power, is not a present interest because the recipient does not have an unrestricted right to the immediate use possession or enjoyment of the property.

Question 85

Is a transfer to a trust a gift to the beneficiaries or to the trustee?

Answer 85

A transfer to a trust is gift to the beneficiaries, not the trustee.

Question 86

How is a gross estate valued?

Answer 86

The value of a gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death (2033).

Question 87

What types of property does a decedent’s gross estate contain?

Answer 87

A decedent’s gross estate includes the value of all property, whether real or personal, tangible or intangible, and wherever situated, beneficially owned by the decedent at the time of his death (Treas. Regs. 20.2033-1(a)).

Question 88

Are improvements paid for by one of the joint tenants considered a contribution toward the acquisition of the property?

Answer 88

Yes, improvements paid for by one of the joint tenants are considered a contribution toward the acquisition of the property.