Ch. 4 – Gifts and Kindred Items

IRC §102(a)  – Gross income does not include the value of property acquired by gift, bequest, devise or inheritance.

Similar to life insurance - §101(a).

IRC §102(b) – But, no gross income exclusion is available for (1) income from property received by gift, or (2) a gift or bequest of income from property.

Income Interests     p.169
Irwin v. Gavit

Taxpayer received an income interest in a testamentary trust for a 15 year period.

Was this gift “property” for §102 gross income exclusion purposes?

Holding:  income derived from the trust is not excluded from GI under §102.

Further, the amount received is “income” for U.S. Constitution purposes.

continued

Income Interests     p.171
Alternate analysis

Note:  Corpus distribution (when life tenant dies or term expires) is not gross income.

Alternative approach:  Allocate the income tax basis proportionately between the several parts, i.e., the term interest and the remainder interest?

Trust Income Taxation  p.172

Subchapter J – §§641 et. seq. re trust income taxation, i.e., trust & beneficiary.

See Chapter 18 discussion.

Trust income taxation applied on a “conduit approach,” i.e., did a trust income distribution occur or, if not, was a trust distribution mandated?  If so, allocation of gross income to trust beneficiary is required. Option: trust tax.

Cf., simple trust vs. complex trust.

Income Interests     p.172
Commr. v. Early        §273

Was the 32% joint interest in trust taxpayers’ acquired received by gift upon compromise of estate/will contest dispute?

They held various Corp. shares which they surrendered in a probate settlement.

Seeking to “amortize” value of estate received over expected joint life (except for §103 income).

Held:  Settlement based on underlying gift dispute and this claim resolved, and donative transfer & no IRC §273 amortization. 

Gift of Appreciated Property                  p.177

Gifts for §102 purposes can be of cash, stock, royalty interest, real property, or other types of property (including a stream of income).

What are the post-gift income tax effects (in addition to IRC §102(b) gross income inclusion).  E.g, income tax basis of gift property when a gift of appreciated or depreciated property is made.

Taft v. Bowers           p.177
Is §1015 Constitutional?                      

A purchases shares for 1000x and holds until FMV is 2,000x.  A then gives shares (worth 2,000x) to B who sells shares for 5000x. 

Is B’s realized gain (1) 3000x or (4) 4000x? 

Held:  4000x gain is realized and is includible in gross income – even though not all gain was accrued while B was owner of the property sold. 

Held: The U.S. Constitution permits the transferred value increase to be taxed to the transferee. Why?  Otherwise – what result?

Taxation Options When Gain Property Transferred

Appreciated property transferred by gift:

Tax the accrued gain when the property is

transferred by gift to donee; a recognition event.

Transfer basis to the donee and subsequent

recognition of all accrued gain to the donee.

3)  Tax basis step-up to FMV when the gift transfer occurs – no gain recognition; accrued gain disappears from the tax base.

Taxation Options When Loss Property Transferred

Assume that depreciated property is transferred by gift.  What is the treatment upon a subsequent sale of the property by the donee?

How much loss deduction is available?

See Code §1015(a).

Three alternative situations for determining gain/loss.  See Problem 2, p. 180.

Transfers at Death
§1014                       p.180

§1014 provides that the tax basis of property received from a decedent is the FMV of that property as of time of decedent’s death (or as of the alternate valuation date - §2032).

Any accrued gain disappears from the tax base.

Is this a “tax expenditure” item?  How much?

Does this produce a “lock-in” effect for the appreciated property holding?  But, possible to borrow against the property?  E.g., consider the income tax effects of a “reverse mortgage”?

Alternative to §1014 Tax Basis Step-up?

See §1022 – in effect for (only) the year 2010 when an estate had an option to elect out of estate tax – in which event a modified carryover tax basis applied.  Subject to various exceptions, e.g., basis step-up of $1.3 million permitted.

What would be the prospects for accurately reporting tax gain in the future, when realized by a beneficiary who has a §1022 basis for property received from a decedent?

2015 Enactment of
§1014(f)

§1014(f) specifies basis of property acquired from decedent can not exceed value as finally determined for FIT purposes.

§6035(a)(1) specifies that executor must furnish to beneficiary information re this value.

Enacted in H.R. 3236, “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (P.L. 114-41, §2004).

Income in Respect  of a Decedent                 p.183

What is “income in respect of a decedent”?

See §1014(c) and §691.

Example:  Cash basis taxpayer’s estate does not get an income tax basis step-up (under §1014) for such items as “accounts receivable” held by the decedent at death. 

Note:  a cash basis taxpayer would not actually have “accounts receivable” - since on a cash method and not an “accrual basis” taxpayer.

Estate Tax & Gift Tax
p. 185

1) Estate tax – an excise tax on wealth transferred at death.

During 2015 – unified credit/exemption equivalent of $5.43 million (double to $10.86 mil. for spousal situations) after inflation adjustment. 

2) Gift tax:  tax rate schedule integrated with estate tax.  Protects against any non-taxed depletion of the estate tax base.

3) Generation skipping transfer tax: additional tax when E&G tax skipped for one generation.

Prizes & Awards      p. 185
§102 re gift exclusion

Pauline C. Washburn, p. 185

Receipt of $900 for merely picking up the telephone.  No services or other request made for cooperation by the source of the funds.

Held:  Characterized as a gift (not gross income) and no GI inclusion.

Correct result? Consider Glenshaw Glass.

Prizes & Awards       p.187

§74(a)  – inclusion of awards and prizes in GI.

What about winning the Nobel prize?

What about winning the Olympic gold medal?

See the §74(b) exception from income inclusion – when income deflection to charity occurs of the amount to be received.

Paul Hornumg case
p. 187

Paul Hornung wins a car as the outstanding player of NFL championship game. Gross income? Or, did (then) §74 enable an exclusion of the value of the car for “artistic” performance?

Note:  last Superbowl game – QB Tom Brady wins truck and gives it to a helpful teammate – what tax results?

Scholarships & Fellowships              p.189

See §117 re a limited exclusion from GI for scholarships.   For tuition and books, but not for room and board.

No exclusion for a payment made for teaching.

What about amounts provided to “student athletes”?

Is this provision discriminatory (i.e., differential tuition pricing)?  Should deduction be permitted for educational expenses?  Or, a depreciable capitalized expense for education cost?

Commercial Gifts (for income tax)         p.190

§102 provides for a GI exclusion for “gifts.”

Even though an accession to wealth?  Yes.

But, no deduction to donor for wealth transfers.

Issue: Was the transfer really a “gift” for FIT purposes?

Duberstein, p. 190:  Received a Cadillac from a business associate (Berman) who was thankful for business tips.  Berman deducted the car cost as a business expense.  Tax Court:  GI inclusion.

Stanton case, p. 191:  Dist. Ct. says gift.  Cont.

Duberstein, cont.
U.S. Sup. Ct.            p.193

Gift must be made from “detached and disinterested generosity.”  p.193.

Deciding this case is to be based (p.195-6) on the tribunal’s experience with the mainsprings of human conduct to totality of facts of each case.

Lower Ct. decision by judge to be reversed when “clearly erroneous” -  FRCP 52(a).

Duberstein case (Tax Court) was not “clearly erroneous”  – based on a compensation event. 

Stanton:  remand for further proceedings. Cont.

Duberstein, cont.
U.S. Sup. Ct.            

Stanton, continued – was the trial court’s determination too sparse?  See FRCP Rule 52(a) re finding of facts by the judge.

Frankfurter opinion – p. 198:  apply a presumptive rule putting the burden on the taxpayer to prove the payment has no relationship with employment. Therefore, include Stanton’s payment in gross income?

See Douglas dissent – p. 197.

Stanton v. United States
On remand                p.200

Remanded for further determination of the tax facts – rather than merely the “ultimate fact.”

Determination by the trial court on remand:  Action by the Board in awarding the departure payment was equivalent to a “gift.”

Business Gift Tax Analysis - Options

Dealing with Duberstein situations:

Analyze the facts in each situation.

Rebuttable presumption that not a gift, but

that income is derived in a business situation.

Non-rebuttable presumption that

compensation has been received.  See §102(c).

But, see Prop. Reg. §1.102-1(f)(2).  Valid reg.?

 - See §274(b) re deduction limit on §102(a) gifts in the business context. 

United States v. Kaiser
p.202

Jury verdict that union strike assistance in form of room rent and food vouchers constituted gift.

No defect in the charge to the jury concerning deciding this “gift” question.

Jury’s prerogative to make this decision.

Issue re allocation of power to decide this question.

Effect of jury finding:  Benefit here is equivalent to a Gov’t. relief program.

Rev. Rul. 61-136
p. 205

IRS agrees that in cases “substantially like those in the Kaiser case” strike benefits will be treated as gifts – excluded from gross income.

Did the IRS concede too much – particularly since each case is based on its own independent facts?

Section 102(c)         p.205
Employee Gifts

§102(c) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.   Cf., Prop. Reg. 1.102-1(f)(2).

Can the employer deduct this “gift”, e.g., as an employee expense? Cf., dividend.

Where a closely held corporation – possible deductible payment rather than a profits distribution?

Burden of Proof Issues
p. 210

§7491 re burden of proof shifted to IRS if certain conditions are satisfied, i.e., taxpayer introduces “credible evidence.”

But, taxpayer must first present various facts to shift burden of proof.

Not relevant to large corporations and partnerships.

Effect of Allocation of Discretion            p.211

When deciding mixed questions of law and fact – and when Tax Court, Federal District Courts, and Claims Court.

Does this cause too much diversity of results on similar issues?

Does this encourage “playing the audit lottery” and “forum shopping”?

Estate of Sydney Carter
p. 211

Employee of Salomon Bros. – investment firm. Benefit paid to widow.

IRS asserts deficiency;  Tax Court agrees.

2nd Cir. reverses – treated as gift for FIT.

Prior fact patterns had been for widows’ payments to be treated as gifts.

Should not be variance among these various decisions – wherever arising?

Dissent: Duberstein rules mandate affirmance. 

Bank of Palm Beach
p. 216

Salomon Bros. was allowed a deduction for payments to Mrs. Carter.

Ct. of Claims states symmetry is not required.

Finding that dominant motivation was for business purposes.

See Section 274(b)  re no deductio9n for business gifts (above $25).

Social Insurance and Welfare Payments    p.217

§85 – unemployment insurance benefits are includible in gross income – why?

§86 – social security benefits - 85% are included – subject to some further exclusions at lower income levels.

Rev. Rul. 2003-12, p. 218

Are flood relief payments excludible from gross income?

Options re payor:  state agency, charity or employer.

Note “general welfare exclusion” - p.219.

Note §139 re terrorism $ disaster relief relief exclusion.

Here:  Holding inclusion in GI, unless specifically excluded.

General Welfare Exclusion

What is the source of the authorizing law for the general welfare exclusion?

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