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Estate and Gift Tax
University of South Carolina School of Law
Boyle, F. Ladson

Estate and Gift Tax

Chapter I – Background

I. State Law as a Source of Federal Tax Results
A. Commissioner v. Estate of Bosch [Δ created trust and gave a general power of appointment to the Δ’s wife. The wife attempted to release the power to avoid estate taxes, but after her death the IRS disallowed the marital deduction as to the Δ because of the nature of the power. A state court proceeding determined that the release was invalid.] (1) Holding: Where the federal estate tax liability turns upon the character of a property interest held and transferred by the decedent under state law, federal authorities are not bound by the determination made of such property interest by a state trial court
(2) Rationale: Based on Erie, in diversity cases, lower state court decisions are persuasive, but not controlling authority
(a) The Commissioner was not a party to the state court proceeding
(b) Issue is determination of a federal tax statute – Legislative history is used to construe the statute
(3) Only a ruling of the state’s highest court on a state law issue is binding on the IRS
B. Rev. Ruling 73-142 [During the ∆’s lifetime, he petitioned the state court to construe a trust document. Contrary to decisions of the state’s highest court, the trial court construed the trust in such a way as to limit the power of the decedent. If the Service was to be bound by the lower court’s ruling, the trust assets would not be subject to estate taxation] (1) Bosch – The Court ruled that where there is no decision of the state’s highest court, the federal court must apply what it finds state law to be, after giving proper regard to decisions of the other courts of the state
(2) This case differs from Bosch
(a) The decree of the state court was handed down before the event giving rise to the tax – The date of the grantor’s death
(b) While the Service would not be bound by the decree as to questions of the grantor’s power before the date of the decree, it would be bound in questions arising after the date of the decree (so get a ruling before the taxable event). So, IRS can be bound with a lower court ruling before the taxable event, but after the taxable event you have to go the state’s highest court.
C. Problems – Page 24
(1) #1 — D ———- Land to B (invalid conveyance); After D’s death, his PR sues in state court to recover land. The state court rules against the PR and the case is not appealed.
(a) Is the land subject to the estate tax? – Could be
· Bosch – The Service is not bound by lower court ruling, but the taxpayer might win in federal court.
(b) Would answer be different if D had sued unsuccessfully during lifetime?
· Yes, if during D’s life, it would become law of the case
· The Service would be bound

Chapter II – Overview of the Federal Taxation of Estates, Trusts and Gifts

I. Federal Gift Tax Structure — §2001, §2501—2512, §25.2502-1
A. Federal gift tax liability is calculated in four steps:
(1) The Code defines what transactions are subject to the tax
(a) What transfers are treated as gifts
(2) The Code allows some transfers to be removed (deducted) from those subject to the tax
(3) A tax is calculated by applying a rate table to the remaining transfers
(4) The taxpayer is allowed to reduce the tax by a credit
B. A “gift” for gift tax purposes is a transfer of:
(1) A beneficial interest in property,
(2) Beyond the control of the transferor,
(3) For less than full and adequate consideration in money or money’s worth
C. Once transfers subject to the gift tax have been identified, it is necessary to determine which of those transfers are “taxable”
(1) Split Gifts – §2513 permits married taxpayers to treat certain transfers as made by one-half each
(2) Exclusions – Some transactions are “excludable”
(a) Statutorily excluded from the definition of taxable gift
· §2503(b) – Excludes gifts of present interests up to $11,000 per donee per taxable year
o Annual exclusion only applies to gifts of a present interest
§ Future interest do not qualify
· §2503(e) – Exclusions for certain medical and educational expenses
· §2503(f) – Exclusions for certain pension transactions
(3) Deductions – Certain transactions are deductible from taxable gifts, thereby reducing the amount of gifts subject to tax
(a) §2523 – Deduction for gifts of certain transfers to the donor’s spouse
(b) §2522 – Deduction for gifts to charity
D. Once the amount of the taxable gifts is determined, the donor’s tax liability for the year can be calculated
(1) The donor’s taxable gifts for the current year are aggregated with the aggregate of taxable gifts made by the donor in prior years
(a) All taxable gifts of the donor made at any time are added together
(2) A first tentative tax is calculated
(a) Tax is calculated under §2501(a)(1), §2502(a), and §2001(c) using the rate tables in federal estate tax §2001
(3) A second tentative tax is calculated
(a) The tax is calculated by applying the rates in §2001(c) only to the taxable gifts made in prior years
(4) The second tentative tax is subtracted from the first tentative tax under §2502(a) to determine the taxpayer’s gift tax liability on the current calendar year’s taxable gifts
E. If property is transferred subject to federal tax liability, the gift is a net gift
(1) Example: $1,000,000 Gift = $667,000 Gift and $333,000 Tax
F. Gifts are valued by date of gift valuation
(1) §1015 – Donee gets transfer basis in the property
(a) Income tax implications
(2) §1016 – Heir gets stepped-up basis in the property
G. Problems – Page 30
(1) #1 – D. a widower, made no prior taxable gifts (Consider §2501, §2502, §2505, and §6019)
(a) Yr. 2000 – D ——–$200,000 to A (net of annual exclusion)
· §2001(c)(1) – Tax is $38,800 + 32% of excess over $150,000
o $38,800 + $16,000 = $54,800
· §2505 – No tax is paid
o Applicable exclusion amount for 2000 = $220,550
o $220,550 – $54,800 = $165,750
· §6019 – Gift return is required to be filed
(b) Yr. 2001 – D ———–$250,000 to B
· §2001(c)(1) – First Tentative Tax
o Current Gift: $250,000
Prior Gifts: $200,000
Total: $450,000
o Tax on total gifts: $70,800 + 34% of excess over $250,000
§ $70,800 + $68,000 = $138,800
· §2001(c)(1) – Second Tentative Tax
o Tax on prior gifts: $54,800
· Tax for Current Year
o First Tentative Tax – Second Tentative Tax
§ $138,800 – $54,800 = $84,000
· §2505 – No tax paid
o Applicable exclusion for 2001 = $220,550
o $220,550 – [$84,000 + $54,800] = $81,750
· §6019 – Gift tax return required
(c) Yr. 2002 – D ——— $650,000 to C
· §2001 – Current Gifts: $650,000
Prior Gifts: $450,000
Total: $1,100,000
o Tax on total gifts – $345,800 + 41% of excess over $1,000,000
§ $345,800 + $4

estate passes to her son, J
(2) What is the amount of A’s gross estate for federal estate tax purposes?
(a) Highlighted assets + $224,000 (Value of RE minus recourse mortgage) = $1,185,000
· When debt is non-recourse, reduce the FMV of the asset by the debt instead of deducting it from the estate
· Joint checking accounts – Amount of contribution is included in gross estate
o Treas. Reg. §20.2040-1(a)(2)
(b) Gross estate = $1,185,000
(3) What is A’s estate tax assuming no taxable gifts during life and a state death tax equal to the maximum state tax death credit?
(a) Gross Estate: $1,185,000
– Expenses = $25,000
Taxable Estate = $1,160,000
(b) Tax on Taxable Estate = $411,400
· $345,800 + 41% of excess over $1,000,000
(c) Taxable Estate – Credits
· Tax on Estate = $411,400
– Unified Credit = $345,800
– [State Death Tax Credit] (4) Who is liable for the payment of the tax?
(a) §2002 – Tax is paid by the executor
I. The Unified Gift and Estate Tax System
A. §2002(b)(1)(B) requires that “adjusted taxable gifts” (defined by §2001(b)) be added to the amount of the taxable estate for the purposes of calculating the tentative estate tax
(1) Once the tentative estate tax is calculated, the estate may subtract gift taxes payable with respect to gifts made by the ∆ after 12/01/76 from the tentative tax
(a) What’s left is the estate tax imposed
B. The effect is to push the estate into a higher tax bracket than it would have been if taxable gifts had not been included in the calculation
C. The effect of unification is that the tax will be the same whether of whether the property passes as a gift or through the estate tax system
(1) Example 1: The ∆ made a taxable gift of $750,000 ($760,000 minus $10,000 annual exclusion) and paid $55,500 in gift taxes. The ∆ died in 2003 with a taxable estate of $750,000
(a) A.T.G. = $750,000
+ Taxable Estate = $750,000
= Tax Base of $1,500,000
(b) Tentative Tax = $555,800
– Gift tax payable = $55,500
– Unified Credit = $345,800
Tax Due = $154, 500
(2) Tax difference is the result of the different natures of the gift tax and the estate tax
(a) Gift tax is a tax-exclusive tax
· Taxable base does not include money used to pay the tax
(b) Estate tax is a tax-inclusive tax
· Taxable base does include money used to pay the tax
D. Problems – Page 38
(1) #1 – In 2003, ∆ made taxable gifts of $1,000,000 exclusive of the annual exclusion. He died later in the same year with a taxable estate of $11,000
(a) What is the estate tax liability?
· Taxable Estate = $1,000,000 + $11,000 = $1,011,000
· Applicable Tax = $345,800 + 41% of excess over $1,000,000
o $345,800 + $4,510 = $350,310
§ Minus Gift Tax Paid = $0