Tax Court Says Value of Gift Will Be Decreased if Donees Pay Related Tax – Los Angeles Income Tax Planning and Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on November 25, 2013

Jean Steinberg and her four daughters signed a binding gift agreement whereby Jean agreed to give her daughters financial gifts in exchange for them paying any gift and/or estate tax due. The tax paid on gifts made by a decedent within three years before the decedent’s death must be added to the decedent’s gross estate. IRC Section 2035(b).

In 2008, Jean gave her daughters cash and securities with a fair market value of over $71 million, and a potential estate tax liability of almost $6 million. When Jean filed her 2008 Form 709, U.S. Gift (and Generation Skipping Transfer) Tax Return, she reported the fair market value as a taxable gift and showed a $32 million gift tax liability. The Internal Revenue Service (IRS) added the potential estate tax liability to the fair market value, calculated Jean owed an additional $1.8 million in gift tax, and sent her a notice of deficiency. Jean filed a petition with the Tax Court and the IRS filed a motion for summary judgment.

The IRS argued that a Tax Court case, McCord v. Commissioner, applied. In McCord, the taxpayers calculated the amount of gift tax owed on an amount equal to the fair market value of the gifts given to their sons decreased by the tax due on the gifts. The taxpayers and their sons had agreed that the sons would be responsible for any transfer taxes generated because of the gifts. The Tax Court, siding with the IRS, held that because the amount of estate taxes was unknown at the time of the gifts, the tax could not be used to reduce the taxpayers’ gift tax liability.

The Tax Court disagreed with the IRS’ argument. Unlike McCord, Jean and her daughters had a written agreement which had been signed after a lengthy negotiation, and all parties had legal representation. Further, in valuing the gifts Jean had used the services of a professional appraiser. The Tax Court also reversed its opinion in McCord, and held that calculating estate tax at the time a gift is given is not speculative.

Summary judgment denied.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Encino, Sherman Oaks, Tarzana, Woodland Hills, Agoura, Westlake Village, Thousand Oaks, Studio City, Burbank, Glendale, Pasadena, Bel Air, Brentwood, Pacific Palisades, Marina Del Rey, Manhattan Beach, Torrance, Irvine, Newport Beach, Las Vegas and adjacent areas. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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