Gee, thanks. Few of us ever have to pay gift tax. Logically, more people should. Taxable gifts avoid tax when compared to passing an asset through a taxable estate because only the amount given to a donee is subject to gift tax, while the estate is taxable on its whole value — not just the amount that goes to the donee. Confusing? Let’s try a quick example, assuming a 40% estate and gift tax rate.
James has $14 million. He wants to give it all in a taxable gift, saving enough to pay his taxes. He makes a $10 million gift, and he pays 40%, or $4 million in taxes.
His sister Janet dies with the $14 million, the tax is 40% of $14 million, or $5.6 million. The after-tax inheritance to her beneficiaries is $8.4 million, instead of the $10 million received by James’s heirs.
The giver is supposed to file a gift tax return and pay the gift tax on Form 709.
But what if he doesn’t? Then the IRS will come after the recipients. That happened to the recipients of gifts from James Howard Marshall II, best known as the short-term husband of Anna Nicole Smith. He died without paying the gift taxes, and the estate couldn’t cover them. The IRS then went after the gift recipients, in a big way — demanding more in gift tax payments and interest than the value of the gift actually received.
The Fifth Circuit Court of Appeals ruled on whether the government could do that:
However, the Government brought suit seeking to hold the Marshalls personally liable for almost $75 million beyond the value of the gifts consisting mostly of interest accrued on the unpaid tax liability from 1995. The Marshalls argued that § 6324(b) limits their personal liability to the value of the gifts they received.
It wouldn’t be much of a gift if it cost you money. The Fifth Circuit ruled against the IRS:
A donee is “personally liable” only for “such tax” — the gift tax and accrued interest — “to the extent of the value of such gift.” The statute’s text does not support the Government’s position.
That seems fair, though fairness isn’t required in the tax law. I’m not sure there’s much tax planning to be done around this, other than maybe making sure Grandpa files a gift tax return when he gives it all away.
Cite: Estate of Marshall, CA-5, No. 12-20804.
TaxGrrrl, Lawyers, Accountants and Administrators, Oh My! Putting Together A Professional Team. “I know what you’re thinking. A professional team costs money. And startups and small businesses are often short on money”
Jason Dinesen, Glossary: Asset. “For individuals, an asset is things such as stocks; houses, buildings and land; investments in partnerships; and personal possessions (TVs, electronics, jewelry).”
Jim Maule, Be Careful With Divorce Tax Planning, Part II:
A simple sentence in the agreement, which the parties drafted without assistance of counsel, would have specified whether or not the payment obligation terminated if the former wife died during the 8-year period. There is no way of knowing if they considered the question. There is no way of knowing, if they considered the question, what they wanted the answer to be. There is no way of knowing if they thought that the answer did not require a provision in the agreement. What can be known is that it is risky to draft a divorce agreement without understanding the tax implications.
Risky, and foolish.
Keith Fogg, Who Gets to Decide What is Frivolous (Procedurally Taxing). “After all, if the IRS has unbridled discretion to determine what is frivolous, it could deny even those with arguably non-frivolous arguments from moving forward in the CDP process of seeking collection relief.”
Robert Wood, Trump Bashes $4 Billion In IRS Refunds To Illegals
TaxProf, The IRS Scandal, Day 834
Howard Gleckman, Scott Walker’s Replacement for the ACA Would Leave Many Uninsured. (TaxVox). Of course, so does the ACA.
Scott Greenberg, John Oliver Set Up His Own “Church” to Make a Point about the Tax Code (Tax Policy Blog). “To demonstrate his point, Oliver announced that he had founded his own church, Our Lady of Perpetual Exemption, showing how “disturbingly easy” it was to obtain tax-exempt status for a sham religious organization (the main mission of Our Lady of Perpetual Exemption is to collect donations).”
News from the Profession. Deloitte Doesn’t Want You Wasting Billable Hours Searching for Adulterer Profiles (Caleb Newquist, Going Concern)