Gifts, Inheritances, and Allocating Basis

Question 1

Are gifts and inheritances included in gross income?

Answer 1

No see 102(a)

Question 2

How do you determine if something is a gift?

Answer 2

Per Duberstein (cadillac from metal shop) a gift is given with “detached and disinterested” generosity.

Donor’s intent controls

factual finding that is almost never overturned on appeal

Question 3

What are the two exceptions to the normal rule of “detached and disinterested” generosity and the donor’s intent controls?

Answer 3

In the context of tips, the recipients state of mind controls (tippees view tips as part of their compensation)

Employer to employee “gifts” are never actually gifts per 102(c)

Question 4

Does Uncle Sam really care if you call something a gift?

Answer 4

Not really as long as the parties are consistent
If its a gift, then the donor pays tax on it and the donee doesn’t. If it’s compensation then the payor deducts it and the payee pays tax on it. (but there might be a slight difference in tax brackets)

Question 5

What is the donee’s basis in a gift?

Answer 5

Donee’s basis = Donor’s basis EXCEPT

for the purpose of determining loss use the lower of carryover and FMV at time of gift

Question 6

How do you know if you’re calculating loss in the choice between carryover and FMV at time of gift?

Answer 6

Compare Donor’s basis to donee’s selling price

Question 7

What is the holding of Taft v Bowers?

Answer 7

It is constitutional for Congress to require the donee to accept the donor’s basis (and thus to tax the donor on appreciation that occurred under the donee)

Question 8

Be careful in calculating gain or loss on gifted property. Remember, FIRST Decide if you’re calculating gain or loss by looking at donor’s basis and donee’s selling price. THEN mechanically apply the formula for gain or loss

Answer 8

Remember there are no negative gains or negative losses. “Excess of” is not pure subtraction

Question 9

What is the kiddie tax?

Answer 9

High tax bracket parents used to leverage the transferred basis rule when giving to their kids (instead of giving cash they would give stock with high gains so that the kids could recognize those gains at a lower tax bracket)

Kiddie tax aims to tax the kid’s unearned income at rates similar to their parents

Question 10

What is a recipient’s basis in a devise?

Answer 10

FMV of Property at time of decedent’s death

Question 11

What is so great about the rule for basis in a devise?

Answer 11

The devisee gets a tax basis step up which eliminates all unrealized gains from the tax base (way better than a gift)

Question 12

What is the incentive of the devise tax basis rules?

Answer 12

the step up eliminates all unrealized gains and losses, so if you’re smart, you will sell everything that you hold at a loss before your death (to capture the loss) and hold everything that you hold at a gain

Question 13

What is IRD?

Answer 13

Income in respect of decedent. This is income that is earned before someone dies that is included in the gross income of their heirs per 691 (the main sources of IRD are IRAs and 401ks)

Question 14

What is the problem in Inaja Land?

Answer 14

1.61-6a requires that when a portion of a piece of property is sold, the basis in the whole must be EQUITABLY APPORTIONED among the parts. But when you sell an easement to the government to flood your land, how can you determine how much you paid for that easement? Would have to do a retroactive valuation

Question 15

What is the solution in Inaja Land?

Answer 15

If apportioning basis among parts would be based on “pure conjecture with no basis in ascertainable fact” then the taxpayer can charge all of the $ received for the pieces to the capital account of the whole. Court allows you to kick the can down the road because when you sell the entire property, it will all even out

Question 16

What is the difference in Inaja Land and Raytheon?

Answer 16

In inaja land the issue was apportioning basis to parts that were sold but the basis itself was certain.
In Raytheon the issue was apportioning basis to parts were sold but the basis itself was uncertain. There is no benefit to kicking the can down the road when time will do nothing to resolve the uncertainty

Question 17

What is the holding of Irwin v Gavitt?

Answer 17

When allocating basis to property that is divided over time, there is no basis in the term interest (because simply “income”) and all the basis is in the remainder (because that’s “property”)

Question 18

What is the uniform basis regulation (1.1014-4)?

Answer 18

It codifies the result of Irwin v Gavitt. Both the term and remainder interests have a basis proportional to the FMV of their interests at the time of the conveyance BUT the term interest cannot use any of their basis should the decide to sell! As time passes and term interest passes and remainder matures, the basis gradually flows into the term interest.

the whole point of this is to prevent the remainder interest holder from immediately selling at a loss (because the FMV is low because cash flows are a ways off and the basis includes the term interest also)

Question 19

What is the one way that the term interest holder can utilize their basis under the Uniform basis reg?

Answer 19

They can team up with the remainder interest holder and sell the entire thing (then they can each use their respective portions of the interest)

Question 20

How do you game the Irwin v Gavitt Rule?

Answer 20

If you’re going to give away property, give the term interest to a low bracket taxpayer (or a charity which is tax exempt) and give the remainder to a high bracket taxpayer