Presentation:
Federal Income Taxation
Chapter 4 Gifts and Kindred Items
Professors Wells
September 2, 2015
Gifts, Bequests and
Inheritances
p.169
Code §102(a) excludes gifts, bequests and inheritances from the
gross income of the recipient; and, no deduction is available to
the donor upon the gratuitous transfer to the donee. An aftertax transfer.
Taxing options: (i) Income to the donee and a deduction to the
donor, or (ii) income to the donee and no deduction to the
donor.
Who should be taxed? Either? Both?
Should tax occur: (i) once (thereby assuring “symmetry” between
taxpayers) or (ii) to both (assuring symmetry for tax system)? 2 Gifts of Income Interests
Irwin v. Gavit
p.169
§102(a) excludes from gross income the value of property acquired
by gift, bequest, devise.
Facts: Anthony N. Brady will left life estate (income interest) to a
trust. Remainderman interest was devised to other beneficiaries.
Issue: Is Ms. Gavit taxable on her receipt of the trust proceeds?
Held: The receipt of the trust income was income to Ms. Gavit.
Why?
3 Gifts of Income Interest
Commissioner v. Early
p.172
Facts: Early and his wife performed various accounting and other
services for Mrs. Van Wert in her old age. Within a year prior to her
death she executed stock powers in favor of the Earlys covering
70,000 shares of El Paso Natural Gas Company stock the certificates
for which were in the Earlys’ possession. The Earlys claimed that
the stock powers were intended to accomplish an outright gift of the
stock to them. Other beneficiaries sought to set aside this gift, and
the dispute was settled with the Earlys receiving an income interest
in 32% of the Van Wert trust. Earlys claimed a basis (per 1014)
offset for amounts received.
Held: Earlys were taxable on the full amount of their life estate with
no basis offset.
4 Inter vivos Gifts
Taft v. Bowers
p.177
Facts:
1.  1916: A purchased 100 shares for $1,000
2.  1923: A gifted shares to B at a time when worth $2,000
3.  1923: B sold shares for $5,000
Taxpayer Position: B’s gain for the period B held stock was $3,000
IRS Position: B has gain of $4,000
5 Income Tax Basis for In-Kind Property Gifts p.180
§1015 - tax basis carryover in the event of gift of appreciated
property; depreciated property - tax basis to donee is the
property’s FMV, not its tax basis to the donor; the donor cannot
transfer losses. §1015(d) provides for upward adjustment of
donee’s basis but limited to gift tax paid on the appreciation of the
property (§1015(d)(6)).
1.  A purchased shares of stock for $10,000. In 2002, when they were
worth $16,000 he gave them to B, who sold the shares in 2014 for
$15,000. How much gain (or loss) did B realize?
2.  C purchased shares for $1,000. In 2011, when the shares were
worth $600, she gave them to D. How much gain or loss will D
realize if he subsequently sells for $500? For $900? For $1,400
Cf., §1041– carryover basis; not loss limiting. 6 Tax Basis for Gratuitous Transfers at Death
p.180
Tax basis step-up occurs as of death - §1014(a).
What happens to the accrued appreciation?
Could be a step-down in tax basis if the property is depreciated as of
the time of death.
Tax basis step-up at death is not applicable to IRD - “income in
respect of a decedent”. See §691.
Relevance of estate tax alternative valuation date?
Tax policy option: gain realization at death.
What cost of §1014(a) to the US Treasury? See Tax Expenditure list
p. 537 estimate of $179.3 billion for 2015-2019.
7 Problems on §1014
p.183
1.  TP owns blocks of stock in three large publicly traded corporations, General
Electric (FMV=$100,000;B=$60,000), General Foods (FMV=$100,000; B=
$100,000), and General Motors (FMV=$100,000; B=$150,000). TP plans to
sell one block of stock, make an inter vivos gift of another block, and bequeath
the third block. From a tax standpoint, How should TP make proceed?
2.  A purchased shares of stock for $10,000. In 2003, when they were worth
$16,000, he gave them to B subject to a reserved life income interest. A later
transferred the life estate to B in 2005, when the stock was worth $17,000. A
died in 2007 and the property, which was then worth $19,000, was includible
in his gross estate pursuant to §§2035(a) and 2036(a). B sold the shares in
2014 for $24,000. How much gain or loss did B realize?
3.  C purchased shares for $1,000. In 2014, when the shares were worth $600, C
died, leaving the shares to D. How much gain or loss will D realize if he
subsequently sells for $500? For $900? For $1,400?
4.  E died, and her estate assets were $10,000 worth of accounts receivable for
services performed for patients. These were valued in her estate at $9,800, and
the executor subsequently sold them all to a collection agency for $9,500. How
much gain or loss is realized on the sale?
8 Prizes
p.185
Pauline C. Washburn v. Commissioner
Taxpayer won $900 without any requirement to perform any service.
Held: Receipt was a cash “gift.”
This decision was based in part on thought that income was derived
from either labor, capital, or both. Since this related to none of these
items, it was not “income.” Glenshaw Glass repudiated this line of
reasoning. And, for good measure, Congress enacted §74.
9 Prizes
Code Section 74
p.187
GI inclusion required under Code §74.
Possible exception (under limited circumstances) if the prize is
assigned to charity by the prize winner. Code §74(b). Why provide
this exception?
10 Prizes
Hornung v. Commissioner
p.187
Paul Hornung (running back for the Green Bay Packers) was named
the MVP of the first Super Bowl. Sport Magazine awarded Paul
Hornung a Corvette that was available in New York. The Super
Bowl was played on December 31, 1961 and the award was
announced after the game.
Issue: Was this award of a Corvette a “gift” or “income.”
What about Nobel gold medals? Or, Olympic medals?
Treatment of a Texas lottery winner? When (if deferred payments)?
What about Oprah Winfrey prizes? See Course Supplement (p. 40)
11 Scholarships as Gross Income
p. 189
Code §117 - GI exclusion for scholarships.
No exclusion is available where services are to be provided to the
scholarship provider.
Must be pursuing a degree program to enable gross income
exclusion.
Scholarships for room and board are taxable. Consider the tax
result to "student athletes"?
However, no “tracing” is required. 12 Gifts & Bequests
Commissioner v. Duberstein
p.190
Duberstein case: Gift of a Cadillac from Berman to Duberstein for
providing good business information.
Stanton case – retiree receives cash.
Gift exclusion treatment for income tax purposes requires
"detached and disinterested generosity".
Measured by: (i) “maxims of experience”, and (ii) “the
mainsprings of human conduct to the totality of the facts of each
case”.
13 Gifts & Bequests
Stanton v. United States
p.200
Stanton case – retiree receives cash.
Gift exclusion treatment for income tax purposes requires
"detached and disinterested generosity".
Measured by: (i) “maxims of experience”, and (ii) “the
mainsprings of human conduct to the totality of the facts of each
case”.
How on remand did the case get resolved?
14 Gifts & Bequests
United States v. Kaiser
p.202
Union strike assistance. Jury found that these disbursements were
gifts to the recipients, not income.
Supreme Court upholds jury verdict, finding that the relevant
determination is a question of fact. Is this really the way these gift
cases should be decided?
Subsequent event: Rev. Rul. 61-136: “in cases presenting facts
substantially like those in the Kaiser case, strike benefit payments
will be regarded as gifts and, therefore, exempt from Federal income
tax.”
Is the IRS stating that this is a simple fact finding or are they
crafting a legal standard out of what is purportedly a “factual case”?
15 Business Gift Taxation Decision Options
p.205
Choices for deciding these cases:
1) Factual analysis for each situation.
2) Rebuttable presumption that not gifts, but rather income
derived in a business transaction exchange.
3) Non-rebuttable presumption that compensation received. Cf.,
§102(c).
Note §274(b) concerning limit on the donor’s deduction for §102(a)
gift transfers.
16 Gifts & Bequests
p.211
Estate of Sydney Carter v. Commissioner
Salomon Bros. paid widow amount husband would have earned for
the year if he had lived ($60,130.84). Estate of Carter treated this as
a gift. IRS argues it was income.
Friendly (Majority) Opinion: Reversed Tax Court and held was a
gift, not income. But, isn’t this a “factual question” that the trier of
fact can decide?
17 Aaron’s Last Wish
(website: www.aaroncollings.org)
July 6, 2012, Aaron Collins died at the age of 30 years of
age. After his death, his family discovered that his will
asked them to “leave an awesome tip (and I don’t mean
25%). I mean $500 on a . . . pizza for a waiter or
waitress.”
"Collins didn’t have the financial means to honor the
request, so his family set up a website (Aaron’s Last
Wish) to help attract donations, and it has gone viral
attracting over $60,000 of
donations. Seth, Aaron’s
brother, has going around
the country providing $500
tips, and the reactions of the
wait staff are posted on
Aaron’s Last Wish website.
Question: What are the
tax consequences to the
waitresses in this video
clip?
Unemployment and
Social Security
p.217
Code §86 - Up to 85% of Social Security benefits is includible in
GI. Why include in gross income when the taxpayer has a
possible “tax basis” in prior social security contributions?
In what amount?
Is the Social Security tax merely another tax (rather than a
“retirement account” held by each taxpayer/individual)?
19 Government Transfer Payments
p.218
Welfare benefits excluded from GI. Why?
A.  Disaster relief payments – exclusions (under IRC §139) for:
1) Personal and living expense
2) Repair of personal residence
3) General welfare payments
B.  Notice 99-3: Temporary Assistance for Needy Families & the
“general welfare exemption”
Unemployment compensation is includible in GI. Historically not,
but §85 was added to make it fully taxable.
Rev. Rul. 2003-12:
Situation 1: State Payor.
Situation 2: Charitable Organization Payor
Situation 3: Employer Payor
20