Federal Income Taxation Chapter 4 Gifts and Kindred Items Professors Wells

Presentation:

September 6, 2017

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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 after-tax 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)?

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Gifts of Income Interests p.169 Irwin v. Gavit

§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?

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Gifts of Income Interest p.172 Commissioner v. Early

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.

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Inter vivos Gifts p.177 Taft v. Bowers

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

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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.

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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.

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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?

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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.

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Prizes p.187 Code Section 74

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? Opray Winfrey show (supp. p. 44)

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Prizes p.187 Hornung v. Commissioner

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)

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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.

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Gifts & Bequests p.190 Commissioner v. Duberstein

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”.

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Gifts & Bequests p.200 Stanton v. United States

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?

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Gifts & Bequests p.202 United States v. Kaiser

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”?

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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.

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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?

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

Aaron’s Last Wish (website: www.aaroncollings.org)

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?

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The “Flu Shoes” Auctioned for $104,765

Jordan’s performance in Game 5 of the 1997 Finals is one of the league’s most well-known legends: fighting off flu-like symptoms, Michael Jordan finished with a game-high 38 points, seven rebound, five assists, three steals and a block in 44 minutes to deliver a 90-88 victory. Chicago would go on to close out Utah in Game 6 to take home the fifth title of Michael Jordan’s illustrious career.

Shoes of that game were given to a Jazz ball boy for bringing him applesauce and graham crackers during the game. Gift or income? Shoes were sold in 2013 for $104,000.

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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)?

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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