893 / Which types of transfers are subject to the federal gift tax?

All transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax.² Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.³ Generally, if property is transferred gratuitously or for an inadequate consideration, a gift (of the full value of the property transferred or the portion in excess of the consideration given) will be considered a gift.⁴

Shareholders of nonparticipating preferred stock in profitable family held corporations have been held to have made gifts to the common stockholders (typically descendants of the preferred shareholder) by waiving payment of dividends or simply by failing to exercise conversion rights or other options available to a preferred stockholder to preserve his position.⁵ The Tax Court has held that the failure to convert noncumulative preferred stock to cumulative preferred stock did not give rise to a gift, but that thereafter a gift was made each time a dividend would have accumulated. However, the failure to exercise a put option at par plus accumulated dividends plus interest was not treated as a gift of foregone interest.⁶

A transaction involving the nonexercise of an option by a son under a cross-purchase buy-sell agreement followed by the sale of the same stock by the father to a third party when the fair market value of the stock was substantially higher than the option price was treated as a gift from the son to the father.⁷ Also, a father indirectly made a gift to his son to the extent that the fair market value of stock exceeded its redemption price when the father failed to exercise his right under a buy-sell agreement to have a corporation redeem all of the available shares held by his brother-in-law’s estate and the stock passed to the son.⁸

With respect to a trust, the grantor/income beneficiary may be treated as making additional gifts of remainder interests in each year that the grantor fails to exercise his right to make nonproductive or underproductive property normally productive.⁹ A mother made gifts to her children to the extent that the children were paid excessive trustee fees from the marital deduction trust of which the mother was a beneficiary.¹⁰ Where a trust was modified to add adopted persons as beneficiaries, the beneficiaries with trust interests prior to the modification were treated as making gifts to the newly added beneficiaries.¹¹

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Planning Point: However, a grantor of a trust does not make a gift to trust beneficiaries by paying the income tax on trust income taxable to the grantor under the grantor trust rules (see Q 797).¹² Therefore, trusts that are disregarded for income tax purposes but not for transfer tax purposes can provide a significant opportunity for trust principal to grow without the reduction of tax.

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Letter Ruling 9113009 (withdrawn without comment by TAM 9409018) had ruled that a parent who guaranteed loans to his children made a gift to his children because, without the guarantees, the children could not have obtained the loans or, at the very least, would have paid a higher interest rate.

The gift tax is imposed only on completed gifts (see Q 894), which is a facts and circumstances analysis.

Where spouses enter into joint and mutual wills, the surviving spouse may be treated as making a gift of a remainder interest at the other spouse’s death.¹³

The transfer of a qualifying income interest for life in qualified terminable interest property for which a marital deduction was allowed (see Q 847, Q 912) will be treated as a transfer of such property for gift tax purposes.¹⁴ If a QTIP trust is severed into Trust A and Trust B and the spouse renounces her interest in Trust A, such renunciation will not cause the spouse to be treated as transferring Trust B under IRC Section 2519.¹⁵

The spouse is entitled to collect from the donee the gift tax on the transfer of a QTIP interest. The amount treated as a transfer for gift tax purposes is reduced by the amount of the gift tax the spouse is entitled to recover from the donee. Thus, the transfer is treated as a net gift (see Q 900). The failure of a spouse to exercise the right to recover gift tax from the donee is treated as a transfer of the unrecovered amount to the donee when the right to recover is no longer enforceable. If a written waiver of the right of recovery is executed before the right becomes unenforceable, the transfer of the unrecovered gift tax is treated as made on the later of (1) the date of the waiver, or (2) the date the tax is paid by the transferor. Any delay in exercise of the right of recovery is treated as an interest-free loan (see Q 896) for gift tax purposes.¹⁶

Where a surviving spouse acquires a remainder interest in QTIP marital deduction property in connection with a transfer of property or cash to the holder of the remainder interest, the surviving spouse makes a gift to the remainder person under both IRC Section 2519 (disposition of QTIP interest) and IRC Sections 2511 and 2512 (transfers and valuation of gifts). The amount of the gift is equal to the greater of (1) the value of the remainder interest, or (2) the value of the property or cash transferred to the holder of the remainder interest.¹⁷ On the other hand, children would be treated as making a gift if the children transfer their remainder interest in a QTIP marital deduction trust to the surviving spouse.¹⁸

Any subsequent transfer by the donor spouse of an interest in such property is not treated as a transfer for gift tax purposes, unless the transfer occurs after the donee spouse is treated as having transferred such property under IRC Section 2519 or after such property is includable in the donee spouse’s estate under IRC Section 2044 (see Q 824).¹⁹ Also, if property for which a QTIP marital deduction was taken is includable in the estate of the spouse who was given the QTIP interest and the estate of such spouse fails to recover from the person receiving the property any estate tax attributable to the QTIP interest being included in such spouse’s estate, such failure is treated as a transfer for gift tax purposes unless (1) such spouse’s will waives the right to recovery, or (2) the beneficiaries cannot compel recovery of the taxes (e.g., where the executor is given discretion to waive the right of recovery in such spouse’s will).²⁰

The gift tax is not applicable to a transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions (i.e., transactions which are bona fide, at arm’s length, and free from any donative intent). A consideration that cannot be reduced to a value in money or money’s worth (such as love and affection, promise of marriage, etc.) is wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift. Similarly, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse’s property or estate, is not considered to any extent a consideration “in money or money’s worth.”²¹

Transfers of property or interests in property made under the terms of a written agreement between spouses in settlement of their marital or property rights are deemed to be for an adequate and full consideration in money or money’s worth and, therefore, exempt from the gift tax (whether or not such agreement is approved by a divorce decree), if the spouses obtain a final decree of divorce from each other within the three-year period beginning on the date one year before the agreement is entered into.²²

For recapture rules applicable where distributions are not timely made in connection with the transfer of an interest in a corporation or partnership which is subject to the Chapter 14 valuation rules, see Q 935. For deemed transfers upon the lapse of certain voting or liquidation rights in a corporation or partnership, see Q 944.

A gift may be made of foregone interest with respect to interest-free and bargain rate loans (see Q 896).

A United States citizen or resident who receives a covered gift from certain expatriates may owe gift tax on the transfer.²³