7.04 Gift Taxes

7.04.1

In General

The gift tax is an excise tax on an individual's right, during life, to transfer money or property by gift. Generally speaking, it is a tax which approximates the estate tax which would have been payable out of the donor's estate at the donor's death had the gift not been made. When property is transferred, the tax is based on the fair market value of the property at the time of the gift. The tax attaches when the transfer occurs, even if the identity of the donee is not then known or ascertainable.

The tax applies to transfers by way of gift in trust or otherwise, whether direct or indirect, and whether the property is real or personal, tangible or intangible. But the tax is applicable only to a transfer of beneficial interest in property, not to a transfer of bare legal title to a trustee.

When property is transferred for less than full consideration in money or money's worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift. However, a sale or exchange made in the ordinary course of business (an arm's length transaction) is considered to have been made for full consideration in money or money's worth. On the other hand, an intrafamily exchange is not considered an ordinary business transaction.

The gift tax is imposed only on completed gifts; a gift occurring when the donor parts with dominion and control over the property given.

Title 26 U.S.C.A. Section 2501 et seq. provides a federal tax on transfers by gift. Some states also impose a state gift tax on transfers by gift.

7.04.2

Liability For The Payment Of Gift Taxes

The initial liability for the payment of a gift tax which is due falls upon the donor of the gift. 26 U.S.C.A. section 2502. A donee can become liable for the tax if the donor does not pay when due, but a donee's liability cannot exceed the value of the gift. 26 U.S.C.A. section 6324.

Gift taxes become due and payable when the gift tax return is filed. 26 U.S.C.A. section 6151.

7.04.3

Federal Tax Liens For Gift Taxes

Title 26 U.S.C.A. Section 6324(b) creates a lien for federal gift tax upon all gifts made during the period for which the return was filed, with the lien to run for ten years from the date of the gift until the liability is either paid or becomes unenforceable by lapse of time.

The federal gift tax lien is similar to the estate tax lien in that it attaches automatically and without the filing or recording of notice as to its existence or extent. If the gift tax is not paid when due, the donee of a gift becomes liable for the tax to the extent of the gift received. However, the donee can sell the received land to a bona fide purchaser or the holder of a security interest free of the tax lien, if the donee has received adequate and full consideration. When such a sale is made, the tax lien (to the extent of the value of the gift) attaches to all property of the donee, including after-acquired property.

See also Estate Taxes. (5.20)

7.04.4

Protected Persons

26 U.S.C.A. Section 6324(b) provides that the special federal gift tax lien is divested from any property transferred by a donee, or by a transferee from a donee, in favor of:

  • A bona fide purchaser for value,
  • A holder of a security interest.

Furthermore, the lien is not valid against a mechanic's lienor or against any of the ten superpriorities listed in 26 U.S.C.A. section 6323(b).