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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 75-72

1975-1 C.B. 310

IRS Headnote

Tax paid by donee; value of property. Gift tax paid by the donee may be
deducted from the value of transferred property where it is expressly shown
or implied that payment of tax by the donee or from the property itself is
a condition of the transfer. Examples illustrate a formula application to
arrive at the tax to be deducted in certain situations. Rev. Rul. 71-232
superseded. 

Full Text

Rev. Rul. 75-72 

The Internal Revenue Service has been asked to expand Example 2 contained
in Rev. Rul. 71-232, 1971-1 C.B. 275, as it relates to the valuation for
Federal gift tax purposes of a gift subject to the condition that the gift
tax be paid by the donee, where such gift is considered as made one-half by
the donor and one-half by his spouse, each of whom is in a different gift
tax bracket by reason of one, or both, of them having made prior taxable
gifts. 

Example 2 has been expanded to give more detailed guidance and Rev. Rul.
71-232 is restated below: 

The donor made the transfer of property having a fair market value of
$150,000.00 at the date of the gift, with the understanding that the donee
would pay the resulting gift tax. His timely filed Federal gift tax return
reflected a reduction in the value of the gift in the amount of gift tax
paid by the donee. 

Section 2512 of the Internal Revenue Code of 1954 provides that if a gift
is made in property, the value thereof at the date of the gift shall be
considered the amount of the gift. If a donor transfers by gift less than
his entire interest in property, the gift tax is applicable to the interest
transferred. Section 25.2511-1(e) of the Gift Tax Regulations. The donor is
primarily liable for the payment of the tax. Section 2502(d) of the Code.
Thus, if at the time of the transfer, the gift is made subject to a
condition that the gift tax be paid by the donee or out of the transferred
property, the donor receives consideration for the transfer in the amount
of gift tax to be paid by the donee. Under these circumstances, the value
of the gift is measured by the fair market value of the property or
property right or interest passing from the donor, minus the amount of the
gift tax to be paid by the donee. 

Accordingly, the gift tax attributable to the transfer of property in this
case may be deducted from the value of that property in arriving at the
amount of the gift where it is shown, expressly or by implication from the
circumstances surrounding the transfer, that the donor attached payment of
the tax by the donee (or out of the transferred property) as a condition of
the transfer. In such event, the resulting tax must, of course, actually be
paid by the donee or from the subject property. 

The following formula discloses a method which may be followed for the
purpose of arriving at the true tax to be deducted from the value of the
transferred property: 

       Tentative Tax
     -------------------  =  True Tax
     1 plus Rate of Tax

Example 1. No bracket change. 

Assume the donor, having made no gifts in preceding years, has this year
made gifts having a fair market value of $150,000.00 to a donee who agreed
to pay the gift tax resulting therefrom. On his gift tax return, the donor
will claim an annual exclusion of $3,000 and his specific exemption of
$30,000.00. The following computation illustrates the working of the
formula. 

In the following computations, T = algebraic expression for the unknown
Federal gift tax. The expression "-T" is used where unknown tax is to be
subtracted to arrive at the net amount of the transfer. 

Gross transfer                      $150,000.00
 Less gift tax for quarter                T
                           ------------------
 Net transfer for quarter               $150,000.00-T
 Less: Exclusion         $  3,000.00
       Exemption           30,000.00         33,000.00
                 -------------        -----------------
 Taxable gift for quarter                $117,000.00-T
 Taxable gift             $117,000.00-T
 Bracket and tax thereon
   (from Rate Schedule,
   Section 2502 of the Code)      100,000.00        $ 15,525.00
                 -------------
 Balance taxed @ .225         $ 17,000.00-T           3,825.00-.225T
                            -----------------
 Tentative gift tax for quarter             $ 19,350.00-.225T
      $19,350.00 (Tentative Tax)   $19,350.00
  T = -------------------------- = ---------- = $15,795.92 (True tax)
       1.00 + .225 (Rate of Tax)     1.225
                Proof
                -----
 Gross transfer                     $150,000.00
 Less gift tax for quarter                  15,795.92
                            -----------------
 Net transfer for quarter                $134,204.08
 Less: Exclusion         $  3,000.00
       Exemption           30,000.00          33,000.00
                 ------------        -----------------
 Taxable gift for quarter                $101,204.08
 Taxable gift             $101,204.08
 Bracket and tax thereon      100,000.00        $ 15,525.00
                 ------------
 Balance taxed @ .225         $  1.204.08         270.92
                            -----------------
 Gift tax (same as above)                $ 15,795.92

This formula will not be applicable if after computing the tentative tax,
there is a change in the tax bracket in computing the true tax. The correct
tax bracket, however, may often be determined by inspection, and an
adjustment made for the bracket change by computing the tentative tax in
the correct bracket. The following computation illustrates this method of
working the formula. 

Example 2. Bracket change. 

Assume in addition to the facts in example 1, that pursuant to section 2513
of the Code, the gifts are considered as made one-half by the donor and
one-half by his wife. Assume further that the wife has made previous
taxable gifts of $100,000.00 (after exhaustion of her lifetime exemption)
on which she has paid Federal gift taxes of $15,525.00. 

Gross transfer by husband               $150,000.00
 Less gift tax for quarter                  T
                            -----------------
 Net transfer for quarter                $150,000.00-T
 Less one-half to be reported by wife              75,000.00-.5T
                            -----------------
 One-half to be reported by husband            $ 75,000.00-.5T
            Husband's tentative gift tax
            ----------------------------
 One-half of net transfer for
  quarter                        $ 75,000.00-.5T
 Less: Exclusion         $  3,000.00
       Exemption           30,000.00          33,000.00
                 --------------     -----------------
 Taxable gift for quarter                $ 42,000.00-.5T
 Taxable gift             $42,000.00-.5T
 Bracket and tax thereon
   (from Rate Schedule,
   Section 2502 of the Code)      30,000.00        $  2,250.00
                ---------------
 Balance taxed @ .135        $ 12,000.00-.5T        1,620.00-.0675T
                            ------------------
 Tentative gift tax for quarter             $  3,870.00-.0675T
              Wife's tentative gift tax
              -------------------------
 One-half of net transfer for
  quarter                        $ 75,000.00-.5T
 Less: Exclusion        $  3,000.00
       Exemption               0.00           3,000.00
                            ------------------
 Taxable gift for quarter                $ 72,000.00-.5T
 Plus prior taxable gifts                 100,000.00
                            ------------------
 Aggregate taxable gifts                $172,000.00-.5T
 Aggregate taxable gifts    $172,000.00-.5T
 Bracket and tax thereon
   (from Rate Schedule,
   Section 2502 of the Code)     100,000.00          15,525.00
                ----------------
 Balance taxed @ .225        $ 72,000.00-.5T       16,200.00-.1125T
                            ------------------
 Tax on aggregate taxable gifts             $ 31,725.00-.1125T
 Less tax on prior taxable gifts              15,525.00
                            ------------------
 Tentative gift tax for quarter             $ 16,200.00-.1125T
            Computation of true gift tax
            ----------------------------
 Husband's tentative gift tax
   for quarter                        $  3,870.00-.0675T
 Plus wife's tentative gift tax for
   quarter                          16,200.00-.1125T
                            ------------------
 Total tentative gift taxes for
   quarter                        $ 20,070.00-.1800T
      $20,070.00 (Tentative Tax)   $20,070.00
  T = -------------------------- = ----------- = $17,008.48 (True Tax)
      1 plus .1800 (Rate of Tax)      1.18
                Proof
                -----
 Gross transfer by husband                $150,000.00
 Less gift taxes for quarter                  17,008.48
                            ------------------
 Net transfer for quarter                $132,991.52
 Less one-half to be reported
   by wife                          66,495.76
                            ------------------
 One-half to be reported
   by husband                        $ 66,495.76
               Husband's true gift tax
               -----------------------
 One-half of net transfer
   for quarter                        $ 66,495.76
 Less: Exclusion        $  3,000.00
       Exemption          30,000.00          33.000.00
                -------------        ------------------
 Taxable gift for quarter                $ 33,495.76
 Taxable gift            $ 33,495.76
 Bracket and tax thereon      30,000.00        $  2,250,00
                ------------
 Balance taxed @ .135        $  3,495.76         471.93
                            ------------------
 True gift tax for quarter                $  2,721.93
            Wife's true gift tax
            --------------------
 One-half of net transfer
   for quarter                        $ 66,495.76
 Less: Exclusion        $ 3,000.00
       Exemption              0.00           3,000.00
                ------------        ------------------
 Taxable gift for quarter                $ 63,495.76
 Plus prior taxable gifts                 100,000.00
                            ------------------
 Aggregate taxable gifts                $163,495.76
 Aggregate taxable gifts    $163,495.76
 Bracket and tax thereon     100,000.00        $ 15,525.00
                ------------
 Balance taxed @ .225        $ 63,495.76          14,286.55
                            ------------------
 Tax on aggregate taxable gifts             $ 29,811.55
 Less tax on prior taxable gifts              15,525.00
                            ------------------
 True gift tax for quarter                $ 14,286.55
               Recapitulation
               --------------
 Husband's gift tax                    $  2,721.93
 Plus wife's gift tax                      14,286.55
                            ------------------
 Total gift tax (same as above)             $ 17,008.48

In the above example, inspection of the husband's tentative taxable gift
($42,000.00-.5T) discloses that since it falls just $2,000.00 above the
$40,000.00 bracket (the tax thereon being $3,600.00 according to the rate
schedule), the true taxable gift will apparently be taxed in the next lower
bracket since "T" will include both the husband's and the wife's gift
taxes. Thus, the tentative tax may be calculated in the next lower bracket
in order to avoid a change in the tax bracket in computing the true tax. In
other cases, where inspection may not clearly indicate whether the bracket
will change, trial computations using first the bracket indicated by the
tentative taxable gift, then using the next lower bracket, will disclose
the correct bracket. If difficulty is experienced in making the
computation, a request for solution of the problem may be submitted (a
reasonable time before the due date of the return) to the Commissioner of
Internal Revenue, Washington, D.C. 20224. 

This Revenue Ruling is concerned only with the gift tax consequences of the
above transaction and not with the income tax consequences thereof. 

Rev. Rul. 71-232 is hereby superseded.