Rev. Rul. 71-232

Advice has been requested regarding the valuation for Federal gift tax purposes of a gift subject to the condition that the gift tax be paid by the donee.

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 / 1 plus Rate of Tax = True Tax

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

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 spouse.

 Gross transfer................................  $150,000.00

                                Proof

While the entire transaction is viewed as a gift in part and a sale in part, this Revenue Ruling is concerned only with the gift tax and not with the income tax consequences of the sale.