Rev. Rul. 76-104

The Internal Revenue Service has been asked to illustrate the manner in which the formula contained in Revenue Ruling 75-72, 1975-1 C.B. 310, ("Tentative Tax/1 plus Rate of Tax = True Tax"), is to be applied in the circumstances described below in order to compute the donors' correct gift taxes.

On October 1, 1975, the donor, a resident of California, gratuitously transferred separate property to a donee (a minor child of the donor) with the understanding that the resulting Federal and State gift taxes would be paid out of the transferred property. The property given to the donee was located in California, and its fair market value on the date of transfer was $200,000. The donor had made no previous taxable gifts, but had exhausted the specific exemption. The donor's spouse has never made previous taxable gifts and has consented to treat one-half of the donor's gift to the donee as having been made by the spouse. This was the first gift that the donor ever made to the donee/child.

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 the donor's entire interest in the 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 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 is to 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. Revenue Ruling 75-72, cited above.

The California "Gift Tax Law" (Division 2, Part 9, Revenue and Taxation Code, as Enacted by Chapter 658, Laws of 1943, Effective July 1, 1945) provides that a gift tax be levied upon every transfer by gift of any property or interest therein of a resident or nonresident donor within the jurisdiction of the State.

With respect to exemptions, section 15421 of the California Gift Tax Law (as amended, effective September 15, 1961) provides for a specific exemption for a Class A donee as follows:

Property of the clear market value of five thousand dollars ($5,000) transferred to a spouse of the donor, of twelve thousand dollars ($12,000) transferred to a minor child of the donor, and of five thousand dollars ($5,000) transferred to any other Class A donee is exempt from the tax imposed by this part.

(It is to be noted that in computing the tax, the specific exemption is not deducted separately but is automatically allowed in the tax table set forth in the California Gift Tax Return.)

Section 15401 of the California Gift Tax Law (as amended, effective July 29, 1967) provides for an annual exemption as follows:

In addition to the specific exemption, property in the aggregate amount of three thousand ($3,000) transferred from any donor to any donee in any calendar year is exempt from the tax imposed by this part.

Section 15901 of the California Gift Tax law provides that both the donor and the donee of a gift are personally liable for the tax imposed; however, the donor is primarily liable for the tax. With respect to the payment of tax by the donee, section 15107 specifically provides that neither a payment by the donee of the tax nor any agreement by the donee to pay such tax will constitute consideration for the transfer of any property.

Since the donor is primarily liable for the payment of the State gift tax in the same manner as the donor is primarily liable for the payment of the Federal gift tax, it is presumed, in the absence of California statutory language or case law to the contrary, that the value of the gift, for State gift tax purposes, is measured by the fair market value of the property or property right or interest passing from the donor, minus the amount of the Federal gift taxes to be paid by the donee. However, in accordance with section 15107 of the California Gift Tax Law, the fair market value of the gift will not be reduced by the amount of the State gift taxes paid by the donee.

Unlike section 2513 of the Internal Revenue Code, the California Gift Tax Law does not provide that a gift made by a married donor may be considered, for State gift tax purposes, as having been made one-half by each spouse.

Based on the foregoing, the application of the formula contained in Revenue Ruling 75-72 ("Tentative Tax/1 plus Rate of Tax = True Tax") to the facts of this case is illustrated as follows:

 I. Transfer to be reported for State gift tax