Rev. Rul. 76-105

The Internal Revenue Service has been asked to illustrate the manner in which the formula contained in Rev. Rul. 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 donor's correct gift taxes.

On October 1, 1975, the donor, a resident of Virginia, gratuitously transferred property to the donor's child with the understanding that the resulting Federal and state gift taxes would be paid out of the transferred property. The property given was located in Virginia, and its fair market value on the date of transfer was $90,000. The donor had made previous taxable gifts of $50,000 (after exhaustion of $15,000 of the specific exemption) on which Federal gift taxes of $5,250 were paid.

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. Rev. Rul. 75-72, cited above.

The Virginia "Gift Tax Law" (Code of Virginia, 1950, chapter 6, Secs. 58-218 to 58-238, as amended) provides that a gift tax be imposed on the share of the respective donees in all property within the jurisdiction of the Commonwealth, which shall in any one year pass by gift made after June 19, 1934.

Section 58-219 of the Virginia Gift Tax Law (as amended, effective July 1, 1972) provides, in part, for an exemption as follows:

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Class A. The father, mother, grandfathers, grandmothers, husband, wife, children by blood or by legal adoption, stepchildren, grandchildren and all other lineal ancestors and lineal descendants of the donor shall constitute Class A.

So much of such property as has the actual value of five thousand dollars and so passes to or for the use of any Class A beneficiary shall be exempt from taxation hereunder.

So much of such property as shall so pass to or for the use of a Class A beneficiary shall be subject to a tax of one per centrum of the actual value of so much thereof as is in excess of five thousand dollars and is not in excess of fifty thousand dollars; to a tax of two per centum upon so much thereof as is in excess of fifty thousand dollars and is not in excess of one hundred thousand dollars; * * *

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Section 58-223 of the Virginia Gift Tax Law (as amended, effective for all gifts made in calendar year 1964 and thereafter provides that the tax imposed shall be paid by the donor, and section 58-229 provides that if the tax is not paid by the donor when due, each donee shall be personally liable to the extent of their respective gifts.

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 Virginia 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 State gift taxes as well as the Federal gift taxes to be paid by the donee.

Unlike section 2503(b) of the Code, the Virginia Gift Tax Law does not provide for an annual exclusion of $3,000 in computing taxable gifts of present interests in property made to any person by the donor during any calendar year.

Based on the foregoing, the application of the formula contained in Rev. Rul. 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