Rev. Rul. 76-57

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 donor's correct gift taxes.

On October 1, 1975, the donor, a resident of North Carolina, gratuitously transferred property to a donee/nephew with the understanding that the donee would pay the resulting Federal and State gift taxes. The property transferred was located in North Carolina, and its fair market value on the date of transfer was $200,000. The donor had made previous taxable gifts of $75,000 (after exhaustion of the specific exemption) on which Federal gift taxes of $10,275 were paid. The donor's spouse has never made previous taxable gifts, but has used up $15,000 of the specific exemption, and has consented to treat one-half of the donor's gift to the donee as having been made by the spouse. This gift was the first gift that the donor ever made to the donee/nephew.

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 property, the git 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. Revenue Ruling 75-12, cited above.

Since March 24, 1939, the North Carolina State "Gift Tax Law" (Chapter 105, Subchapter 1, Article 6, General Statute of North Carolina, as Amended and Supplemented), has provided that a gift tax be levied upon the shares of the respective beneficiaries in all property within the jurisdiction which shall in any calendar year pass by gift.

With respect to exemptions, section 105-188 of the North Carolina Gift Tax Law (as supplemented to January 1, 1974) provides, in part, as follows:

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(d) Gifts to any one donee not exceeding total value of three thousand dollars ($3,000.00) in any one calendar year shall not be considered gifts taxable under this article, and where gifts are made to any one donee in any one calendar year in excess of three thousand dollars ($3,000.00), only that portion of paid gifts exceeding three thousand ($3,000.00) in value shall be subject to the tax levied by this article. * * *

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(g) A donor shall be entitled to a total exemption of thirty thousand dollars ($30,000.00) to be deducted from gifts made to donees named in subsection (f), less the sum of amounts claimed and allowed as an exemption in prior calendar years. * * *

The $30,000.00 exemption, referred to in subsection (g) above, is applicable only to Class A beneficiaries, who are defined in section 105-188(f)(1) of the North Carolina Gift Tax Law as lineal issue, or lineal ancestors, or a husband, or a wife of the donor, or children legally adopted by the donor.

Section 105-191 of the North Carolina Gift Tax Law provides that the tax imposed shall be paid by the donor, and section 105-193 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 North Carolina statutory language or case law to the contrary, that the value of the State 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 State gift taxes as well as the Federal gift taxes to be paid by the donee.

Unlike section 2513 of the Internal Revenue Code, the North Carolina 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