Rev. Rul. 76-49

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 donors' correct gift taxes.

On September 1, 1975, the donor, a resident of New York State, gratuitously transferred property to a donee with the understanding that the donee would pay the resulting Federal and State gift taxes. The property transferred was located in New York, and its fair market value on the date of transfer was $250,000. This was the first gift that the donor had ever made and the donor's spouse had never made any prior gifts. The donor's spouse consented to treat one-half of the donor's gift to the donee as having been made by the spouse.

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.

Beginning with gifts made on or after January 6, 1972, the New York State "Gift Tax Law" (chapter 60, article 26-A, Consolidated Laws, as Amended and Supplemented), provides that a gift tax is imposed, on a quarterly basis, on the transfer by gift by any individual, resident or nonresident.

With respect to gifts made by residents, the New York Gift Tax Law provides as follows:

Sec. 1000. For purposes of this article, any reference to the internal revenue code means the United States Internal Revenue Code of 1954, with all amendments enacted on or before December thirty-first, nineteen hundred seventy-one.

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Sec. 1003. (a) General.--The New York gifts of a donor shall be determined as follows:

(1) New York Resident.--The New York gifts of a New York resident are the total amount of gifts made in any calendar quarter within the meaning of section [2503] of the internal revenue code, less the amount of any gifts included therein of real or tangible personal property having an actual situs outside New York state.

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Sec. 1004. (a) General.--The New York taxable gifts of a donor for any calendar quarter are the New York gifts made by such donor in such quarters, as determined under section [1003], less

(1) the amount which would have been deductible under section [2522] of the internal revenue code if the New York gifts made in such calendar quarter had been the only gifts made, and

(2) the amount which would have been deductible under section [2523] of the internal revenue code if the New York gifts made in such quarter had been the only gifts made.

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Sec. 1006. (a) General.--A final federal determination that a transfer constitutes a taxable gift and of the value thereof and of the allowability and amount of any deduction or exclusion with respect thereto shall also, subject to the modifications provided for by this article, determine the same issues for purposes of the tax under this article, unless such final federal determination is shown by a preponderance of the evidence to be erroneous.

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Although section 1003(a) of New York's Gift Tax Law directly incorporates Federal taxable gifts, these are increased by the $30,000 specific exemption authorized under section 2521 of the Internal Revenue Code since section 1004(a) only authorizes New York taxable gifts to be reduced by the amounts deductible under sections 2522 and 2523 of the Code. These sections relate, respectively, to charitable and similar gifts, and gifts to a spouse.

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