Rev. Rul. 78-362

ISSUE:

Are a co-tenant's monthly payments of a mortgage debt on property held jointly regarded as gifts to the other joint tenants?

FACTS:

On January 15, 1974, D, the donor, paid 30x dollars as a down payment for the purchase of real property. D had title to the property conveyed to the joint ownership, with rights of survivorship, of D, A, and B. A and B were the children of D. The fair market value of the property was 150x dollars.

The property was subject to a mortgage of 120x dollars that was to be paid in monthly installments of 3x dollars. The payment included principal and interest on the mortgage plus escrow payments of local real property taxes and casualty insurance premiums. As each monthly payment to the mortgage became due, A and B lacked funds to contribute to the payment. Therefore, D made all of the monthly payments and at the time of each payment advised A and B that D did not expect any reimbursement from them.

Under local law, a joint tenant may unilaterally sever the joint tenant's interest in the jointly held property at any time. Interests of joint tenants are presumed to be owned in equal shares.

Local law provides that co-tenants are equally responsible for the payment of the expenses of jointly held property. A co-tenant who has paid all of the expenses of the property is entitled to reimbursement from the other joint tenants for their aliquot shares of the indebtedness.

LAW AND ANALYSIS

Section 2511(a) of the Internal Revenue Code of 1954 provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

A transfer is taxable as a gift to the extent that the value of the property transferred exceeds the consideration in money or money's worth received by the transferor. See section 25.2512-8 of the regulations. If an individual with the individual's own funds purchases property and has title conveyed to the individual and others as joint tenants with rights of survivorship, and any joint tenant acting alone may sever the joint tenant's interest, the individual is deemed to have made a gift to the other joint tenants of equal shares of the property. See section 25.2511-1(h)(5) of the regulations.

In addition, the payment of money or property on behalf of an individual can result in a taxable gift. For example, the gratuitous payment of the debt of another person is a transfer subject to the gift tax. See Estate of Woody v. Commissioner, 36 T.C. 900 (1961).

A mortgage debt on property that is subject to the mortgage is regarded as the obligation of the owner of the property in that the payment of the mortgage debt by someone else is equivalent to a cash payment directly to the owner of the property. Further, the value of the owner's interest in the property is increased as the mortgage debt on the property is reduced.

In the present situation, D, A, and B owned equal interests in the jointly owned property that could be unilaterally severed. Since D provided the funds for the down payment and received no consideration from A and B, D made taxable gifts of one-third interests to A and B when the property was purchased and placed in joint ownership. Inasmuch as the expenses of the property were the obligations of D, A, and B in equal shares, D's monthly payments to the mortgage were gifts to A and B when D paid their respective one-third shares of the obligations without the expectation of reimbursement from A and B.

HOLDING:

On January 15, 1974, D made gifts to A and B, valued at 10x dollars for each gift, of one-third interests in the net value of the property placed in joint ownership. Thereafter, D made monthly gifts to A and B of 1x dollars each, which is one-third of the total monthly payment to the mortgage lender.