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THE FEDERAL GIFT TAX

NATURE OF THE TAX

The Federal gift tax is imposed upon the transfer of property by gift. It is imposed upon the person making the gift (donor). If, however, he does not pay the tax when due, the person receiving the gift (donee) may be called upon to pay it to the extent of the value of the property received by him. Gift tax returns, if due, are required to be filed on a quarterly basis.

PERSONS SUBJECT TO THE FEDERAL GIFT TAX

To determine whether a person is subject to a gift tax, one must first determine whether the person is a citizen or resident of the United States, or if he is not a citizen or resident, whether the property involved in the gift was situated within the United States. A. Citizen or Resident of the United States

The Federal gift tax is applied to all transfers by gift of property, wherever situated, by individuals who, at the time of the gift, were citizens or residents of the United States. The term "United States" includes only the 50 States and the District of Columbia. It does not include U.S. possessions or territories. For a U.S. citizen, the place of his residence at the time of the gift is immaterial. A noncitizen is a U.S. resident if, at the time of the gift, he was domiciled in the United States. A person acquires a domicile by living in a place, even for a brief period of time, with no definite present intention of leaving permanently.

A gift by a corporation is considered a gift by its individual stockholders. A gift to a corporation is generally considered a gift to its individual stockholders, except that in certain cases, a gift to a charitable, public, political, or similar organization may be regarded as a gift to the organization as a single entity.

B. Nonresidents, Not Citizens

In the case of individuals who are neither citizens nor residents of the United States, the Federal gift tax is applied only on gifts of property situated within the United States. Similar treatment is accorded a U.S. citizen residing in a U.S. possession at the time of the gift, if he acquired his U.S. citizenship solely by reason of being a citizen of the possession, or by birth or residence in that possession. A gift of intangible personal property is not subject to the Federal gift tax if it is made by a nonresident alien individual, except in the

GIFTS IN GENERAL

The gift tax applies to any gift of real or personal property, whether tangible or intangible, and whether given in trust or otherwise. In other words, all transactions in which property or property interests are gratuitously transferred to another constitute gifts subject to tax. However, transfers of money or other property to a qualified political organization for use by the organization are not subject to the gift tax. Special rules for the types of property or property interests given by nonresidents not citizens are discussed below.

The tax does not apply to transfers made for valuable consideration unless the value of the gift exceeds the consideration received. In that case the tax is imposed only on the value of the excess. However, if a bona fide transfer, sale, or exchange is made at arm's length in the ordinary course of business, the transaction will be assumed to be for consideration and not gratuitous. A consideration that is not reducible to a value in money or money's worth, i.e., love and affection, or a promise of marriage, is to be wholly disregarded and considered totally gratuitous.

If a gift is made on the express or implied condition that the donee pay the gift tax, the payment of this tax may be deducted from the value of the gift made as partial consideration for the gift. It should be noted that such an agreement does not release the donor from the principal liability of paying the gift tax, if in fact the tax is not paid.

CESSATION OF DONOR'S DOMINION AND CONTROL

The gift tax is not imposed upon the receipt of property but rather upon the donor's act of making the transfer. The tax is measured by the value of the property transferred, provided the transfer results in a completed gift. Whether a gift is considered complete depends upon all the facts in a particular case.

A gift is complete if the donor has parted with dominion and control over the transferred property or property interest, leaving him without the power to change its disposition, whether for his own benefit or for the benefit of others. For instance, if a donor creates a trust under the terms of which he can revoke the transfer and revest title in himself, the transfer is an incomplete gift. The same would be true if the donor reserved the power to alter the instrument enabling him to name new beneficiaries or change the interests of the beneficiaries. The gift would, in either case, become complete at such time as the donor renounces the power, or his right to exercise it ceases, because of the occurrence of some event or contingency or the fulfillment of some condition other than the death of the donor. Despite the reservation by the donor of the powers described above, the gift would be considered complete if the powers could be exercised by him only with the consent of a person having a substantial adverse interest. For instance, the donor creates a trust giving income for life to his wife and providing that, at her death, the corpus is to be distributed to his son. The donor reserves the right to revoke the transfer but only with the consent of his son, in which event the corpus would revest in the donor. The gift is considered complete in its entirety.

If a donor delivers a properly endorsed stock certificate to the donee or the donee's agent, the gift is completed, for gift tax purposes, on the date of delivery. If the donor delivers the certificate to his bank or broker as his agent, or to the issuing corporation or its transfer agent, for transfer in the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation. If a donor delivers his own check or note to another as a gift, the gift is not complete, for gift tax purposes, until the check or note is paid or is transferred for value to a third person.

PARTICULAR TYPES OF GIFTS

There are particular types of gifts for which the gift tax statute provides special rules.

A. Powers of Appointment

The exercise or complete release of a general power of appointment is treated as a gift unless the exercise or release was for adequate consideration. There are different rules for the treatment of powers of appointment if the power was created before October 22, 1942.

A power of appointment is a power to determine who shall own or enjoy, presently or in the future, the property subject to the power. It must be created by another and does not include a power created by the possessor himself, or retained by him when he transfers his own property. The term "power of appointment" includes all powers that are, in substance and effect, powers of appointment regardless of the terminology used in a particular instrument and regardless of local property law.

Some powers do not constitute a power of appointment. A power to amend only administrative provisions of a trust that do not substantially affect the beneficial enjoyment of the trust property or income would not be considered a power of appointment; nor would a simple power to manage, invest, or control assets, or allocate receipts and disbursements, when exercised only in a fiduciary capacity.

A general power of appointment is one in which the possessor of the power can appoint himself, his creditors, his estate, or his estate's creditors. It includes the unlimited power to consume, invade, or appropriate either income or corpus, or both, for the benefit of the holder of the power.

If a power of appointment is exercisable by the possessor, but only with the consent or joinder of (1) the creator of the power, or (2) a person having a substantial adverse interest in the property subject to the power, the possessor is not considered to hold a general power of appointment. For this purpose, a trustee administering a trust in his fiduciary capacity does not, by that fact alone, have an adverse interest in the trust.

If the possessor of a general power of appointment exercises or releases the power during any calendar quarter, he will have made a gift during that calendar quarter. A release of a power need not be formal in character. For instance, the failure to exercise a general power of appointment within a specified time, so that the power lapses, constitutes a release of the power. However, the lapse is treated as a release only to the extent that the value of the property that could have been

either $5,000 or 5 percent of the total value of the property out of which the appointment could have been satisfied.

In contrast to a release, a general power of appointment that is disclaimed or renounced does not result in a gift. A disclaimer is a complete and unqualified refusal to accept the power of appointment. There can be no disclaimer of a power after it has once been accepted, and the disclaimer must be effective under local law. The failure to renounce or disclaim the power within a reasonable time after learning of its existence will be presumed to be an acceptance.

The exercise of a general power of appointment created before October 22, 1942, will also result in a gift as explained above. However, the release or lapse of such a power does not result in a gift. Also, a power created before October 22, 1942, that is only exercisable by the possessor in conjunction with another person, regardless of adverse interest, is not treated as a general power of appointment.

A power of appointment created by will is generally considered as created on the date of the creator's death. However, a power of appointment created by a will executed before October 22, 1942, is considered as created on or before that date if the creator died before July 1, 1949, without having republished the will by codicil or otherwise after October 21, 1942. A power of appointment created by an inter vivos instrument is considered as created on the date the instrument takes effect. Such power is not considered as created at some future date merely because it is not exercisable immediately, or because it is revocable, or because the identity of its holders is not ascertainable until after the date the instrument takes effect. However, if the holder of a power exercises it by creating a second power, the second power is considered as created at the time of the exercise of the first.

B. Tenancies by the Entirety

The contribution made by a husband or wife in the creation of a tenancy by the entirety may constitute a gift either at the time of contribution or at the time of the termination of the tenancy. A tenancy by the entirety is essentially a joint tenancy in real property between husband and wife with the right of survivorship or a tenancy that gives them similar rights, regardless of local terminology.

The contribution made by a husband or wife in the creation of a tenancy by the entirety in real property is not considered a gift in that calendar quarter unless the contributing spouse elects to treat the transaction as a gift in that quarter. In order to make the election, a gift tax return must be filed for the quarter in which the transaction occurred, even though the gift value does not exceed $3,000. If such an election is made, the contribution of either spouse will constitute a gift to the extent the consideration furnished by him (or her) exceeds the rights in the tenancy retained by him (or her).

If the election is not made, no gift will result at the time the tenancy is created. There is, however, a gift upon the termination of such a tenancy, other than by the death of a spouse, if the proceeds received by one spouse on termination of the tenancy are larger than the proceeds allocable to the consideration furnished by that spouse to the tenancy. The same rule applies to contributions that increase the value of such a tenancy, such as improvements, reduction of indebtedness,

etc.

The election to treat the creation of a tenancy by the entirety in real property, or additions made to its value, as constituting a gift in the calendar quarter in which made, shall be exercised by including the value of the gift in the gift tax return of the donor for the quarter in which made. The election may be made only in a return filed within the time prescribed by law, or before the expiration of any extension of time granted for filing the return. The value of a gift made upon the creation of the tenancy is the amount of the consideration furnished by the donor spouse less the value of his or her retained rights in the tenancy. The extent of those rights depends upon local law.

If under local law, either spouse acting alone can bring about a severance or his or her interest in the property, the value of the donor's retained interest is one-half of the value of the property. If the spouse is entitled to share in the income or other enjoyment of the property, but neither acting alone may defeat the right of the survivor to the whole of the property, the amount of retained interest of the donor is determined by the use of appropriate actuarial factors for the spouses at their respective ages at the time the transaction takes place. C. Certain Property Settlements

Transfers of property or property interests made under the terms of a written agreement between spouses in settlement of their marital or property rights are deemed to be for adequate consideration and, therefore, are exempt from the gift tax (whether or not the agreement is approved by a divorce decree), if the spouses obtain a final decree of divorce from each other within 2 years after entering into the agreement. Transfers to provide a reasonable allowance for the support of minor children (including legally adopted children) of a marriage are not subject to the gift tax if made under an agreement that satisfies the above requirements.

A legal obligation of support is reducible to a value in money and may be surrendered as adequate consideration in exchange for property. A transfer in settlement of inheritance rights, on the other hand, is not reducible to money, and results in a gift. Therefore, the transfer of property under a property settlement agreement incident to a legal separation results in a gift only to the extent that the value of the transferred property exceeds the value of any support rights surrendered.

D. Survivor Annuities

A gift will generally result when an employee who has an unqualified right to an annuity elects a lesser amount so that upon his death a survivor annuity will be paid to his designated beneficiary. The gift is made in the calendar quarter in which he gives up his power to deprive the beneficiary of the survivor annuity by making his election irrevocable.

However, if the election or option and the annuity are part of a "qualified plan" the election, to some extent, may not be subject to the gift tax. A "qualified plan" is a stock-bonus, pension or profit-sharing plan that meets a number of conditions specified by law. If the plan is qualified, only that part of the annuity that is attributable to the employee's contributions to the plan is subject to the gift tax upon the exercise of the election or option. The portion of the annuity attribut

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