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Thursday, April 05, 2012


A donor makes a gift to a grantor retained income trust (GRIT). Gift tax is due on the gift, but is not paid by the donor. The IRS seeks to impose transferee liability on the gift recipient, and collect the tax liability from that recipient.  However, at the time the IRS seeks to collect, the trust has already terminated and paid its principal out to the remaindermen. Who, then, is responsible for the tax as a transferee? Is it the income beneficiary, the trustee, the remaindermen?

In a recent District Court case, the court determined that it was the income beneficiary who should bear the transferee liability. Is that the proper result? I don’t think so, but that is based on practical aspects since there does not appear to be much precedent on the issue.

Code §6901(a)(1)(A)(iii) imposes the transferee liability on the “transferee” of property. Presumably, the trust corpus would be used to pay the tax if the trust remained in existence. The court noted as much when it provided that “gift taxes should have been paid from the corpus of the trust at the time it became clear that the donor…would not pay them.”

If the trust has terminated, then who is the transferee? The court could see “no reason why the definition of a donee for a gift tax exclusion should differ from the definition of a donee for the purposes of gift tax liability.” The court found that for purposes of Code §2503(b) and annual gift tax exclusion, the beneficiaries of the trust are considered the donees. This narrows the field of transferees to the beneficiaries. This is then further narrowed to the income beneficiary and not the remainder beneficiaries since such gifts only apply to present interests and not future interests.

The court further noted that it was the income beneficiary who benefitted from the gift to the trust, per its income interest. The remaindermen held only an uncertain interest that could have been depleted, and thus should not be considered the donees.

Here are my concerns with holding the income beneficiary responsible:

a. The distinction between present and future gifts under Code §2503(b) should have nothing to do with who is a transferee in this circumstance. That distinction arises by the express language of Code §2503(b)(1) which excludes from its reach “gifts of future interests,” and thus only has relevance to determining the scope of the exclusion from taxable gifts.

b. Since the initial gift went into corpus, one would think that the remaindermen, who ultimately received the corpus, should bear the transferee liability.

c. At worst, the increase in income actually received by the income beneficiary attributable to the gift should be computed, as well as the amount of the gift distributed to the remaindermen as corpus (by some type of analysis of appreciation or depreciation in corpus that occurred after the gift was received and before the distribution out of the trust to the remaindermen). Then, the income beneficiary and the remaindermen should bear the tax liability pro rata to the amounts of the gift effectively received by each. Since the remaindermen end up receiving corpus attributable to the gift, why should they not have to bear some part of the gift tax liability?

d. What would have happened if the gift tax sought from the income beneficiary exceeded the additional income generated for the income beneficiary from the gifted property? The case gives no indication whether this occurred here. Presumably, the income beneficiary’s liability would be limited to this increase in income received, but the case does not tell us. And if that limit sets in, can the IRS then proceed against the remaindermen for the remaining portion of the tax? It would appear not, based on the theory of liability espoused by the court’s opinion.

By the way, did you know that if a donor has an unpaid gift tax liability, and made multiple gifts to multiple recipients, the IRS can collect the total gift tax from any one or more of them (up to the amount of the gift he or she received)? That is, each donee is potentially on the hook for all the gift taxes incurred by the donor that year, and not just for the taxes attributable to the gift that donee received (although the maximum amount of tax liability of a donee is limited to the value of the gift he or she received).

U.S. v. MacIntyre, 109 AFTR 2d Para. 2012-624 (DC TX 3/28/12)

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