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Saturday, June 30, 2012


No, I don’t think so.

Back in my March 11, 2012 posting, I discussed the general issue of clawback for large gifts made in 2011 and 2012, and the likelihood of the IRS asserting its application in later years when the donor died (if unified credit amounts are then lower). While I didn’t discuss it in the blog, I had been struggling with the assertion by Professor Pennell at the Heckerling Institute that clawback was a nonissue. imageAs best I could, I looked at the statute and could not make the risk of clawback disappear from the perspective of a pure statutory analysis and applying IRS prior guidance and direction how to compute estate taxes when prior gifts had been made. Without getting too technical here, the issue is whether, in computing deemed gift taxes on prior gifts under Code §2001(b)(2), one should use the unified credit amount that existed at the  time of the gift or at the time of later death. Prior IRS interpretations are to use the unified credit applicable in the year of the gift – this reduces the credit for prior gift taxes available against estate taxes, and makes clawback a real threat. In my March 11, 2012 posting, I did note a number of reasons why clawback should not be applied and why the IRS may choose not to apply it. The bottom line for me at the time was that there was a good chance clawback would not ever be asserted by the IRS, but that there was room to do so in the statute if they desired.

Fast forward to a conference I attended last week. At the conference, Professor Pennell indicated that he thought the newly issued unified credit regulations (which pertain primarily to portability) support that clawback was a nonissue. I was happy to hear that, and sat down today to review the regulations and write a posting to that effect.

However, I am still scratching my head. Near as I can tell, the new regulations do not address the issue. Indeed, Treas. Regs. §20.2010-2T(c)(2) and –2T(c)(5), Ex. 2. reinforce in my mind the IRS’ focus in the gift tax computations on the unified credit amounts applicable in the year of the gift and not death. This provisions do not directly apply to Code §2001(b)(2) but in a way are similar since they relate to computations of how much of a prior gift was subject to gift tax in a prior year (for purposes of portability).

I am in no way near as smart, well-read or well-versed in these areas as Professor Pennell, so my disagreement with him makes me nervous (as it did back in March).  Perhaps when I review the new Regulations in more detail, I’ll find something that changes my mind. In the meanwhile, if anyone has read the Regulations and can point me in the direction of a provision that validates that clawback will not be applied, please send me an email at I would love to be wrong on this for the sake of certainty and resolution of the issue in favor of taxpayers, so help me out!

In the meanwhile, I had also thought to do a summary of the new portability rules. However, since portability is set to expire on December 31, 2012, let’s hold off on that until we know that it will be extended.

T.D. 9593; REG-141832-11

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