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Saturday, June 16, 2012


Code Section 6324(b) reads:

[U]nless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. (emphasis added)

The underlined provision has three accepted implications:

     a. If gift tax is not paid by the donor, the IRS can collect it from the donee;

     b. Such “tax” includes interest charged against the donor on the tax; and

     c. The total of the gift tax and such interest on the donor obligation that becomes the liability of a donee is capped at the value of the gift received by the donee.

A recent case addressed the separate question whether Code Section 6324(b) prohibits the IRS from separately charging interest on the donee for failure to pay the above amounts due, and whether the total cap on the value of the gift precludes such interest from being charged to the extent all of these transferee liabilities exceed the value of the gift.

The court determined that there was adequate statutory authority to conclude that (a) interest on the transferee for its unpaid liability can be assessed, and (b) such interest liability is outside the cap on total liability that is tied to the value of the gift received. Thus, a donee of a gift can be put into the egregious situation of owing more in taxes and interest than the value of the gift received.

Of course, for interest and tax to exceed the value of the gift, interest will need to be running at a high rate and/or for a long time. Nonetheless, a failure to pay required gift taxes often is not uncovered until many years after the fact – for example, oftentimes not until the death of the donor when the estate tax return is being prepared. Thus, situations when gift tax liability may have run for 10 or 20 years are not as rare as you may think.

While this decision is bad for donees, all hope is not lost. There is a split in the Circuit Courts of Appeal on this general issue, so a different result can occur in different Circuits, and perhaps the Supreme Court may ultimately resolve the issue in favor of donees.

U.S. v. MacIntyre, 109 AFTR 2d 2012-XXXX, (DC TX), 06/07/201

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