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Wednesday, October 12, 2016

Failure to Make Check-Off on Gift Tax Return Bars 5 Year Ratable Treatment for contribution to 529 Accounts

Contributions made to an education Section 529 plan are taxable gifts. However, such a gift will qualify for exclusion as an annual exclusion gift to the extent of the available exclusion for the donee in the year of the gift.

If the amount contributed exceeds the available annual exclusion, Code §529(c)(2) allows that gift to be spread ratably over a five year period for gift tax purposes, if the taxpayer so elects. The Form 709 provides a check box for electing such ratable treatment.

In a recent Tax Court case, the taxpayer made contributions that exceeded the available annual exclusion amounts, but did not make the ratable election on a gift tax return (in one year, he did not file a gift tax return, and in another year he filed but did not make the election). It appears that the taxpayer did not report these amounts as taxable gifts.

Would the taxpayer’s treatment of the gifts as nontaxable constitute a 5 year ratable election, even though the election was not checked on a gift tax return?

No, says the Tax Court. The legislative history to Code §529(c)(2) and the Form 709 instructions require a return to be filed and an election to be checked off. So, since there was no checkoff, the fundings constituted taxable gifts in the year made (less available annual exclusion).

Estate of Edward G. Beyer, et al., TC Memo 2016-183

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