Increase in Donees Basis for Gift Tax PaidStraight Gift

To expand on Problem 3(a) on page 136 of the Casebook, the basis of property acquired by gift is increased by
the amount of gift tax paidwhether paid by the donor or the doneewith respect to the gift, subject to the
following limitations:

First, total basis may not exceed the fair market value of the property at the time of the gift.
1015(d)(1)(A); Reg. 1.1015-5(a)(1)(i).

Second, the increase in basis is limited to the lesser of two amounts:

The amount of gift tax paid, multiplied by a fraction, the numerator of which is the net
appreciation in value of the gift (the amount by which the fair market value of the gift
exceeds the donor's adjusted basis immediately before the gift) and the denominator of which
is the amount of the gift. 1015(d)(6)(A)(i) and (ii) and (B); or, if lesser:

The amount of gift tax paid. 1015(d)(6)(A).

Example 1:

On January 10, 2015, Uncle gives his apartment to Nephew. Uncle's adjusted basis in the
apartment was $300,000. The apartment is worth $400,000 on January 10, 2015. Uncle
pays $80,000 of gift tax with respect to the gift. Nephew's basis in the apartment is
$300,000 plus an increase for the applicable portion of the $80,000 gift tax paid. That
increase for the $80,000 paid is limited to the lesser of $20,000 ($80,000 $100,000 (net
appreciation) / $400,000 (amount of gift)) or $80,000 (total gift tax paid), but total basis
after the increase cannot exceed the fair market value of the gift ($400,000). Nephew's
basis in the apartment is $380,000.

Example 2:

On January 10, 2015, Uncle gives his apartment to Nephew. Uncle's adjusted basis in the
apartment was $100,000. The apartment is worth $400,000 on January 10, 2015. Uncle
pays $80,000 of gift tax with respect to the gift. Nephew's basis in the apartment is
$100,000 plus an increase for the applicable portion of the $80,000 gift tax paid. That
increase for the $80,000 paid is limited to the lesser of $60,000 ($80,000 $300,000 (net
appreciation) / $400,000 (amount of gift)) or $80,000 (total gift tax paid), but total basis
after the increase cannot exceed the fair market value of the gift ($400,000). Nephew's
basis in the apartment is $160,000 ($100,000 + $60,000).

Example 3:

On January 20, 2015, Aunt gives her apartment to Niece. Aunt's adjusted basis in the
apartment was $100,000. The apartment is worth $1 million on January 20, 2015. Aunt
pays $200,000 of gift tax with respect to the gift. Niece's basis in the apartment is
$100,000 (carryover of Aunts basis) plus an increase for the $200,000 gift tax paid. That
increase for the $200,000 paid is limited to the lesser of $180,000 ($200,000 $900,000
(net appreciation) / $1 million (amount of gift)) or $200,000 (total gift tax paid), but total
basis after the increase cannot exceed the fair market value of the gift ($1 million).
Niece's basis in the apartment is $280,000 ($100,000 + $180,000).

Donees Basis Where Part Gift, Part Sale

The basis of property acquired in a transaction that is in part a gift and in part a sale equals the sum of two
amounts. Reg. 1.1015-4(a).

The first amount is the greater of the amount paid by the transferee, Reg. 1.1015-4(a)(1)(i), or
the transferor's adjusted basis at the time of the transfer. Reg. 1.1015-4(a)(1)(ii).

The second amount is the increase for any gift tax paid, as described above. Reg. 1.1015-4(a)(2)
(citing 1015(d) and Reg. 1.1015-5).

First, assume no gift tax has been paid.

NO Gift Tax Paid

Example 4:

Transferor owns land in which Transferor's adjusted basis is $50,000. The land is worth
$90,000 and Transferor sells the land to Transferee for $60,000, paying no gift tax.
Transferee's basis is $60,000, the greater of $50,000 (Transferors basis) or $60,000
(amount paid by Transferee).

Example 5:

Same facts as Example 4, except that Transferor sells the land to Transferee for $35,000.
Transferee's adjusted basis is $50,000, the greater of $50,000 (Transferors basis) or
$35,000 (amount paid by Transferee). However, for purposes of computing loss,
Transferee's basis is limited to the fair market value of the property at the time of the
transfer. Reg. 1.1015-4(a) (first sentence of flush language at end).

Example 6:

Transferor owns land in which Transferor's adjusted basis is $100,000. The land is worth
$90,000 and Transferor sells the land to Transferee for $80,000, paying no gift tax.
Transferee's adjusted basis is $100,000, the greater of $100,000 or $80,000 (amount paid
by Transferee). However, for purposes of computing loss, Transferee's basis is $90,000
(fair market value of land at time of transfer). Reg. 1.1015-4(a) (first sentence of flush
language at end).

Second, assume that gift tax has been paid. No examples are given in the regulation or in the treatises I was able
to check, but the following appears correct under the literal language of Regs. 1.1015-4(a)(2) and -5(c):
Gift Tax is Paid

Example 7:

Transferor owns land in which Transferor's adjusted basis is $50,000. The land is worth
$90,000 and Transferor sells the land to Transferee for $60,000, paying gift tax of
$10,000.

Transferee's basis has two components:

$60,000, the greater of $50,000 (Transferors basis) or $60,000 (amount paid

by Transferee).

Applicable portion of gift tax paid: Increase for the $10,000 paid is limited to
the lesser of $13,333 ($10,000 $40,000 (net appreciation) / $30,000 (amount
of gift, i.e., $90,000 value-$60,000 paid by transferee)) or $10,000 (total gift
tax paid), but total basis after the increase cannot exceed the fair market value
of the gift ($30,000). Thus, applicable portion of gift tax paid is $10,000.

Transferees total basis is therefore $70,000 ($60,000 + $10,000).