Basis adjustment for gift tax paid - amendment to regs. sec. 1.1015-5.

• Author: Richter, Michael H.
• Position: Brief Article

Regs. Sec. 1.1015-5 has been amended to add a new Regs. Sec. 1.10 1 5 -5 (c) and move the original subsection (c) to (d). The new subsection was added to provide guidance and examples for Sec. 1015(d)(5), which contains special rules for limiting the addition to basis of gift taxes paid on property given to a taxpayer after Dec. 31, 1976. The amended regulation is effective Aug. 22, 1995 and applies to decedents dying and to gifts made after Aug. 22, 1995.

Generally, the basis of property acquired by gift will be the same basis in the hands of the donee as it was in the donor's hands. The basis of the property in the donee's hands will, however, be increased by the amount of any gift tax paid on the gift, but not above the fair market value (FMV) of the property at the time of the gift.

As an exception to the general rule, in the case of a loss recognized by the donee on the sale of property, the basis will be the property's FMV on the date of the gift, if the FMV is less than the basis. Furthermore, if more than one gift is made by the donee in a calendar year, the gift tax is allocated proportionately to all the taxable gifts made during the year by the donee in accordance with Regs. Sec. 1.1015-5(b).

Finally, as indicated in the guidance and examples provided in new Regs. Sec. 1.1015-5(c), the addition to basis for gift tax paid provided by Sec. 1015 is limited to the amount (not in excess of the gift tax paid) that bears the same ratio to the amount...