Gifts and Bequests

• Author: Deborah A. Geier
• Pages: 185-214

Chapter 7: Gifts and Bequests

Recall from Chapter 1 that a fundamental precept of an income tax is that the same dollars

should not be taxed to the same taxpayer more than once and that we use “basis” as the tool to

keep track of previously taxed dollars to implement this precept.

Do not be lulled into thinking that the same dollars cannot be taxed to the same taxpayer more

than once under two separate tax systems, however. It happens routinely. For example, the same

dollar of labor income is commonly taxed twice to the same taxpayer at the Federal level: once

under the payroll taxes (the Social Security and Medicare Taxes described in Chapter 3) and once

under the income tax.

Moreover, even if we limit our focus to the Federal income tax itself, the same dollar is

commonly taxed to more than one taxpayer as it is transferred from taxpayer to taxpayer in the

economy. For example, Doris earns wages from her job as a store clerk, and she includes those

wages in her Gross Income under § 61(a)(1). Doris then pays some of her after-tax dollars to her

window washer, David, for washing the windows of her home. They are after-tax dollars because,

as a personal expense, Doris cannot deduct the outlay, which means that the amount that she pays

to David effectively remains in her tax base and is taxed to her. David cannot claim that his receipt

should be free of Federal income tax in his hands because those dollars were already taxed once

(to Doris) under the Federal income tax. Thus, the same dollars are includable in Gross Income by

both Doris and David and are taxed twice under the income tax as they move from Doris to David.

What if Doris simply makes a gift of those dollars to David during life or leaves a bequest to

David at her death instead of paying them as wages to David?

Possible taxation approaches to the transfer and receipt of gifts and bequests

When we think about gratuitous transfers, whether an inter vivos gift (during life) or a death-

time bequest, we have two taxpayers to consider—the donor and the donee—and we have two

possible tax systems to consider at the Federal level: the Federal income tax and the Federal wealth

transfer taxes, consisting of an integrated system composed of the estate tax, the gift tax, and the

generation-skipping transfer tax, each of which is legally imposed on the donor. Unlike wealth

taxes, which tax the fair market value of assets again and again, year after year, the wealth transfer

taxes are excise taxes imposed on the donor only on the act of transfer, whether during life or at

death. The wealth transfer taxes are the subject of a separate tax course and are not examined here

in any detail except to the extent that their mere existence may help us to think about how

gratuitous transfers should be treated under the income tax.

Should the income tax treatment of inter vivos gifts and death-time bequests be integrated with

the wealth transfer taxes so that the same dollars are not taxed under both Federal tax systems? If

the answer to that is “yes,” should the payroll taxes (Social Security Tax and Medicare Tax) on

wages be integrated with the income tax on wages so that the same dollars are not taxed under

both Federal tax systems, as well?1 If the answer to the latter is “no” because the income tax and

payroll taxes serve different purposes, should the answer to the former also be “no” for the same

reason? Should the income and wealth transfer tax systems ensure that a dollar is taxed at least

1 See, e.g., Deborah A. Geier, Integrating the Tax Burdens of the Federal Income and Payroll Taxes on Labor

Income, 22 VA. TAX REV. 1 (2002).

Chapter 7 Gifts and Bequests Chapter 7

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once between the two systems rather than escaping tax entirely under both, as is not uncommon

today (particularly because of the combination of the realization requirement, the high estate tax

exemption, and § 1014, described below)?

Under the Federal income tax—viewed alone and without regard to any possible treatment

under the estate tax—should amounts transferred as inter vivos gifts or bequests be effectively

taxed to both the donor and the donee, just as both David, the window washer, and Doris were

effectively taxed on the same dollars under the income tax when she paid them to David as wages?

The making of a gift is clearly a personal expense of the donor, so it would generally be

nondeductible (unless contributed to a charity, considered in Chapter 17). Thus, the issue boils

down to whether it ought to be included in the donee’s Gross Income when received. And what if

property (instead of cash) is transferred, and the property has unrealized built-in gain at the time

of transfer? Should the gift or bequest qualify as a realization event under § 1001? At what basis

should the donee take the property?

To help us to think about these questions, consider the story appearing in the Los Angeles Times

in 2010, which reported that Christie’s New York sold Pablo Picasso’s 1932 portrait of his mistress

entitled “Nude, Green Leaves and Bust” for $106.5 million. Bidders came from all over the world,

including Asia, the U.S., Europe, and Russia, although the winning bidder (by telephone) was not

identified. The article relates the following:

The painting came from the estate of Frances Brody, the Los Angeles arts patron

who died last year [2009] at age 93. Her husband Sidney, a real estate developer,

died in 1983. The estate consigned this Picasso to Christie’s along with some 80

other artworks. The most valuable pieces, including sculptures by Alberto

Giacometti, went up for auction Tuesday night; the remainder are slated for

Wednesday morning…. The Brodys originally bought “Nude, Green Leaves and

Bust” in January 1951 from Paul Rosenberg’s New York gallery for $19,800 (about

$166,000 in today’s dollars).2

When an individual dies, a new taxpayer autom atically springs into existence called an “estate,”

which in essence takes the place of the decedent. The estate owes income tax on any income

realized by it during its existence, using the rate schedule found in § 1(e) (reprinted in Chapter 8).

For example, when the estate receives an interest payment on a corporate bond that the decedent

owned before death, the estate must include that interest payment in its Gross Income under §

61(a)(4), just as the decedent would have included it had she not died. At some point, the estate

will distribute all of its (after-tax) cash and other assets to the estate beneficiaries as described in

the decedent’s will or under the laws of intestacy and cease to exist. Thus, the cash collected by

the Brody estate on the sale described above, as well as any other cash and property owned by the

estate, less any income tax (and estate tax, if any) owed, would be distributed to Mrs. Brody’s

2 Jori Finkel, Picasso Sets Record Sales Price, http://articles.latimes.com/2010/may/05/entertainment/la-et-brody-

picasso-20100505. At the time, this sale represented the highest price ever obtained for an artwork. That record has

since been broken multiple times, most recently in 2017, when a work attributed (though no unequivocally) to

Leonardo da Vinci sold at auction for $450.3 million. See Robin Pogrebin & Scott Reyburn, Leonardo da Vinci

Painting Sells for $450.3 Million, Shattering Auction Highs,

at https://www.nytimes.com/2017/11/15/arts/design/leonardo-da-vinci-salvator-mundi-christies-auction.html.

Trivia tidbit: After Frances Brody’s death, the talk show host Ellen DeGeneres bought the house from the estate

for $40 million before it officially was listed for sale. See Ste ven Kurutz, The Unsettling Thing About Ellen, at

www.nytimes.com/2014/04/24/garden/the-unsettling-thing-about-ellen.html?hpw&rref=garden.