Restoration of unified tax credit previously used.

• Author: Smith, Byron C.

The IRS recently issued Letter Ruling 9718004, addressing the revaluation of prior-year gifts when preparing a current-year gift tax return. If a taxpayer has used his unified credit only in a prior-year property transfer, he may have an opportunity to revalue those gifts and increase the amount of the unified credit available.

Estate and gift taxes are computed under a unified transfer tax system. Gifts made in the current year are added to taxable gifts from previous years in determining the current year's gift tax rate. Upon a decedent's death, lifetime gifts are added to the taxable estate to determine the rate of tax for an estate. Any gift taxes previously paid, or unified credit previously used, are factored into the tax computation, assuring that previous gifts and transfers are not taxed twice.

In the letter ruling, T transferred undivided interests in real estate to family members in 1982 and 1989; these gifts were reported on timely filed gift tax returns. The gifts did not result in any gift tax payable, but used a portion of T's unified tax credit. In 1991, T transferred an undivided interest in other real property, resulting in gift taxes of $167,011. This liability was paid with the filing of the gift tax return. In valuing these gifts, T did not claim any discount for the fractional interest transferred, but valued the gifts at the proportionate share value of the entire property. T passed away in 1994.

On April 13, 1995, T's executor filed a claim for refund relating to the over-valuation of the 1991 gifts. This refund was based on the claim of a fractional interest discount in valuing the real property transferred in 1991. In a meeting with the Service in October 1995, the executor contended that this discount should also apply in valuing the 1982 and 1989 transfers, i.e., that in computing the gift tax liability for 1991, the value of the taxable gifts for 1982 and 1989 should be decreased. This adjustment would result in additional unified tax credit being available in 1991, reducing the 1991 gift tax liability and the overall estate tax liability.

The IRS allowed the refund on the original 1991 tax return, but disallowed the verbal request for revaluing the 1982 and 1989 gifts on the 1991 gift tax return. The Service concurred that the use of the unified credit did not result in the payment or assessment of gift taxes in 1982 and 1989; therefore, the statute of limitations (SOL) had not begun to run (Rev. Rul. 84-11)...