Capital Gain or Loss on Gifted Property

When you gift investment or business property to someone and that person sells that property they owe tax on the gain. The basis in the property for gain purposes is what the basis was in the hands of the donor (the person making the gift). So, if the donor had a basis of $100 and the donee (recipient of the gift) sold the property for $110, there would be a $10 gain.

What is the basis for someone who receives a gift and sells it for a loss. In that circumstance the basis is the LOWER of the basis in the hands of the donor or fair market value at the time of the gift. So let’s say that Fred holds a mortgage note on Blackacre from Mona for $100,000. The mortgage is under-water and there is no way that Mona will ever be able to repay the loan. Fred gifts the note to his son, Bam. Bam immediately forecloses and the property sells for $50,000. Does Bam get a capital loss of $50,000 or a capital loss of zero. That goes to what was the market value of the note on the date of the gift. It would appear that it would no more than $50,000. However, if Bam could have gotten an appraiser or another lender to state that the fair market value of the note was an amount larger than $50,000, then Bam could perhaps take the loss equal to the appraised amount. This is found in Reg. 1015-1 of the IRS regulations.

Upstream Gifting

Let’s say Sid hit it big with your new product, Spacebook and he went from a middle aged computer geek to a billionaire overnight and lives in California. His aging parents are not in great health. His basis in his dot.com stock is about $10,000. His unrealized gain on that stock is $2,999,990,000. He wants to know how to reduce taxes and liquidate some of his stock in the next ten years. Perhaps he should gift $10,000,000 worth of stock to his parents. When the last parent dies, the stock is stepped up to the date of death value. Thus, the $10,000,000 in stock would now have zero capital gains. But Sid is nervous that his parents might not hold onto the stock. So, he said can I create a trust for them. The answer is yes. There are a number of trust vehicles that will work, so long as the last living parent has when is known as a general power of appointment to appoint the assets to his or her estate or creditors. There are trusts known as intentionally defective grantor trusts in which Sid gets taxed on the income while giving his parents the use of that income. The net result to Sid is tax savings of $3,300,000. You can buy a lot of other things for $3,300,000 and he is able to give his parents an income from that stock for the rest of their lives.

Tax Season is over and now for another tale.

There is a very big project going on in which the IRS, State Tax Departments, State Attorney’s General and the Justice Department are engaged. Medicaid fraud cases involving home health agencies. It usually starts with a home health agency owned by non-citizens. If the agency is located in a state with income taxes, the state then commences a net worth tax audit on the business owner. Usually, as with any American, there are problems with the return. Then commences a criminal tax filing alleging tax fraud and because the company is owned by a new or non-citizen with ties overseas, they ask for no bond and make statements about the medicaid fraud investigation that they are pursuing. Many times they will get the tax preparers involved as well with offers of immunity. At that point, the Government can force open the books of the home health provider. The other trick is to have the IRS pursue an indictment for failure to collect and pay over employment taxes. Usually this is a civil issue, but for these cases they use the criminal means to again force open the books of the company. While there is a ton of fraud in the home health industry, this particular program seems to be similar to the old mafia investigations where corruption could not be proved, so tax laws are used instead. So, to home health agencies out there a couple of words of warning. (1) Pay your withholding taxes, even if you don’t pay yourself, your rent or any other bill; (2) Make sure your personal tax returns are unassailable. Don’t simply trust your preparer. Review the returns carefully to ensure that all items of income and expense are properly taken. Remember you sign those returns under penalties of perjury. (3) If the FBI, IRS, or a state tax agent starts an audit engage a seasoned tax professional to get involved at the earliest possible time. This could mean the difference between an indictment and a civil penalty,. If you have returns out there that have problems and YOU HAVE NOT YET BEEN CONTACTED BY AUTHORITIES, consider voluntarily amending them and paying the taxes, interest and penalties now. (or at least starting a voluntary payment arrangement with the tax authority). If you are an immigrant and have family members overseas that you support, try to keep a log of what you send overseas and to whom. That way, when the Government comes calling you have a record of where the money went. Lastly, remember that if your gifts to any one person (anywhere in the world) exceed $13,500 you need to file a Federal Gift tax return. With these tips you might avoid a long spell in jail.

More on the Pastor’s Housing Allowance

Judge Crabb is apparently friendly to folks who take a broad view of the Establishment Clause. She declared the National Day of Prayer unconstitutional (and probably will decide that Thanksgiving and Christmas should not be federal holidays at some point if given the chance), and she was reversed by the 7th Circuit Court of Appeals. But if the standing of the FFRF individuals is upheld, then pastors will have a problem because Section 107 is clearly friendly to religion. However under the Supreme Court test she cited the O’Connor test, the concept of religious neutrality has come in. Under that test you can’t discriminate against religious participation in universal government benefits, like school vouchers and free lunches to needy kids as long as you don’t require indoctrination with the use of those funds. The question here like all tax cases is of course the ever present, this is a tax case. This is where it gets interesting. Going back to Justice Roberts decision concerning Obamacare, a tax is a tax. Apparently, the 16th Amendment allowing the Government to tax income pretty much allows it to tax anything it wants including not having insurance. So, what if it exempts from income housing allowances for clergy and disability payments to Veterans. If Congress can tax something, they can choose not to tax something. The 16th Amendment gives Congress the power to lay taxes on income from whatever sources derived. Thus, Congress can pick and choose which incomes it wishes to tax even those that may be religious. So, interestingly enough, if this case goes to the Supreme Court, it may well be that the Obamacare ruling gives the Justices an out.