Retroactive Gift Tax Filing to Decrease Capital Gains

[macuser_22]

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@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

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You have that backwards and it has nothing whatsoever to do with a 709  (a 709 only applies to the giver of a gift - never to the receiver).     A gifted property does *not* have a higher cost basis.  A gift retains the cost basis of the giver.       Property that are sold have the cost basis of the buyer.  (Which goes back to my prior comments).

[macuser_22]

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@macuser_22 wrote:

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@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

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@macuser_22 wrote:

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@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

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You have that backwards and it has nothing whatsoever to do with a 709  (a 709 only applies to the giver of a gift - never to the receiver).     A gifted property does *not* have a higher cost basis.  A gift retains the cost basis of the giver.       Property that are sold have the cost basis of the buyer.  (Which goes back to my prior comments).

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As an example, suppose a property was acquired in 1950 for $10,000 and today is is worth $1,000,000,   As a gift the receiver of the gift has a gain of $990,-000.      But if the property was was sold to the other person (the receiver)  in 2018 when the property was worth $800,000 then the receiver would only have a gain of $200,000.

[Anonymous_]

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@macuser_22 wrote:
Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect?    There is clearly a penalty for not filing it, but what is it if it does not exist?

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If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).

Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.

[macuser_22]

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@Anonymous_ wrote:

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@macuser_22 wrote:
Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect?    There is clearly a penalty for not filing it, but what is it if it does not exist?

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If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).

Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.

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Why is there zero tax due?  -- only because the $11 million exemption makes it so.   How does one get the gift applied to the exemption? - only one way - by filing a 709 form.     Agreed, that filing late 709 means that there will be zero tax due, but there is a penalty due based on what the tax would have been had the 709 never been filed.   What is due is the *penalty*, not the tax.     However, the IRS will accept almost any reasonable explanation why the 709 was not timely filed and forgive the penalty.

[Anonymous_]

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@macuser_22 wrote:
Why is there zero tax due?  -- only because the $11 million exemption makes it so.   How does one get the gift applied to the exemption? - only one way - by filing a 709 form.  

The exemption is provided for in Section 2505 of the Code and its applicability has nothing to do with the filing of Form 709. If it were otherwise, that would be spelled out in the Code or Regs and it is not.

[macuser_22]

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@Anonymous_ wrote:

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@macuser_22 wrote:
Why is there zero tax due?  -- only because the $11 million exemption makes it so.   How does one get the gift applied to the exemption? - only one way - by filing a 709 form.  

The exemption is provided for in Section 2505 of the Code and its applicability has nothing to do with the filing of Form 709. If it were otherwise, that would be spelled out in the Code or Regs and it is not.

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Then what is the point (or purpose) of the 709 at all if it can be simply ignored with no tax or penalty.  Are you suggesting that it can be ignored since it makes no difference?

[Anonymous_]

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@macuser_22 wrote:
Then what is the point (or purpose) of the 709 at all if it can be simply ignored with no tax or penalty.  Are you suggesting that it can be ignored since it makes no difference?

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I am simply suggesting that a penalty cannot be imposed without statutory authority.

You appear to be arguing that a penalty can be imposed but have not yet cited a Code section that imposes a penalty other than one that is based upon tax due.

You also stated that the lifetime exclusion does not apply unless a 709 is filed (and tax is due as a result) but there is absolutely no authority (that I can find) for that proposition. 

[macuser_22]

ALL gifts are taxable to the giver - §2503(a).

Only the first $10,000 ($15,000 now adjusted for inflation) is excluded from the tax §2503(b).

The tax imposed is   defined in §2001.

However, you can get a "credit" for the amount of the gift tax that is applied to the lifetime exemption (not exclusion - only the first $15,000 is excluded) §2505 and other related sections.    You get the credit by filing the 709 form that applies the taxable gift to the credit.

Filing  the 709 late to get the credit can result in a penalty based on the tax imposed by §2001.

[Anonymous_]

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@macuser_22 wrote:

However, you can get a "credit" for the amount of the gift tax that is applied to the lifetime exemption (not exclusion - only the first $15,000 is excluded) §2505 and other related sections.    You get the credit by filing the 709 form that applies the taxable gift to the credit.

Filing  the 709 late to get the credit can result in a penalty based on the tax imposed by §2001.

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I cannot find any language in the Code or Regs that state a taxpayer loses the credit provided for in Section 2010(c) (or incurs a penalty) simply by failing to file Form 709. 

To put it another way, I cannot find any language stating that filing Form 709 is required to secure the credit against tax provided in the Code.

Can you find such language in the Code or Regs? If you cannot, then any such penalty does not exist and you are arguing based upon your beliefs rather than actual statutory language.

[Opus 17]

I am not going to get into this fight, except to point out that under the tax code, all income is assumed to be taxable unless proven otherwise.

I will also note that the statute of limitations is three years from the date the tax return is filed. If a required return is not filed, the clock on the statute of limitations never starts running, and the taxpayer can be audited and penalized at any indefinite time in the future.

For the taxpayer, the important point is going to be to document exactly how each property transfer occurred in order to document the basis. The basis of the property will be the same regardless of whether any paperwork is filed. The issue of the missing gift tax return will only come up if the taxpayer is audited regarding the reporting of the capital gains.  The taxpayer should keep all of the documents and proofs that they gather and use to determine the basis for at least six years after the sale.

[Anonymous_]

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@Opus 17 wrote:

....all income is assumed to be taxable unless proven otherwise.

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I agree; all income is generally taxable unless specifically excluded under §§101-140. Gifts are specifically excluded, but if an examination involves reviewing various financial records, such as bank statements for example, then the individual under review had better be able to explain large deposits to accounts.

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@Opus 17 wrote:

For the taxpayer, the important point is going to be to document exactly how each property transfer occurred in order to document the basis. 

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In fact, there is language in the Code (I believe §6001) that specifically requires documentation (statements and records) be retained to comply with promulgated rules and regulations.

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@Opus 17 wrote:

....If a required return is not filed, the clock on the statute of limitations never starts running....

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Correct (again) but merely because the statute of limitations does not start it does not follow that a penalty is assessed and/or deductions, exemptions, et al, are lost. 

For example. with respect to gift tax returns, Treas. Reg. §25.6019-1(f) provides:

The return is required even though, because of the deduction authorized by section 2522 (charitable deduction) or the unified credit under section 2505, no tax may be payable on the transfer. 

The language clearly implies that the unified credit is not lost if a return is not filed and that should not come as a surprise.

For instance, a federal income tax return for 2019 is generally required to be filed by a single person whose gross income exceeds $12,200 but there is no penalty if a refund is due (and the return is not filed because, perhaps, the refund is miniscule). The taxpayer does not, out of nowhere, lose the $12,200 standard deduction as a result of failing to file a return.

[macuser_22]

You will not find any reference to the 709 or 709 filing requirements in the tax code because the 709 (like other forms) are an IRS invention used to interrupt and apply the actual code as defined in various code section in chapter 12 that defines the tax, the penalties and the $15,000 exception.    Other then the $15K exception, there is no other exception.  The $11.4 million is not an exception to the tax, the tax is still there even though it can be credited to the $11.4 million lifetime exclusion (not exception).   Even with the exclusion, the tax is still there (even though it does not have to be paid if applied to the exclusion) and can be computed on the gift which is what the penalty is based on.     It is all in the code but in bits and pieces in various sections.

[Anonymous_]

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@macuser_22 wrote:

You will not find any reference to the 709 or 709 filing requirements in the tax code because the 709 (like other forms) are an IRS invention used to interrupt and apply the actual code.....

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The steps for the computation of the rate of tax are basically set forth in the Regs.

See Treas. Reg. §25.2502-1

If you read the Reg to which I referred in an earlier post, it is clear that a return is required to be filed even if there is no tax due as a result of the unified credit under Section 2505 (that is specifically stated in the Reg). The current $15,000 annual exclusion is simply a threshold beyond which a return is required to be filed; it is not the threshold for which tax is due if exceeded (whether or not a return is filed).

You are making an attempt (in my opinion, a futile one) to twist the language of the Code and Regs into a result you believe should obtain. 

Some law professors have an issue with the Code not providing for a penalty in this instance, as well:

See https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=5899&context=faculty_scholarship

While taxable gifts of less than the applicable exclusion amount must be reported on a gift tax return, taxpayers who fail to file may nevertheless not face a penalty, Why? The code applies failure-to-file penalties only when tax is actually due.