The Year-End: A Time for Ignoring the Holidays And Disclaiming Gifts (for Tax Purposes)
December 21, 2020
Happy Holidays? Bah Humbug!
The “holiday season” is once again upon us. A time to spend with family and friends, a time for gift-giving (and re-gifting), for songs and for story-telling, and a time for remembering those who cannot be with us, those whom we have lost,[i] and a time to help those to whom life has been less than kind.
Sounds like a Hallmark card, doesn’t it? The sentiments expressed are genuinely held, but how to manifest them as tangible acts? There’s the rub, as some fictional Dane may have said.[ii]
I, for one, have failed miserably, having put my studies, my work, and my “profession” ahead of all holiday-related activity since high school. I admit, the fault for this shortcoming is almost entirely mine. Like Scrooge, it may be said of me:
“You fear the world too much…. All your other hopes have merged into the hope of being beyond the chance of its sordid reproach. I have seen your nobler aspirations fall of one by one, until the master passion, Gain, engrosses you.”[iii]
Thankfully, but sad to say, I am hardly unique. Even as I write this, I know there are many attorneys and accountants who have been working around the clock for weeks preparing transactions that “must” close before the end of the year, or who have been implementing gift and estate plans for clients who are eager to capture – before the year-end – the benefit of what many see as the end of some very generous tax laws.[iv] (You should see their expressions after I’ve explained that they will need the approval of their PPP lender before doing anything.)[v]
The last thing most of my colleagues and I want to see is people making merry,[vi] or hearing people wishing others to be merry.[vii]
The first thought that comes to mind in reaction to such holiday cheer:
“If I could work my will, every idiot who goes about with ‘Merry Christmas’ on his lips should be boiled with his own pudding and buried with a stake of holly through his heart. He should!”
And that’s putting it mildly.
Then there are those who insist that you join them and who, after you have politely refused their less-than-sincere entreaties, leave you with “We’ll miss you, it won’t be the same.” To them, I’d like to say,
“I wish to be left alone. Since you ask me what I wish, . . . , that is my answer. I don’t make merry myself at Christmas, and I can’t afford to make idle people merry.”
The final straw is the long lines of cars slowly winding their way toward the malls during the weekend – shopping? seriously? now? – effectively turning three lanes into one passable lane, as I drive to or from the office.
Years ago, this would have elicited all manner of expletives and “colorful” gestures from me. I have since inured myself to the inconvenience and to the fact that these people were not working while I was. Forget Scrooge speaking in the first person – let’s go with the omniscient narrator, instead, to convey the feeling:
“He carried his own low temperature always about with him; he iced his office in the dog-days, and didn’t thaw it one degree at Christmas. External heat and cold had little influence on Scrooge. No warmth could warm, not wintry weather chill him. No wind that blew was bitterer than he, no falling snow was more intent upon its purpose, no pelting rain less open to entreaty. Foul weather didn’t know where to have him.”
With that catharsis by confession behind me, I can turn now to some legal advice[viii] recently issued by the Office of Chief Counsel in connection with an inadvertent gift – how appropriate – by what appears to have been a sophisticated taxpayer.
An American with a Stiftung[ix]
Taxpayer was a U.S. resident individual[x] who was a primary beneficiary of the Foundation[xi] (a “Stiftung”); for our purposes, basically, a civil law entity analogous to a trust. The objectives of the Foundation included “the defrayal of expenses for the upbringing and education, the fitting out and furtherance, the livelihood in general and the economic furtherance in the widest sense of the relatives of certain families.” Of course, the Foundation was governed under Country law.
According to its governing document (its “statutes,” or articles of organization), the Foundation Council or Board (basically, the trustees) had the authority to determine the beneficiaries, as well as the conditions for their beneficial interests.
The governing document also provided that the Foundation Council was entitled to issue by-laws (“by-statutes”) which would have the same legal effect as the Foundation’s statutes.
The Foundation Council was also authorized, at its own discretion, to supplement and amend the statutes, including the Foundation’s objects and organization.
For example, the Foundation’s statutes provided that, if the circumstances under which the Foundation was formed so changed that the Foundation’s purposes may “no longer be sensibly achieved,” the Foundation Council had the authority to wholly or partly dissolve the Foundation. Upon dissolution, the Foundation assets were to be distributed to the beneficiaries in accordance with the provisions of the statutes.
In any event, according to its statutes, the Foundation would be dissolved in Year. At that time, the Foundation assets would be distributed among the then-living beneficiaries in compliance with their beneficial interests (“benefit quotas”).
At some point, the Foundation Council amended the Foundation’s statutes to provide that Taxpayer would become the primary beneficiary of all of the assets and earnings of the Foundation, including any potential liquidation proceeds. Among the benefits payable to the Taxpayer was a specified sum of money (the “Benefit”).
The Foundation’s amended statutes also provided that, in the event of the passing of the primary beneficiary (Taxpayer), an amount equal to twice the Benefit would be payable to the secondary beneficiaries, who would be Sibling 1, Sibling 2; and Sibling 3.
In addition, the primary beneficiary’s surviving spouse (Spouse) and children would receive the Benefit, which would be funded with the earnings of the Foundation assets. In the event that the earnings were insufficient to pay the Benefit, the assets of the Foundation could be used as supplements.
Subsequently, the Foundation Council, after acknowledging the Taxpayer as the sole first beneficiary of the Foundation, amended the statutes as follows:
“IT IS HEREBY RESOLVED to distribute the total net assets of the [F]oundation to the first beneficiary of the [F]oundation and to bring such assets in alignment in accordance with his wishes.”
In an email correspondence to the Foundation Council on the same date, the Taxpayer directed the transfer of all Foundation assets held in the Bank 1 Account (which held the primary assets of Foundation) to the Bank 2 Account.
Thereafter, the assets held in the Bank 1 Account were transferred to the Bank 2 Account, and the Foundation was then dissolved.
Taxpayer was not designated as an account owner of the Bank 2 Account. Based on an affidavit from Sibling 2 and an affidavit from Taxpayer, Taxpayer never had signature authority or control over, or access, to the funds in the Bank 2 Account from the time the assets initially were transferred to the Bank 2 Account at Taxpayer’s request.
The IRS questioned whether the Taxpayer – a U.S. resident – had made a taxable transfer that was subject to the U.S. Gift Tax.
I Have a Gift for You
The Code imposes a gift tax for each calendar year on the transfer of property by gift during the calendar year. The tax applies to all transfers by gift of property, wherever situated, by an individual who is a citizen or resident of the United States.[xii] It applies whether the gift transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal and tangible or intangible.[xiii]
It should be noted that the gift tax is not imposed upon the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer, nor is it conditioned upon the ability to identify the donee at the time of the transfer.
On the contrary, the tax is a primary and personal liability of the donor, is an excise upon the donor’s act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable.[xiv]
The donor’s gift is complete as to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or the benefit of another.[xv]
But I Don’t Want It!
What if you already have your own stiftung when someone offers to give you theirs?
Should you be a gracious donee and accept it, knowing you can re-gift it to some unsuspecting, stiftung-less stiff later?
You may, but you’d be facing a potential gift tax liability if you do. (Keep reading.)
If a person makes a qualified disclaimer with respect to any interest in property, the gift tax is not applied with respect to such interest; it’s as if the interest had never been transferred to such person.[xvi]
The term “qualified disclaimer” means an irrevocable and unqualified refusal by a person to accept an interest in property but only if:
(1) the refusal is in writing,
(2) the writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date that is nine months after the later of:
(A) the date on which the transfer creating the interest in the person is made, or
(B) the day on which the person attains age 21,
(3) the person has not accepted the interest or any of its benefits, and
(4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either:
(A) to the spouse of the decedent, or
(B) to a person other than the person making the disclaimer.[xvii]
If a person makes a qualified disclaimer for purposes of the federal gift tax, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead, it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer.
Accordingly, a person making a qualified disclaimer is not treated as making a gift.[xviii]
Good Intentions? Not Enough
In the present case, the Foundation Council resolved “to distribute the total net assets of the [F]oundation to the first beneficiary of the [F]oundation and to bring such assets in alignment in accordance with his wishes.”
Taxpayer was identified as the “primary,” “first,” or “sole first” beneficiary. The Foundation Council acted within its authority to dissolve the Foundation and to distribute the assets of Foundation to or for the benefit of Taxpayer as the primary and sole first beneficiary.
The transfer of the Foundation’s assets held in the Bank 1 Account to the Bank 2 Account was completed at Taxpayer’s request and direction. The fact that Taxpayer had no signature authority or ownership interest in the Bank 2 Account indicated Taxpayer had released dominion and control over the Foundation’s assets held in the Bank 1 Account, and constituted a completed gift for gift tax purposes.
The transfer of the Foundation’s assets to an account in which Taxpayer had no ownership interest under applicable local law was not a qualified disclaimer under the Code because Taxpayer directed the transfer to the Bank 2 Account.
Therefore, the Foundation’s assets in the Bank 1 Account were treated as if the Foundation’s assets had been transferred to Taxpayer and then transferred by gift to the owner of the Bank 2 Account.
As a resident of the U.S. at the time of the transfer, Taxpayer was subject to gift tax on the gift transfer of the assets from the Bank 1 Account to the Bank 2 Account. Taxpayer was treated as having received the Foundation assets and thereafter as transferring such assets by gift when, upon the dissolution of Foundation, the assets were transferred at Taxpayer’s direction to an account over which Taxpayer had no ownership or control.
The dissolution of Foundation and subsequent transfer at Taxpayer’s direction of Foundation assets to an account over which Taxpayer had no ownership or control constituted a release of dominion and control over the assets, thereby resulting in a completed gift for gift tax purposes.
With that, the Office of Chief Counsel advised that the transfer of the Foundation’s assets to an account in which Taxpayer had no ownership interest under applicable local law was not a qualified disclaimer because Taxpayer directed the transfer to the account.
It’s Far from Over
I hope you’ve learned a lesson that will serve you well for many holiday seasons to come. May you use it in good health. If you accept a gift, better keep it (especially if it’s a loaded stiftung[xix]). If you don’t want it, better disclaim it in accordance with the rules described above.
If you’re like me, just tell folks you don’t want anything, that you don’t have time for such frivolity. If they really want to give you something, ask them to leave you in peace and to save you some ham.
[i] My dad passed earlier this year. We lost office colleagues and friends this year: Mike Healey and Bill Brown. It’s funny, but I still see Billy everywhere I go in the office.
[ii] No time for to read Hamlet? No problem. Try this: https://www.youtube.com/watch?v=A4elUNV65tA
[iii] Apologies, but you’re in for a number of quotations from A Christmas Carol. Trying to get into the spirits, you might say. Get it? Ha.
As for the reference to “gain,” well, that’s unique to each of us. The need to constantly prove oneself can be quite the motivator.
[iv] Damn you, Georgia. Why couldn’t you have held the run-offs before Thanksgiving? There is a chance that much of this year-end fire drill may be unnecessary. Remember 2012? Where’s Sherman now?
[v] https://www.taxlawforchb.com/2020/12/year-end-gifting-of-equity-in-a-business-with-an-outstanding-ppp-loan/ .
[vi] Probably the same folks who kept going to bars and parties when they were warned not to, or who were asked to stay home during the Thanksgiving holiday but who, instead, chose to spread this wicked virus.
[vii] Please don’t get me wrong. I am trying to be facetious. (I know, “keep your day job, Lou.”) We are grateful to have our jobs. The fact that we are this busy is amazing, considering where the economy was earlier this year. The economy has a long way to go, and there are millions of folks who are in need of assistance. This is why we have taxes. The social contract doesn’t work without them.
[viii] CCA 202045011.
[ix] It’s not what it sounds like.
[x] Reg. Sec. 25.2501-1(b).
[xi] I remember the first time I encountered such a “foundation,” which is roughly the translation of “stiftung.” Something must be wrong here, I thought; how can a Sec. 501(c)(3) organization have private beneficiaries?
[xii] Reg. Sec. 25.2501-1(a)(1).
[xiii] IRC Sec. 2511(a).
[xiv] Reg. Sec. 25.2511-2(a).
[xv] Reg. Sec. 25.2511-2(b).
[xvi] IRC Sec. 2518(a).
[xvii] IRC Sec. 2518(b).
[xviii] Reg. Sec. 25.2518-1(b).
[xix] We’ll cover your tax reporting obligations at another time.