Stuart A. Bronstein wrote:

- quote -

I must beg to differ with Stu.

First of all, the court in the case cited by him (Citizen's
Natl. Bank of Waco v. United States 417 F.2d 675 (5th Cir.
1969)) makes the following statement:

"The Commissioner apparently did not contest the actual
basis used by the trustee in computing the gain realized by
the trusts in the instant case. As a result, we do not have
before us on this appeal the question of whether or not
Treas. Reg. §1.1015-4 properly implements the principal
function of the statute." The case is concerned with the
tacking of holding periods for determination of whether gain
is long term or short term. That makes any discussion of
1.1015-4 in the case dicta and not precedent setting.

Even tossing out that fact, the quote that Stu made from the
case misrepresents what the court actually said. Here's the
full quote from that paragraph:

"We note that §1015(a) dealing with gifts provides that the
transferee's basis for determining gain "shall be the same
as it would be in the hands of the donor." Subsection (b)
dealing with sales to trusts provides that the transferee's
basis "shall be the same as it would be in the hands of the
grantor increased in the amount of gain or decreased in the
amount of loss recognized to the grantor on such transfer."
Thus both subsections (a) and (b) require the transferee to
determine his basis at least in part by reference to the
transferor's basis. Nevertheless, regulation §1.1015-4
provides that if the transfer is part a gift and part a
sale, then the transferee must determine his basis by the
price paid if that amount is greater than his transferor's
basis. On its face, the regulation seems to be introducing a
concept, price paid, not found in either subsection of the
Code. However, upon closer examination it appears that
"price paid" is not really at total variance with the Code.
Indeed, the "price paid" method will always produce the same
dollar amount as will "the grantor's basis increased in the
amount of gain or decreased in the amount of loss recognized
to the grantor," the method prescribed in subsection (b) of
the Code. The two phrases express identical amounts in
different words. Therefore, insofar as the primary function
of §1015 is concerned, the change in terminology makes no
change in result. The transferee's actual basis will be the
same, regardless of which method is used to make the
computation. However, the change in terminology is quite
significant insofar as it affects the incidental function of
§1015, which is the determination of whether or not the
transferee is eligible to tack his transferor's holding
period. As this case illustrates, by the mere change in
words the regulation cuts off the transferee's right to tack
whenever, as here, the price paid is greater than the
transferor's basis."

The court here is finding that the language in Reg 1.1015-4
means exactly the same thing as the language in the code.
The court did not find any conflict in the language, and
certainly did not declare the regulation to be invalid.

--Chris

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- quote -

But if the parents sold it for FMV, there would be a taxable
gain of $100,000. The Capital Gains Tax on the other
$50,000 seems to have disappeared. That doesn't seem
likely. (Assume it's not a their residence, so the
exclusion doesn't apply; or use a stock holding instead.)

Seth

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"cballard[at]tyyni.net" <cballard[at]tyyni.net> wrote:

- quote -

One court (Citizen's Natl. Bank of Waco v. United States 417
F.2d 675 (5th Cir. 1969)) says that under IRS §1015 the
basis must be based on the basis in the hands of the donor.
They interpret 1.1015-4 as meaning the same thing as
§1015(b): "the basis shall be the same as it would be in the
hands of the grantor increased in the amount of gain or
decreased in the amount of loss recognized to the grantor on
such transfer under the law applicable to the year in which
the transfer was made."

That is that the basis starts out as the basis of the donor.
And if it is only part gift the basis is increased by the
amount of gain recognized.

In short, the either/or approach by the regulation is
inconsistent with the specific language in §1015(a) which
says, "shall be the same as it would be in the hands of the
donor...." As a result it is not enforceable.

Stu

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Seth Breidbart wrote:
- quote -

They didn't sell a house for $150,000. They sold 1/2 a house
for $150,000. Their basis in that 1/2 is $100,000.

I wouldn't mind being wrong on this position.

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- quote -

Seth has been correct in this entire discussion. When in
doubt, check the regulations -- in this case Reg 1.1015-4.

In the case of a part gift, part sale, the regulation says
that, for the purposes of determining gain, the transferee's
basis is the larger of: (i) the amount paid by the
transferee, or (ii) the transferor's basis. For the
purposes of determining loss, the transferee's basis is the
smaller of: (i) the basis used for determining gain, or (ii)
the fair market value of the property at the time of the
transfer.

Reg 1.1001-1(e) addresses things from the transferor's
perspective. The transferor in a part gift, part sale
transaction must recognize gain to the extent that the
amount paid to the transferor exceeds the tranferor's basis.
The transferor is not allowed to recognize a loss in a part
gift, part sale transaction.

--Chris

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- quote -

It doesn't. The parents have a NONDEDUCTIBLE $50,000 LOSS on
the sale, and file a Gift Tax return on the $150.000
(-$24,000) gift. The child, if the house is sold immediately
for FMV, would have a $50,000 GAIN on the sale.

($300,000 sale - $250,000 basis) = $50,000 gain.

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- quote -

No, A has a capital gain of $2500. It's like selling half
for market value and giving the rest as a gift.

Stu

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- quote -

The parents bought a house for $200,000 and sold it for
$150,000 and have a *gain*? How does that work?

Seth

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- quote -

A buys stock for $5,000. It goes up to $10,000. A sells it
to B as a gift for $5,000. A has no Capital Gains tax. B
paid $5,000 and received a $5,000 gift. Your calculation
says that B's basis is $7,500 (A's cost of the 50% that's a
gift, plus B's payment). B sells the stock; total Capital
Gains is only $2,500.

That still avoids tax; Capital Gains should be on $5,000.

Seth

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- quote -

It's not because you have it wrong.

If someone pays $100 for stock worth $10,000 he is paying
for one percent and the other 99 percent is a gift. His
basis is $999 (what the donor paid for the 99% that was a
gift) plus $100.

Stu

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- quote -

I misspoke. The child's basis is the amount paid plus the
parent's basis in the part gifted. Using your numbers, the
child's basis would be $150,000 (for the half interest
purchased) + $100,000 (the donor's basis in the half
interest gifted) = $250,000.

The parent would have a $50,000 gain to report on the sale
and a $150,000 gift return item to report.

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- quote -

Carefully reading both responses above (Bill and Seth), I
have to disagree with both of them. Using the same $300,000
home, the recipient pays $150,000 and gets a gift of the
other $150,000 value. The donors cost basis in the "gifted"
half is $100,000. Add that to the "purchased" half and you
get an adjusted cost basis of $250,000. If this house were
then sold for FMV ($300,000), there would be a capital gain
of $50,000. The donor, of course, would be subject to Gift
Tax reporting on the $150,000 gift.

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- quote -

If true, that would be a great way to avoid some amount of
Capital Gains tax. You buy stock for $1,000, it goes up to
$10,000, and you sell/gift it for $100. The amount of the
gift is $9,900, so if the recipient's basis is as you claim,
they can sell it for $10,000 and there's no capital gains
tax. Meanwhile, you don't have any capital gains tax to
pay, taking a non-deductible $900 loss; nor is the gift
large enough to trigger a gift tax.

Therefore, it can't be the case.

The basis of the recipient is the _larger_ of the basis of
the donor or the amount paid, not their sum. That way, the
full increase is subject to Capital Gain Tax (perhaps partly
by each of the parties, as it would be if the stock were
sold/gifted for $5,000).

Seth

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wrote:

- quote -

Why not?

- quote -

If he bought from a stranger, the price he paid is Fair
Market Value by definition.

Seth

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"SMF" <smfwdf[at]comcast.net> wrote:
- quote -

As someone else mentioned, it would come under §2036, which
says that the parents are treated as the owners when they
die, it is included in their taxable estate for estate tax
purposes, and the basis is stepped up to the value on the
date of death.

Stu

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:
- quote -

The IRS can get it from the recipient.

- quote -

If he lived there for two years out of the five before sale,
I agree with you.

Stu

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- quote -

It's a gift even if a gift tax return was not filed. The
effect is that the statute of limitations never runs on the
return, and the value of the property will be pulled back
into the parents' estate, though that is unlikely to result
in a stepped up basis.

I don't remember off the top of my head if the value
included in the estate will be the value on the date of the
gift, or the date of death.

Stu

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Seth Breidbart wrote:
- quote -

The child's basis is the amount paid + the amount of the
gift. Using your $300,000 house as an example, the child's
basis would be $150,000 (cash paid) + $150,000 (the amount
of the gift).

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Paul Thomas, CPA wrote:
- quote -

What if the parent lived in the house until they passed in
2005? Hopefully that changes things....tax wise that is..
Thanks

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- quote -

If the parents didn't file a proper gift return, I don't see
that the son could use their basis. If he bought a house
from a stranger at a bargain price, his basis is the
(bargain) sale price. I understand that dealing with a
relative has its own set of tax concerns and warnings. So
where is the gift aspect accounted for?

JOE

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