- quote -

Good , sound answer. Unfortunately, the donor's basis in the
main tract of land & timber best is maybe $1,000. Few
generations back was purchased for "about $10 per acre" &
unfortunately always passed on for $1.00 rather than
allowing it to be inherited and stepped up to then current
market value. Of course it's also likely that they have
previously harvested timber for sale with no tax reporting,
etc. Now they think that I'm the BAD guy for "causing them
to owe taxes". Guess that comes with the hat.

Thanks

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- quote -

In this case she is unlikely to have any basis in the land
other than the recited $1 (or $10), and that only if she can
prove that she actually paid those amounts over.

The problem here, based on the facts you presented, is that,
if we respect the contracts as such, they represent a form
of prepaid compensation for services to be rendered.
Compensation for services is, obviously, generally included
in gross income for the year in which received (for a cash
method taxpayer).

Thus, if the agreements were bona fide exchanges of real
property for services, your client should have included the
fair market value of the land, less whatever cash she
actually paid, as income.

If she had actually done so, she would then have a basis in
the land equal to the amount paid, plus the amount(s)
included in income.

Assuming that the client did not include any amounts in
income, her basis would only be the amount of cash, if any,
that she actually paid over, in this case $1 (or $10); and
then only if she can prove actual payment - such recitations
are typical in most contracts, and are frequently not
followed by actual payment of cash, so the IRS may be
inclined to ignore the recitations altogether (just to add
insult to injury, because if you're in audit on these
contracts, you've got bigger problems than having the
recited $1($10) consideration respected).

Even if you were able to prevail in having the arrangements
respected as transfers of property in prepayment of
compensation for services to be rendered, you would then
face the problem of a deficiency audit for failure to
include the amounts in income, as well as the assertion of
deficiencies against the grantors for failure to recognize
and report any of the unrealized gain that was inherent in
the property when it was transferred.

The bigger problem, however, is that the "unwritten
understanding" is not likely to be respected as a binding
agreement reflecting an arms' length transfer of property in
exchange for services. You have a transfer of property
between family members, an "unwritten understanding" that
services would be provided that are indistinguishable from
the services a family member would ordinarily be expected to
provide voluntarily out of family sentiment or generosity
rather than in exchange for full payment, and, overall, an
arrangement that looks exactly like one generation
transferring property to the natural objects of its bounty
and affection - the younger generation.

What you have here is, more likely than not, a gift for
federal tax purposes - that is how the IRS and the courts
are almost certainly going to characterize the transactions.

With respect to property transferred to your client directly
from her father, that transfer is almost certainly going to
be treated as a gift. With respect to property transferred
to your client from other relatives, depending on their
relationship to the client's father, and how each relative
acquired the property in question, those transfers are also
likely to be treated as gifts.

Further, even if your client actually paid the recited $1
(or $10), that will not prevent the transaction from being
treated as a gift, instead, there will be a sale of $1's
worth, and a gift of the remaining fair market value of the
property at the time of transfer.

Your best hope at this point would be to see if there were
any way to treat the original transfers as gifts fitting
under the annual exclusion amount that applied for the year
in which the transfer was made. In that case, no gift tax
was due and no return had to be filed, so you would avoid
deficiencies for unpaid gift tax.

Beyond that, there is the possibility of the IRS asserting
deficiencies for unpaid gift tax. If any of the original
transferors is still alive, they might be able to file a
gift tax return and claim a portion of their lifetime
gift/estate exclusion amount against that part of the
original FMV of the property that exceeded the annual
exclusion amount, in which case there would only be
penalties for failure to timely file the gift tax return.

With respect to any transferor who is now deceased, any gift
tax deficiency would most likely be asserted against your
client, the donee (donees are secondarily liable for unpaid
gift tax).

At this point, you should probably develop the facts, going
back to the original transfers, on the assumption that these
were gifts and that there may be gift tax deficiencies, plus
penalties and interest, that may need to be faced.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

Anyone have good cites/authority(ies) for attributing some
value to "good & valuable consideration" on land sales?

I have a TP who acquired serveral tracts of land with timber
from father and other relatives ten or more years ago. The
Warranty Deeds reflect that ...in consideration of One (or
10) Dollar(s) and other good and valuable consideration ...
the land was transferred to TP. The unwritten understanding
was that she would continue to care for her aged father
until he died, which she did for more than 9 years after
the sale/transfer.

Not really a gift and his basis was very little.

In 2006 TP sold timber on these lands for about $40,000. We
are hoping to legitimately establish basis of more than the
One Dollar or 10 Dollars reflected on the warranty deeds for
these properties.

I'm grasping at this point for any legitimate means to
reduce her capital gains tax. Any ideas/ Help?

Thanks!

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ------------------------------------------------------- >