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Tax Law Update: December 2019

David A. Handler and Alison E. Lothes highlight the most important tax law developments of the past month.

• Recipients of real estate personally liable for gift tax—In U.S. v. Estate of Elson, Civ. No. 18-11325, (D. N.J., Oct. 9, 2019), Sidney Elson made gifts of real estate in 2004 to two individuals. He didn’t file a gift tax return at that time, nor did he do so in 2006, the year of his death. In 2009, the executor of his estate (who was also one of the gift recipients) filed a late gift tax return. The Internal Revenue Service audited the return and found that it failed to disclose other gifts and assessed additional gift tax. While some payments were made, as of 2017, over $680,000 was still owed.

The IRS filed a complaint against the recipients of the gifts, asserting that they were liable for the unpaid gift tax under Internal Revenue Code Section 6324.  The defendants argued that the statute of limitations had run, and the assessment was time barred.

Under IRC Section 6324, a lien in the amount of the unpaid tax attaches to all gifts made during the period for which a return is filed but for which the tax is unpaid, for a period of 10 years from the date of the gift. The court agreed with the gift recipients that the lien had expired. However, Section 6324 also imposes personal liability on the recipient of a gift for gift tax not paid when due, up to the value of the gift. Section 6324 isn’t clear regarding the statute of limitations applicable. The defendants argued that the same 10-year period for the lien applied to the personal liability of the gift recipient. However, the court disagreed and held that the statute of limitations applicable to personal liability was distinct from the provisions relating to liens. It held that because the IRS assessed additional gift taxes in 2011 (within three years of the filing of the gift tax return in 2009), it had 10 years from the date of the assessment to commence an action to collect under Section 6502, which it did. The defendants argued that the IRS assessment against the estate in 2011 wasn’t sufficient to start the limitations period with respect to a claim against them individually, as gift recipients. However, based on statutory interpretation and case law, the court disagreed and held for the IRS. 

• IRS releases 2020 inflation adjustments—In Revenue Procedure 2019-44, the IRS has released the official inflation adjustments for 2020, and the adjustments relevant to estates, trusts and gifts are all as expected.

For an estate of any decedent dying in calendar year 2020, the basic exclusion amount will be $11.58 million for determining the amount of the unified credit against estate tax under IRC Section 2010.  The exemption for generation-skipping transfer tax, which is determined by reference to the unified credit, will also be $11.58 million.

The annual exclusion will remain the same as in 2019: The first $15,000 of qualifying gifts to any person is excluded from the calculation of taxable gifts under IRC Section 2503 made during that year. 

For calendar year 2020, the first $157,000 (up from $155,000) of qualifying gifts to a spouse who isn’t a U.S. citizen (other than gifts of future interests in property) will be excluded from the total amount of taxable gifts under Sections 2503 and 2523(i)(2) made during that year. The special use valuation limitation will be $1.18 million (up from $1.16 million). The IRC Section 6166 2% portion will be $1.57 million (up from $1.55 million).

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