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Gifts made in contemplation of death

Actually, Ms. Gerstner is kinda wishy-washy on the subject. I have seen her papers. In the article you cited, she says, "In general, lottery winnings are taxable to the recipient as ordinary income when received." However, in this article

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She states just the opposite, "What if a taxpayer unduly delays claiming his/her winnings? If a taxpayer wins the lottery in September 2003, and delays claiming the prize until January 2004, the Service would probably include the winnings in 2003 income unless a "substantial" limitation or restriction caused the delay in collection"

Both papers conflict with each other. Both papers contain vague qualifiers such as ?probably? and ?In general?. Neither contains a definitive position on the issue.

I, on the other hand, content that constructive receipt never happens before the lottery ticket is presented to the lottery commission, regardless of the time lag involved. That was the point that I was trying to make. I merely presented an off-the-wall example to illustrate the absurdity of attaching constructive receipt at the time of the drawing. If constructive receipt happens when the lottery commission writes a check, all those questions are easily answered, even by an enrolled agent.

Here is a true example: In 2012, the Ashkar brothers of Syracuse, New York, presented a five million dollar winning scratch ticket purchased in 2006. The Ashkar brother openly admitted to postponing the collection of the winning prize "for personal reasons". Conspicuously absent from all the news articles was any mention of the failure-to-file penalties. If the three million lump-sum winnings had been constructively received in 2006 (as you tax experts claim), the failure-to-file penalty would have been a whopping $300,000, give or take. Not relevant to this discussion is the fact that eventually, the brothers were indicted for fraud for stealing the ticket from someone else.

Reply to
NadCixelsyd
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I can answer the questions that I posed very easily:

Answer: Linda would pay no taxes because constructive receipt had not attached to her winnings before she lost the ticket.

Answer: No, Linda would owe no tax because she didn't have any income.

Answer: Both the federal and Massachusetts withholding would have been credited to her 2014 account because that's when the taxes were withheld and that's when constructive receipt occurred.

Reply to
NadCixelsyd

Our assets are half in my name and half in my wife's. We each leave our assets to our sons in a trust. Our lawyer explained that federal estate tax exemption is portable, but state tax is not. Since the state tax exemption is very low and the tax is graduated, it is essential to do it this way to leave 2 small estates instead of one big one.

But the assets have some pretty significant appreciation. If we held them jointly and the basis got stepped up when one of us died, then we might actually save money; as income tax saved by getting them stepped up might actually exceed the money lost on the increased state estate tax. (or it might not; it will require some analysis and and guesses about timing...)

Before I look into the numbers I want to make sure I have the concept right. Thanks.

Reply to
Troubled

This again? No, sorry, you're wrong.

One court said of constructive receipt,

"income is recognized when a taxpayer has an unqualified, vested right to receive immediate payment. [Citations]. Normally, the constructive receipt doctrine precludes the taxpayer from deliberately turning his back on income otherwise available. [Citations]. "

AMES v. COMMISSIONER OF INTERNAL REVENUE, 112 T.C. 304, 312 (1999).

Another court, a federal appeals court, quoted IRS regulations on constructive receipt with approval:

"[i]ncome although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions."

26 C.F.R. ? 1.451-2(a), quoted in JOMBO v. C.I.R., 398 F.3d 661, 664 (D.C. Cir. 2005).

If someone has a winning lottery ticket, and they could reasonably send it in and get the money before the end of the year, there is contructive receipt irrespective of when they actually get the money.

Reply to
Stuart Bronstein

On that you are completely incorrect. In response to another of your posts I cited and quoted two federal court cases that show how wrong you are on this. You asked for citations, now you have them.

Reply to
Stuart Bronstein

You seem to be confusing income tax with estate tax.

What exactly is your question? In your example you suggested a reverse gift in contemplation of death, so gifted stock would come back to the donor as an inheritance and with a stepped up basis.

The general rule is that if propety is included in the taxable estate of the decedent for estate tax purposes, it gets the stepped up basis.

But if the estate is so small that there is no estate tax, and it appears to be a scheme to evade income tax, the IRS could ignore the gift under either the economic reality or step transaction doctrines.

You did not indicate whether the couple lives in a community property state, which would eliminate any ambiguity, so I assume they do not.

Reply to
Stuart Bronstein

I'm sorry for not being clearer. I am not the OP; I was asking an entirely different question based on a reply the OP got.

I just want to ascertain that if my wife and I had a joint account rather than individual accounts, the survivor would get a stepped up basis on the joint account. That doesn't really make sense and I just want to be sure I understood it properly.

If it is correct, the income tax savings might be worth more than the estate savings on two individual accounts.

Reply to
Troubled

If you are in a community property state and what is in the account is community property, then the entire account will get a stepped up basis when one spouse dies. Otherwise it will get a stepped up basis to the extent the deceased spouse will be considered as contributing - usually half.

If you want to try a reverse gift in contemplation of death to increase basis, don't expect it to work if you are audited.

Estate tax is often at a higher rate than income tax. However with the unlimited marital deduction and $5+ million per person exemption, the estate tax won't bite many people.

Reply to
Stuart Bronstein

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