Trying to Focus--Gift Tax & Dependents

snipped-for-privacy@verizon.net (Phil Marti) posted:

Indeed, a seeming contradiction. However, if they're a dependent, how can one limit the cost of such dependency?

Rephrasing, if you pay your dependent's tuition to some high-priced colleges, you may incur an annual expense that exceeds the $12,000 limit on that item alone -- and that ignores food, housing, etc.

At what point does an expense become a gift?

What? We should now start to look for logic in tax laws and regulations?

Bill

That specific example, along with the dependent's medical expenses paid directly to the providers, doesn't affect gift tax as long as the tuition payment was made directly to the institution. Both are specifically exempt from gift tax.

See Dickman vs Comm'r, 465 U.S. 330 (1984).

This is the case where the 11th Circuit reversed the Tax Court and ruled that intra-family interest free loans were taxable gifts. The Supreme Court upheld the 11th. (BURGER, C. J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, BLACKMUN, STEVENS, and O'CONNOR, JJ., joined. POWELL, J., filed a dissenting opinion, in which REHNQUIST, J., joined.)

One of the arguments raised by Greene dealt with the contention that imposing a gift tax on interest-free loans could result in imposing the tax on routine neighborly or familial gifts, thus intruding into cherished zones of privacy.

The court responded:

"Our laws require parents to provide their minor offspring with the necessities and conveniences of life; questions under the tax law often arise, however, when parents provide more than the necessities, and in quantities significant enough to attract the attention of the taxing authorities. Generally, the legal obligation of support terminates when the offspring reach majority. Nonetheless, it is not uncommon for parents to provide their adult children with such things as the use of cars or vacation cottages, simply on the basis of the family relationship. We assume that the focus of the Internal Revenue Service is not on such traditional familial matters. When the Government levies a gift tax on routine neighborly or familial gifts, there will be time enough to deal with such a case.

Moreover, the tax law provides liberally for gifts to both family members and others; within the limits of the prescribed statutory exemptions, even substantial gifts may be entirely tax free. First, under Section 2503(e) of the Code, 26 U.S.C. Section

2503(e) (1982 ed.), amounts paid on behalf of an individual for tuition at a qualified educational institution or for medical care are not considered "transfer[s] of property by gift" for purposes of the gift tax statutes. More significantly, Section 2503(b) of the Code provides an annual exclusion from the computation of taxable gifts of $10,000 per year, per donee; this provision allows a taxpayer to give up to $10,000 annually to each of any number of persons, without incurring any gift tax liability. /8/ The "split gift" provision of Code Section 2513(a), which effectively enables a husband and wife to give each object of their bounty $20,000 per year without liability for gift tax, further enhances the ability to transfer significant amounts of money and property free of gift tax consequences. /9/ Finally, should a taxpayer make gifts during one year that exceed the Section 2503(b) annual gift tax exclusion, no gift tax liability will result until the unified credit of Code Section 2505 has been exhausted. /10/ These generous exclusions, exceptions, and credits clearly absorb the sorts of de minimis gifts petitioners envision and render illusory the administrative problems that petitioners perceive in their "parade of horribles.""

I know of no other case that has addressed this issue other than a really really really old case in the Ninth Circuit. Comm'r vs Greene (41 B.T.A. 515). A trustee of an estate of a woman that had been declared incompetent had to provide support & maintenance to the woman's older children (they were in their

40s) by state court order. The Ninth Circuit said that a gift was a transfer for less than full and adequate consideration. They found nothing in section 503 (this was the relevant section in the Revenue Act of 1932) to imply that state law should be used to define "consideration." They said that the gift tax reaches all transfers where the consideration is not reducible to money or money's worth. They also added that there was no requirement for donative intent under section 503.

I'm the one who asked the original question, and we have a few experts working it. Indeed, even though you may be able to cliam an individual as a dependant for income taxes, that does not mean that the money you use to support them is not subject to gift tax. Anyone you are not legally REQUIRED to support that you give financial support to is considered a gift. So, you 19 year old child, any support is a gift. Legally you can kick them out at 18. Tuition and medical are exempt, but everything else counts.

Thank you very much to all who contributed here.

Not going to jail (for violating the state court order) wasn't considered adequate consideration?

Seth

What is the URL? All I could find was , and it does not have the word "interest- free", or "Our laws require parents" in it.

Go to

and enter the citation 465 US 330 and click Get It.