Discussion on Taxes Question

Did you know that to give or receive a large gift could have consequences in terms of taxes? Yes, even in gifts! Throughout the paper two core cases Crummy vs Commissioner and Mikel vs Commissioner and an article in the Wall Street Journal " A Way to Make Big Gifts to Family Without Tax" by Laura Saunders the topic gifts will be addressed in different levels.

According to the IRS, a gift is considered "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

" Meanwhile, the person( also known as the Donor) who gives the gift is the responsible for paying the Tax Gift, and the amount of tax due is based on the value of their gift. Yet, the recipient (also known as the donee) of the gift is usually not the one responsible for paying the gift tax. In some instances there are cases in which if the donor fails to complete the tax payment on the gift, in those cases the donee may have to do so.(1)

Why was the Gift Tax implemented? According to the IRS, "The gift tax was implemented in order to stop people from dodging the Estate Tax by giving away all of their money before death. While most individuals don't need to worry about having to pay the gift tax, there are a lot of people who neglect to file the proper paperwork." The IRS has made an extensive emphasis and effort to make the US population aware of the "must know" rules regarding Gifts Tax. The first point to take into consideration is, "Gifts to Family Members Count"; the gift tax applies in its entire power on every family, regardless, unless spouses. The only case where giving a gift is exempt from taxes is when the donee is a spouse of the donor; then it qualifies for the marital deduction. The second rule to acknowledge is, "There Is an Annual Gift Tax Exclusion". For the year 2018, the annual exclusion is $14,000 per recipient. In simplified terms, if a donee gives 14,000 to each of their own children this year, no gift tax payment would be due. However, another acknowledgment to take into consideration is that "You May Need to File a Gift Tax Return (Form 709)".

Generally, if a doner gave someone more than 14,000 dollars during the year a Federal gift tax return (IRS Form 709) must be filed.  According to the IRS, "Only individuals are responsible for filing gift tax returns — corporations or trusts that make gifts will pass the filing and payment responsibilities onto their individual stockholders or beneficiaries. Additionally, a married couple cannot file a joint gift tax return." (1)     "Married Couples Can Give Twice As Much" is a concept in which spouses can each donate up to $14,000 to the same recipient and not exceed the annual exclusion cap. Therefore this means a married couple can give up to $28,000 to each donee without having to abide by gift tax. The "basic exclusion" otherwise known as the unified credit depicts both the lifetime gift tax exemption and the estate tax exclusion, which accumulates to a total of $5.34 million. The current law set by the government states individuals may give away up to $5.34 million throughout their lifetime and not be forced to pay gift or estate taxes. However it is important to note that any amount that is declared in avoiding the gift tax can decrease the amount that is exempt from the estate tax. It is important to note that if the donor exceeds the $5.34 million limit the donor or the heirs; a tax up to 40% will have to be paid.(1)

On June 25, 1968, at the United States Court of Appeals within its Ninth Circuit the Crummey family disputed gifts and trusts against the Commissioner of Internal Revenue Services (IRS). This case would later affect a great deal of the taxation regarding gifts and set a precedence in the Mikel v. Commissioner case. According to Steven J. Willis, on February 12th 1962, the Crummey family made a living trust intended to benefit their four children; the case focuses on the taxes that were filed between the years 1962 and 1963. Both Mr. and Mrs. Crummey filed for a gift tax return for both years; they claimed 3,000 dollars in exclusion for each year as they stated it fell under the provision of  26 U.S.C ?§ 2503. However, the Commisioner of the IRS stated that they were only to be granted 3,000 between both petitioners for each year. The reason that the IRS decided that the Crummeys were entitled to only one portion is because their beneficiaries under 21 would be considered to be future interest. This means that if a beneficery is under 21 they are disallowed under ?§ 2503(b). In turn, this means that the gift return tax is only intended to be meant to donee's that are of present interest.(2)

This case established many points that would later effect the outcome of petitioners granting gifts in relation to tax returns. During the course of the court case the Tax Court found that the Crummey's were entitled to an additional 3,000 dollar exclusion in the year of 1962. The court found that the IRS was correct in granting a return for the children over 21 and due to the fact that the child under 21; but 18 years old in the state of California due to rights of a person above 18 was deemed to be of present interest. This case established that it is up to the court; not the IRS to determine if a minor donee can use the gift in present time. Further, it means that a minor can not be considered future interest just based on their minor status. Ultimately, this states that under the provisions of a trust; income can not be accumulated until the minor is of 21 years or older. This does not apply when the donor can prove that the minor is in need of the gift before the age of 21. Overall, the court  decided in the favor of the Crummey family; stating that due to the nature of the law in the state of California and the inability to prove that the children under 21 were to be of future interest the court awarded the 3,000 gift tax return in the years of 1962 and 1963. The case of Crummey v. Commissioner  would later established the bases for the case of Mikel v. Commissioner. (3)

In 2007, the Mikel family also challenged the gift tax exclusion 2503(b). In the year 2007 the maximum federal gift tax exclusion limited the donors to 12,000 dollars per spouse. The family gifted 60 beneficiaries four total properties; three in Brooklyn and one in Florida that totaled to a property value of 3,262,000 dollars with a withdrawal limit of 24,000 dollars. The Mikel family petitioned for 1,440,000 of gifted property which upon the original value should qualify under the exclusion gift tax. The greatest point of contention is that although the properties were illiquid many of the 60 beneficiaries were minors or spouses of the family; meaning the trust has an forfeiture clause due to the complication of religious binding in arbitration panel. The trust was constructed in a similar manor to the Crummey trust established in 1962. The trust stated that a trustee had to give notice of the withdrawal rights within 30 days and the trustee is allowed to further distribute the cash or the property in order to satisfy their own needs. Further, the trust included a clause in the context of saving and construction in the intent to qualify for the federal tax annual exclusion. The case although on a grander scale was able to be argued by the Mikel family due to the Crummey v. Commissioner case. The tax court awarded the gift tax exclusion to the Mikel family; this is highly against previous decisions by the IRS. The case is very important because it allows for future opportunities to exploit a "Crummey Trust" and allows for the limit of an annual exclusion gift to be 50,000 dollars per donor no matter the number of beneficiaries. The court ruled in the Mikels favor because they found that the beneficiaries had a present future in the property and their withdrawal demand was approved and not denied by the donors. Once again, due to the inability to prove that the trusts were not in future interest the Mikel family was ultimately awarded the gift tax exclusion.(4)

In the article "A Way to Make Big Gifts to Family Without Tax" by Laura Saunders it discusses the correlation between the Crummey v Commissioner and Mikel v Commisioner cases. The article addresses the importance of the Crummey case in relation to modern day gift tax exclusion. As Sanders states the Crummey ruling established the Crummey trust which allows for donors to gift a beneficiary including any minor and still count as a tax free gift.The important factor that derived from the cases is that their beneficiaries have a right to withdrawal the funds in a 30 day to 60 day range.The Mikel's case as Sanders stated  was a smart tax maneuver and due to the previously established provisions of the Crummey trust was awarded in their favor. The Mikel's case was important as it was a large landmark in a recent trend in the upswing of pro-taxpayer ruling court cases against the IRS. The Mikel's in the eyes of Sanders were able to gain the gift tax exclusion due to the fact that minor and spouse beneficiaries were protected under the Crummey Trust provisions.

However, the article makes a good point in the fact that the Mikel cases added one more variable. The family included a clause known as the terrorem clause or otherwise known as the no-contest clause. This clause states that there is a threat to deny the gift or benefits to the beneficiaries who decide to challenge the trust through the use of a lawsuit. The tax court ruled as the article states in favor of Mikel's because they were able to dispute,he IRS over a discretionary payout by the trustees. The IRS felt that the clauses made 1.6 million in transferable taxes; which then would not be considered in the gift tax exclusion. Ultimately, the article states that for people who are considering to set up gift trust such as the families of Mikel and Cummey they should decide if it is better to divide the money into one beneficiary or many.Another point to consider is to make such financial decisions when/if there is a couple in the position to donate that both should be alive when establishing the trust in order to receive a full tax exclusion.(5)

In conclusion, in the context of the cases of Crummey v Commissioner and Mikel v Commissioner the court rulings have set a new gift tax exclusion criteria. The Crummey case ultimately has laid the ground work for future families to be able to gift beneficiaries especially minors large sums without the repercussion of taxes. The outcome of both cases to be ruled in the favor of the donor's and not the IRS was surprising. However, I believe that the court made the right decision as the IRS should not be able to deem the status of a minor present or future intent. It does beg the question if the establishment of the Crummey case allows for people to maneuver the system in the future and allow donors to have an exclusion from gift tax based on the inability of the IRS to prove the future interest. The Mikel case adds to this ability to avoid paying gift tax by distributing to multiple beneficiaries. This could mean that future donors could distribute large sums of money and property by "abiding" of moving assets through the umbrella of the provisions set by the Crummey and Mikel cases. Overall, the cases provided an outlook and a better understanding of how to receive a gift tax exclusion in a world where almost everything and anything is taxed.

References

1. 7 Things You Should Know About Gift Tax. (2014, October 07). Retrieved from https://www.irs.com/articles/7-things-you-should-know-about-gift-tax (1)
2. Top100Cases Crummeyed. 2009.(pdf) Retrieved December 12 2018 from http://nersp.osg.ufl.edu/~acadian/poland/2009/Top100Cases/crummyC/Crummeyed.pdf(2)
3. Browse cases. (n.d.). Retrieved December 12, 2018, from https://casetext.com/case/crummey-v-cir(3)
4. (n.d.). ISRAEL MIKEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ERNA MIKEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Retrieved December 12, 2018, from https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6532921 (4)
5. Saunders, L. (2015, May 22). A Way to Make Big Gifts to Family Without Tax. Retrieved from https://www.wsj.com/articles/a-way-to-make-big-gifts-to-family-without-tax-1432311083 (5)

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