Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-63

1975-1 C.B. 294

IRS Headnote

State tax paid by donor on inter vivos gift. State gift tax paid by the donor on a transfer in contemplation of death, which constituted prepaid State inheritance tax after his death, created an asset for the benefit of his estate and its value is includible in his gross estate for Federal estate tax purposes.

Full Text

Rev. Rul. 75-63

Advice has been requested concerning the inclusion in the gross estate for Federal estate tax purposes, under section 2033 of the Internal Revenue Code of 1954, of State gift taxes paid [by] the donor-decedent on gifts of property later included in his gross estate as transfers in contemplation of death.

Nine months before his death the decedent made substantial gifts of property to his children. By reason of these inter vivos transfers, the decedent became liable for State gift taxes. Several months prior to his death, the decedent filed the State gift tax return and paid the taxes shown hereon to be due.

After the decedent's death, his executor filed a State inheritance tax return in which the value of the gifts was included as part of his gross estate as property transferred in contemplation of death. The gross amount of the State inheritance tax found to be due was satisfied partly through an allowable gift tax credit for the State gift taxes paid by reason of the gifts. The remainder was paid in cash. Under the applicable State law, any gift tax paid on a gift that is included in the donor-decedent's gross estate constitutes an advance payment of State inheritance tax.

The value of the donated property was also includible under section 2035 of the Code as a part of the decedent's gross estate for Federal estate tax purposes. A State death tax credit authorized by section 2011 of the Code was allowable against the Federal estate tax, in the gross amount of State inheritance tax before the application of the State gift tax credit, upon certification by the State taxing authority that such gross amount had been paid on behalf of the decedent's estate. See Rev. Rul. 71-355, 1971-2 C.B. 334.

Section 2033 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. Under section 2053(c)(1)(B), death taxes may not be deducted in determining the value of the decedent's taxable estate.

If an inter vivos transfer originally subject to a State gift tax is ultimately subject to an inheritance tax, the gift tax credit provisions contained in the State's law make the payment of such gift tax tantamount to a prepayment of, or a down payment on, the inheritance tax. Commonwealth, Department of Taxation v. Lewis, 208 Va. 221, 156 S.E. 2d 589 (1967); In re Estate of Kirshbaum, 268 Cal. App. 2d 155, 73 Cal. Rptr. 711 (1968); cf. McGill v. Oklahoma Tax Commission, 258 P. 2d 1180 (1953); In re Estate of Shivers, 105 N.J. Super. 242, 251 A. 2d 771 (1969). An inheritance tax is not a property tax imposed upon a decedent's entire estate and the estate is not primarily liable for its payment; rather, an inheritance tax is a separate succession tax levied against each of a decedent's beneficiaries (or transferees) for the privilege of receiving a share of his estate, either by inheritance, by testamentary disposition, or by certain inter vivos transactions that are regarded by the law as taking effect in possession or enjoyment at the death of the transferor.

If the value of property subject to an inter vivos transfer is later included in the donor-decedent's estate, then the State gift tax liability that arose at the time of the inter vivos transaction is only a contingent liability of the donor that disappears upon his death and reappears as a post-death inheritance tax liability of the transferee(s) of the property. See McGill, above. By reason of the privity that exists between the decedent and the transferee of his property, a gift tax payment made by the decedent that becomes a prepayment or downpayment on the inheritance tax liability of his beneficiary constitutes an asset created by the decedent during his lifetime that inures to the benefit of his estate after his death.

A chose in action created by a decent during his lifetime in favor of, and for the benefit of, his estate is includible in the gross estate as property owned by the decedent at the time of his death. Estate of Carrie V. Pratt, 1 CCH Tax Ct. Mem. 627 (1943), petition for review dismissed (2d Cir. 1944). In Pratt the decedent created during her lifetime an otherwise nontaxable trust under the terms of which she directed the trustees to turn over to her executor any amount up to $50,000 necessary to pay State and Federal death taxes. The court concluded that the result of this arrangement was to give to the decedent's estate the benefit of whatever value the claim against the trustee had at her death. This amount was held to constitute an asset includible in her gross estate. Similarly, in those jurisdictions where the lifetime payment of State gift taxes on the transfer of property subsequently included in the donor's gross estate constitutes a prepayment of inheritance taxes, such prepayment by the donor creates an asset the value of which accrues to his estate upon his death.

A donor-decedent who makes a taxable inter vivos gift depletes his estate not only by the amount of the gift, but also by the amount of the gift tax paid by him prior to his death. Where the value of the donated property is later included in the donor-decedent's gross estate by reason of the nature of the transfer, and the State gift tax paid qualifies as a State death tax that, in turn, is allowable as a credit against the Federal estate tax under section 2011 of the Code, the failure to restore the amount of the State gift tax payment to his estate would be tantamount to the allowance of both a deduction and a credit for State death taxes paid. This is a result that Congress clearly intended to avoid by enacting section 2053(c)(1)(B) (which proscribes the deduction of an estate, succession, legacy, or inheritance tax from the gross estate).

Accordingly, the donor-decedent's lifetime payment of State gift taxes on the inter vivos transfers of property later included in his gross estate as transfers in contemplation of death, which payment constituted a prepayment of the State inheritance tax, created an asset for the benefit of his estate, the value of which is includible in his gross estate for Federal estate tax purposes under section 2033 of the Code.