Rev. Rul. 84-11

1984-1 C.B. 201.

                       Internal Revenue Service
                                 Revenue Ruling

                      UNIFIED CREDIT;  ADJUSTMENT TO VALUE

                          Published: January 16, 1984

SECTION 2505. - -UNIFIED CREDIT AGAINST GIFT TAX

(Also Sections 2501, 2504; 26 CFR 25.2501-1, 25.2504-2.)

  Unified credit;  adjustment to value.  A donor's use of the unified credit does not result in the payment or assessment of the gift tax which would preclude the subsequent adjustment to the value of the gift.

ISSUE

  Does a donor's use of the unified credit under section 2505 of the Internal Revenue Code result in a payment or assessment of gift tax that would preclude an adjustment to the value of the gift under section 2504(c)?

FACTS

  In December 1977, D, the donor, made a gift of stock to A.  D made no other gifts during that calendar quarter.  On April 15, 1978, D filed a gift tax return reporting the fair market value of the gift to be $123,000.

  The annual exclusion was allowable under section 2503 of the Code.  Therefore, the return indicated a tentative gift tax liability of $29,800 which was fully offset by the unified credit.

  In 1982, D made a gift to B of $230,000.  Upon audit of the gift tax return filed for 1982, an adjustment was made to increase the value of the 1977 gift to reflect the correct fair market value of the stock at the time of the gift. Although no gift tax could be assessed for the gift to A because the period of limitations on assessment had expired, the adjustment increased the aggregate sum of D's taxable gifts.  Therefore, the rate of tax applicable to the 1982 gift was increased.  D contended that the adjustment was barred by section 2504(c) of the Code because, since the unified credit was used, a tax was assessed or paid for the

1977 gift.

LAW AND ANALYSIS

  Section 2501 of the Code as amended by the Economic Recovery Tax Act of 1981  (the Act), imposes a tax for each calendar year on the transfer of property by gift during the calendar year.

  Section 2502 of the Code, as amended by the Act, provides, in general, that the tax imposed by section 2501 shall be an amount equal to the excess of--

    (1) a tentative tax on the aggregate sum of the taxable gifts for the calendar year and for each of the preceding calendar periods, over

    (2) a tentative tax on the aggregate sum of the taxable gifts for each of the preceding calendar periods.

  Section 2505(a) of the Code, as amended by the Act, allows a credit of  $192,800 against the gift tax imposed by section 2501. The credit is reduced by the sum of the amounts allowable as a credit to the individual for all preceding calendar periods. Section 2505(b) provides that the amount of the unified credit is phased in over several years.  The maximum amount of the unified credit available for gifts made after December 31, 1981, and before January 1, 1983, is $62,800.  In the case of gifts made after June 30, 1977, and before January 1, 1978, the maximum amount of unified credit available is $30,000.  Further, because the unified credit is mandatory any unified credit that is allowable must be applied to the extent of gift taxes that are imposed under section 2501. Rev. Rul. 79-398, 1979-2 C.B. 338.

  Section 2504(c) of the Code, as amended by the Act, provides that, if the time has expired within which a tax may be assessed on the transfer of property by gift made during a preceding calendar period, and if a tax has been assessed or paid for such preceding calendar period, the value of the gift shall, for purposes of computing the tax for any calendar year, be the value of the gift which was used in computing the tax for the last preceding calendar period for which a tax was assessed or paid.

  Explaining section 2504(c), H.R.Rep. No. 1337, 83rd Cong., 2d Sess. 93, A 322 (1954) states:

  Subsection (c) of this section will prevent the value of a gift from being adjusted under such circumstances in cases where a tax was paid for the prior year in question.  This subsection, however, will not prevent such an adjustment if no tax was paid for the prior year  ...  (Emphasis added)

  See also Sen.Rep. No. 1622, 83rd Cong., 2d Sess. 127 (1954), which states:

    [Once the value of a gift has been accepted for purposes of the t ax by both the Government and the taxpayer, this value should

be acceptable to both in measuring the tax to be applied to subsequent gifts.  For that reason the bill provides that the value of the gift as reported on a taxable gift tax return for a prior year is to be conclusive as to the value of the gift (after the statute of limitations has run) in determining the tax rate to be applied to subsequent gifts.  This substantially increases certainty in the gift tax area.

  The unified credit is a substitute for the specific exemption formerly provided under section 2521, and a gift tax liability is incurred only after the credit has been exhausted.  See H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. 15 (1976), 1976-3 (Vol. 3) C.B. 735, 749;  see also, Rev. Rul. 79-398, 1979-2 C.B. 338.

  Section 6501 provides in general, that the amount of any tax imposed shall be assessed within three years after the return was filed.

  Sections 6201, 6202 and 6203, and the regulations thereunder, provide for the time and method of assessment of taxes.  Generally, only taxes, net of credits, are the subject of assessment.  There are exceptions, such as the assessment of erroneous credits and the deficiency assessment procedures, but none of them are applicable here.  Taxes that are entirely offset by a correctly claimed credit are not assessed or paid within the meaning of section 2504(c) of the Code.

  This conforms to the Congressional intent underlying section 2504(c), which was to prevent the valuation of a past transfer to be

placed in doubt after the Service had previously been satisfied as to the correctness of the taxpayer's valuation.  On the other hand, an undervaluation of a gift that fell within the limits of the unified credit might have little or no current tax consequence, and it should not acquire any finality from the fact that it went unchallenged at the time the return was filed.

  Accordingly, in this situation, there was no payment or assessment of the gift tax on D's 1977 gift and, therefore, the value of the stock can be adjusted for purposes of computing the aggregate sum of taxable gifts made by D.

  Further, as noted above, section 6501 of the Code bars an assessment after the expiration of the period of limitations. However, in this situation, where use of the additional unified credit for the 1977 gift offsets the tax imposed by section 2501, no assessment of tax results on the return filed for the gift.  The only assessment made, within the meaning of section 6201, would be to the return filed for the gift made in 1982.  Therefore, there is no bar to adjusting D's available unified credit to reflect the credit that would have been used had D correctly valued the 1977 gift.  Consequently, the unified credit available to D for the 1982 gift must be adjusted to reflect the credit that would have been used had D correctly valued the 1977 gift, even though no tax can be assessed for the 1977 gift.

HOLDING

  A donor's use of the unified credit, under section 2505 of the Code, does not result in a payment or assessment of gift tax that would preclude an adjustment to the value of the gift under section 2504(c) of the Code.

Rev. Rul. 84-11, 1984-1 C.B. 201.