Taxing Lessons From Court Decisions

Decisions — Completely gifted

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“No” is a complete sentence, and “no” is what the taxpayer in letter ruling 201825003 hopes the IRS will say.

The taxpayer owns a collection of artwork. She and her now-deceased spouse entered into a deed of transfer with two museums. Under the deed, the taxpayer agreed she would donate the artwork to the museums when she dies. If the taxpayer receives a favorable ruling on the gift tax treatment (in this case, that the gift is incomplete), the donation under the deed will take effect as of the date of the favorable ruling. If the taxpayer does not obtain a favorable ruling, then the deed does not come into force.

The deed provides that the taxpayer gets to keep physical possession of the artwork during her life, but she can’t sell or otherwise dispose of the works. She can give up the right of possession early if she chooses by delivering the artwork to the museum.

Though the taxpayer can keep the art during her lifetime, under the deed, the museums are the legal owners and they become the full owners when the taxpayer dies.

In the deed, the museums agree that the artwork will be installed in a special area of the premises specifically dedicated to the taxpayer’s collection, and that the museums will not become privately owned. If any of these conditions are not satisfied, the taxpayer can revoke the deed.

The taxpayer and the museums intend for the transfer of the artwork to not qualify as a completed gift for US gift tax purposes on the basis that the taxpayer is not releasing dominion and control over the artwork until her death.


As a general rule, under US tax law, a gift is completed when the donor no longer has “dominion and control” over it. That means the donor can’t take the gift back or change the gift.

A gift is considered incomplete when the donor retains certain rights or powers, such as being able to take the gift back.

The determination of whether a gift is complete or incomplete affects how the transfer is taxed. Completed gifts can qualify for the annual gift tax exclusion ($15,000 in 2018), and also allow the donor to not be taxed on any future appreciation of the value of the gift. Incomplete gifts are not subject to gift taxes, remain the property of the donor, and are included in the donor’s estate upon death.

A donor may also have non-tax reasons for wanting a gift to be incomplete, such as not wanting to give up control over the asset.

Here are the rules relating to gifts, as relevant to this particular letter ruling.

From section 2501 of the internal revenue code: Imposes a tax for each calendar year on the transfer of property by gift during the calendar year.

From section 2511(a) of the internal revenue code: Provides that the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal and tangible or intangible.

From section 25.2511-1(e) of the gift tax regulations: Provides that if a donor transfers by gift less than the entire interest in property, the gift tax is applicable to the interest transferred. The tax is applicable, for example, to the transfer of an undivided half interest in property, or to the transfer of a life estate when the grantor retains the remainder interest, or vice versa.

From section 25.2511-1(g) of the gift tax regulations: Provides that the application of the gift tax is based on the objective facts and circumstances under which it is made, rather than on the subjective motives of the donor.

From section 25.2511-2(b) of the gift tax regulations: Provides that as to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in no power to change its disposition, whether for the donor’s own benefit or the benefit of another, the gift is complete.

But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case.

Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined.



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Sorry, wrong answer :(
Right answer!

The question of whether a transfer is a completed gift and subject to gift tax turns on whether the settlor has abandoned sufficient dominion and control over the property transferred to put it beyond recall.

In the present case, upon the effective date of the deed, the taxpayer will transfer the legal title, naked ownership and remainder interest of artwork to the museums while retaining a life estate and usufruct.

During the period of the life interest and usufruct, the taxpayer may not sell or otherwise dispose of any of the artwork. She retains no power to change the disposition of the artwork to the museums and is expressly barred from doing so under the deed.

Although the transfer of the artwork to the museums is subject to several conditions, the conditions that could cause a revocation of the transfer are not dependent on any act of the taxpayer.

Accordingly, we conclude that the taxpayer’s grant to the museums of the legal title, naked ownership and remainder interest in and to the artwork, as defined by the deed, would be a completed gift for gift tax purposes, but for the condition precedent of receipt of a favorable ruling on the gift tax treatment.

Editorial note: The terms naked ownership and usufruct are generally used in Louisiana law. In broad non-legal terms, usufruct means the right to use, possess and administer property, and naked ownership means ownership subject to the usufructuary rights.

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