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Posted by cballard@tyyni.net on January 6, 2007, 12:21 am
Please log in for more thread options Stuart A. Bronstein wrote:
> One court (Citizen's Natl. Bank of Waco v. United States 417
> F.2d 675 (5th Cir. 1969)) says that under IRS §1015 the
> basis must be based on the basis in the hands of the donor.
> They interpret 1.1015-4 as meaning the same thing as
> §1015(b): "the basis shall be the same as it would be in the
> hands of the grantor increased in the amount of gain or
> decreased in the amount of loss recognized to the grantor on
> such transfer under the law applicable to the year in which
> the transfer was made."
>
> That is that the basis starts out as the basis of the donor.
> And if it is only part gift the basis is increased by the
> amount of gain recognized.
>
> In short, the either/or approach by the regulation is
> inconsistent with the specific language in §1015(a) which
> says, "shall be the same as it would be in the hands of the
> donor...." As a result it is not enforceable.
I must beg to differ with Stu.
First of all, the court in the case cited by him (Citizen's
Natl. Bank of Waco v. United States 417 F.2d 675 (5th Cir.
1969)) makes the following statement:
"The Commissioner apparently did not contest the actual
basis used by the trustee in computing the gain realized by
the trusts in the instant case. As a result, we do not have
before us on this appeal the question of whether or not
Treas. Reg. §1.1015-4 properly implements the principal
function of the statute." The case is concerned with the
tacking of holding periods for determination of whether gain
is long term or short term. That makes any discussion of
1.1015-4 in the case dicta and not precedent setting.
Even tossing out that fact, the quote that Stu made from the
case misrepresents what the court actually said. Here's the
full quote from that paragraph:
"We note that §1015(a) dealing with gifts provides that the
transferee's basis for determining gain "shall be the same
as it would be in the hands of the donor." Subsection (b)
dealing with sales to trusts provides that the transferee's
basis "shall be the same as it would be in the hands of the
grantor increased in the amount of gain or decreased in the
amount of loss recognized to the grantor on such transfer."
Thus both subsections (a) and (b) require the transferee to
determine his basis at least in part by reference to the
transferor's basis. Nevertheless, regulation §1.1015-4
provides that if the transfer is part a gift and part a
sale, then the transferee must determine his basis by the
price paid if that amount is greater than his transferor's
basis. On its face, the regulation seems to be introducing a
concept, price paid, not found in either subsection of the
Code. However, upon closer examination it appears that
"price paid" is not really at total variance with the Code.
Indeed, the "price paid" method will always produce the same
dollar amount as will "the grantor's basis increased in the
amount of gain or decreased in the amount of loss recognized
to the grantor," the method prescribed in subsection (b) of
the Code. The two phrases express identical amounts in
different words. Therefore, insofar as the primary function
of §1015 is concerned, the change in terminology makes no
change in result. The transferee's actual basis will be the
same, regardless of which method is used to make the
computation. However, the change in terminology is quite
significant insofar as it affects the incidental function of
§1015, which is the determination of whether or not the
transferee is eligible to tack his transferor's holding
period. As this case illustrates, by the mere change in
words the regulation cuts off the transferee's right to tack
whenever, as here, the price paid is greater than the
transferor's basis."
The court here is finding that the language in Reg 1.1015-4
means exactly the same thing as the language in the code.
The court did not find any conflict in the language, and
certainly did not declare the regulation to be invalid.
--Chris
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