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The Tax Court recently denied annual gift tax exclusions to gifts from a mother to daughters-in-law and granddaughter-in-law where it was shown there was a pre-existing agreement that the donees would immediately transfer the “gifts” to their husbands. See Estate of M.A. Bies, 80 TCM 628 (2000).

The mother desired to keep a family business going even though only a few of her children and grandchildren evidenced any interest in continuing it. She initially planned to give shares of stock in the family-owned corporation during her lifetime to those of her sons that expressed an interest in it. She provided in her will to leave any remaining shares of stock in the corporation to the same sons at her death. A buy-sell agreement between the two sons indicated that they anticipated ultimately being the sole owners of the business.

A tax advisor persuaded her to not only give gifts of stock to the two sons, but also to their wives in order to take advantage of additional $10,000 per year gift tax exclusions. Later, a grandson and his wife was added to the arrangement. Each year, a number of shares of stock valued at $10,000 was given to each donee.

The evidence showed that at the same time the shares of stock were delivered to the daughters-in-law and granddaughter-in-law, documents transferring the shares to the donees’ respective husbands were also executed.

The Tax Court held the transfers to the daughters-in-law and granddaughter-in-law were in fact additional gifts to the two sons and grandson, which were made with no purpose other than obtaining extra gift tax exclusions. The court held it would look at the substance of the transaction rather than merely its form.

Certainly, wives and husbands are free to transfer property among themselves without gift tax consequences, but what killed this arrangement was the evidence of a pre-arrangement between the donees and donor that the shares would be transferred to the husbands immediately upon receipt.

We frequently receive calls about similar gifting arrangements. For example, a common query is “why can’t my brother and I agree that I’ll give each of his children $10,000 per year and he’ll give each of my children $10,000 per year?” It’s argued that gifts from aunts and uncles to nieces and nephews are not uncommon and the IRS shouldn’t even look twice at it.

Aunts and Uncles can gift to nieces and nephews, or anyone else as far as that goes, but the existence of a reciprocal pre-arrangement will cause the IRS to look at the substance not the form of the transaction and undoubtedly cause it to disallow an annual gift tax exclusion.

Last Updated: 12/15/2002 11:52:00 AM