Taxation - Diedrich v. Commissioner: Net Gift Produces Taxable Income to Donor

Abstract

INTRODUCTION|A net gift is a transfer of property in which it is expressly agreed or implied that payment of the gift tax will be made by the transferee as a condition of the transfer. The theory underlying the net gift doctrine is that all a donor intends to give when making a gift conditioned on the donee's payment of the gift taxes is the value of the property transferred less the amount of the gift taxes payable. Therefore, absent that requisite intention, the amount of the gift tax is not considered as property that effectively passes from the donor and is not taxable as a gift. Although the Commission of the Internal Revenue (Commissioner) has admitted that net gifts are legitimate for gift tax purposes, the Commissioner has always considered net gifts as transfers that produce income to the donor. However, courts have held that a net gift produces no income tax liability to the donor, thus rejecting the Commissioner's theory. This line of reasoning has finally been brought to an end with the Eighth Circuit's decision in Diedrich v. Commiasioner. The court in Diedrich held that income accrues to the donor to the extent the amount of gift tax paid exceeds the donor's basis in the property transferred. The Diedrich decision may resolve this income tax controversy which has been a frequently litigated issue in the net gift area...