Estate & Gift Tax - Searcy


Course Title

Estate & Gift Tax



First Assignment

Estate & Gift Tax - Assignment for First Class - for Tuesday August 27 


To:  Students in Estate & Gift Tax 

 From:  Prof. E. Dale Searcy 

Re:  Your Study Assignment for our First Class Meeting 

 Attendance at our first class meeting is of unusual importance, because that is the only opportunity for me to explain the procedure which applies to some future classes which I will miss.  I will be out of town and therefore unavailable to teach a few of our classes; my first absence will be our second class meeting, Tuesday, September 3.  All students will meet in the same room as if I were there, at the scheduled meeting time on September 3.  Attendance will be taken, and absences will count toward the maximum absences permitted.  Normal preparation will be required.  Class will be conducted via video recording.  Students will be called upon by name from the video to answer questions.  The video will be stopped to allow time for the student called upon to recite, after which the video will be resumed.  The details of this unorthodox procedure will be addressed during our first class meeting on August 27. 

 The 2 required books for this course are: 

 Hellwig & Danforth, Estate & Gift Taxation, SECOND Edition, 2013, Lexis-Nexis,  ISBN 9780769865034, first available for distribution in very late July, 2013  

This coursebook IS in stock at the Capital bookstore, but may not yet be in stock at internet discount sellers. 

 Lathrope, Lathrope's Selected Federal Taxation Statutes and Regulations, West Academic Press, 2014 Edition, ISBN 9780314288981 

 BOTH of the above books contain coverage of the changes enacted January 2, 2013, and therefore earlier editions are NOT acceptable for use in this Estate & Gift Tax course. 

 This first assignment is somewhat like a syllabus, in which the items your are to study in the coursebook and in the Code and Regulations are expressly and surgically designated, interspersed with notes which I have written to supplement those assigned items.  You are to study the items in the order set forth. 

 Any time anything which is assigned [e.g., Code or Reg. provision, coursebook item, or syllabus handout] contains a relevant term or expression or abbreviation with which you are not familiar, you are to exercise professional student due diligence.  Translation:  you are required to do what it takes to learn the meaning of that item.    

 Your are not required to study any items not expressly designated in a handout or expressly assigned during class.  E.g., the coursebook lists Code and Reg sections at the beginning of every chapter, and of course contains Code and Reg section and case and Revenue Ruling citations within each chapter, but you are not expected to study any of those cited sections or items unless expressly assigned. 

Whenever you are assigned to solve problems or answer questions, whether those are in the coursebook or in the handout, before coming to class, it is absolutely essential that you prepare handwritten notation solutions.  Use any abbreviations or short-hand that will be understandable to you.  One purpose of these handwritten solutions is facilitate your immediate recitation in those instances when your are called upon during class.  Whenever you are called upon, it would be altogether unacceptable for you to waste the time of your classmates and me while you fumble through your coursebook or the class handout assignment in order to resurrect in your mind the facts in the problem, the issue asked, and your recollection of the solution ideas which you formulated at the time you originally prepared for class.  Your handwritten solution notations will facilitate your prompt explication of your analysis. 

You know from your prior tax courses that section numbers in the Internal Revenue Code of 1986 [which we call the “Code”] contain no period and no hyphen, whereas section numbers in the Regulations contain a period and a hyphen.  Therefore, when the syllabus handout directs you to study any Code or Reg, it never necessary for me to include the word “Code” or “Reg.”  The section number citation alone will inform you whether the item is in the Code or Regs. 


 Study §§ 2001(a), 2031(a), and 2051.  Estate Tax [ET], Gross Estate [GE], and Taxable Estate [TE]. 

 Study pp. 1 - 5.  Overview of the ET and the Gift Tax [GT]. 

 Below is an oversimplified sketch of the ET for a client who never made any inter vivos gifts.  This formula does not follow the tax computation technique set forth in the Code. 


less    Deductions [e.g., debts, admin. expenses, and charitable and marital transfers] 

=        TE 

less    “Exemption” [$5.25M for decedents dying in 2013] 

=        ET “Base” 

x40% flat ET Rate 

=        ET payable 


Study § 1.06.  Fair Market Value [FMV]. 

 The income tax has a “catch all” provision, § 61(a), which includes in Gross Income [GI] all income from whatever source derived.  As brought out on p. 2, the ET has no “catch all” provision, but rather has a series Code sections, each of which requires inclusion in the GE of a rather specific type of property arrangement.   

 There are instances when two different Code provisions both require inclusion in the GE with respect to the same item of property or the same power or right.  Double inclusions are never required.  However, sometimes the $ amount required to be included in one of the over-lapping sections is different from the other.  In such a situation, the $ amount includible in the GE is the larger of the two $ amounts.  

The first line in the above “sketch” of the ET is GE.  The first Code section that we will study which requires inclusion in the GE is § 2033.  As we shall see, § 2033 is a somewhat narrow provision. 

 Study § 2033.  Property interests of decedent. 

Study p. 21 up to § 2.04 on p. 25.  § 2033 in general; uncashed checks signed by decedent; promissory notes payable to decedent. 

 “Income in Respect of a Decedent” [IRD] is an INCOME tax concept.  § 691.  Greatly oversimplified, IRD means income which decedent earned or derived before death, but which income has not been included in decedent’s INCOME tax GI before or on decedents date of death by reason of decedent’s method of accounting.   

For income tax purposes, virtually every individual [translation: human being] employs the cash method of accounting.  [The other important method of accounting is the accrual method.]  Under the cash method, an item is includible in GI in the year actually or constructively received. 

          Actual receipt occurs when the Taxpayer [TP] possesses the item of income, such as money or property.  [Recall that GI may be realized in the form of property in kind, as well as in cash.]    

          Constructive receipt occurs when TP has earned or otherwise derived the right, without significant restriction, to reduce an item of income to possession, but TP does not yet “actually” possess the item of income. 

 Illustrations of IRD include salary and legal or accounting fees earned before death, but which the employer or client has not yet “paid” before death.  A lawyer or accountant who works for a corporation at a salary of $x per month, payable on the 4th day of the following month, might die on the 2nd day of the month.  Alternatively, the individual might be self-employed and have completed a project for a client at an agreed fee of $y, which the client has not yet paid, and the individual might then die.   

 Because the item of income has not been actually received or constructively received before death, and because death is not an income taxable event requiring inclusion in GI of the earned but not yet received item of income, this item of income has not yet been included in any TP’s GI. 

In these cases, the employer or client does not avoid the obligation to pay the amount owing by reason of the death of the earner before payment was made.  The claim for payment which the decedent possessed before death continues in effect after death.  That claim is an item of IRD.   The payment will typically be made to the probate estate of the earner. 

 For INCOME tax purposes, the post-death payment [i.e., the ultimate collection] must usually be included in the GI of the person to whom that payment is “actually” made.  

We are studying ESTATE tax.  That IRD item, the claim, IS property which the decedent possessed at the time of death, and which the decedent can transmit at death via a provision in decedent’s will or via the laws of intestate succession.  Therein lies a tax rub:  IRD items are includible in the decedent’s GE, and are therefore subject to the ET, and ultimate collection [in tax parlance, the ultimate “realization”] of the same IRD items require inclusion in some succeeding person’s GI.  So IRD items are subject to BOTH the ET and the IT. 

 Study § 2.04.  Items of income earned before death but not collected before death. 

 Study §§ 2.05 through 2.08.  § 2033 application to different situations and arrangements. 

 The following assigned problems inquire ONLY into whether § 2033 requires inclusion.  Some of these items are not includible under § 2033.   FYI, most of the items which escape inclusion in the GE under § 2033 will nevertheless be required inclusions under other Code provisions which we will study in future lessons. 

Prepare Problem 1, pp. 34 - 35, except omit part g. 

 Prepare Problems 2 and 3, p. 35. 

 Prepare Problems 5 and 6, p. 36. 

Prepare Problem 7, p. 36. 

 Prepare Problem 8, p. 36, thinking about a type of check which a donor might use to increase the chances that the gift will be considered complete upon delivery of the check to the donee.  Do not spend more than a minute or two thinking about this one. 

 Study § 2501(a)(1).  Events essential to a Taxable Gift [TG].  Three of these words are critical. 

Study p. 37 up to [1] on p. 42.  Some GT fundamentals. 

Study [2] on p. 48 to [C] on p. 50.  Below-market interest rate loans to family members. 

 Study § 25.2511-1(a).  Direct versus indirect or delayed gifts. 

 Study § 25.2511-2(a) through (f).  Meaning of “transfer”.  This material is of extraordinary importance. 

 Study [C] on p. 50 to § 3.04 on p. 56.  Meaning of “transfer”.  

 Prepare Problems 1, 2, 3, and 5 [omit 4] on pp. 56 - 57.