Gift tax limitation period does not apply to estate tax.

While alive T made gifts to members of her family; for most of these, timely gift tax returns were filed, but no gift tax was ever paid. In 1986, T died and S, her executrix, filed a timely estate tax return, reporting the total of gifts made in 1977, 1978, 1981 and 1982. The IRS increased the amount of T's prior gifts (claiming that T had undervalued the gifts by approximately $800,000), and assessed additional estate taxes. S challenged this revaluation, arguing that the limitations period applicable to gift tax computation barred the revaluation of gifts when imposing estate taxes. The Service contended that the gift tax limitation period applied only to the imposition of gift taxes. The district court (opinion West, J.) agrees with the IRS; the limitations period for gift tax purposes does not apply for estate tax purposes.

Gift tax

Chapter 12 of the Internal Revenue Code provides for the imposition of gift taxes. Under Sec. 2504(c), Congress provided for a limitations period on the revaluation of gifts for the purposes of computing gift taxes. VALUATION OF CERTAIN GIFTS FOR PRECEDING CALENDAR PERIODS.--If the time expired within which a tax may be assessed under this chapter or under corresponding provisions of prior laws on the transfer of property by gift made during a preceding calendar period, as defined in section 2502(b), and if a tax under this chapter or under corresponding provisions of prior laws has been assessed or paid for such preceding calendar period, the value of such gift made in such preceding calendar period shall, for purposes of computing the tax under this chapter for any calendar year, be the value of such gift which was used in computing the tax for the last preceding calendar period for which a tax under this chapter or under corresponding provisions of prior laws was assessed or paid. (Emphasis added.)

The expiration of time in which the tax may be assessed is the three-year limitations period as provided in Sec. 6501.

It is clear from the face of this statute that the limitations on revaluation apply to the gift tax area solely (i.e., "for purposes of computing the tax under this chapter"). The legislative history regarding Sec. 2504(c) contemplates its purpose only as it relates to measuring gift tax. It is believed that once the value of a gift has been accepted for the purposes of the tax by both the Government and the taxpayer, this value should be acceptable to both in measuring the tax to be applied to subsequent gifts. For that reason the bill provides that the value of a gift as reported on a taxable gift tax return for a prior year is to be conclusive as to the value of the gift (after the statute of limitations has run) in determining the tax rate to be applied to subsequent gifts. This substantially increases certainty in the gift tax area. (Emphasis added.)

Estate tax

The estate tax rate is computed by adding the sum of the taxable estate and the amount of the adjusted taxable gifts, credited by the amount that would have been payable under the gift tax. Sec. 2001(b) provides as follows. COMPUTATION OF TAX.--The tax imposed by this section shall be the amount equal to the excess (if any) of--

(1) a tentative tax computed under subsection (c) on the sume of--

(A) the amount of the taxable estate, and

(B) the amount of the adjusted taxable gifts, over

(2) the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the provisions of subsection (c) (as in effect at the decedent's death) had been applicable at the time of such gifts. For the purposes of paragraph (1)(B), the term "adjusted taxable gifts" means the total amount of the taxable gifts (within the meaning of section 2503) made by the decedent after December 31, 1976, other than gifts which are includible in the gross estate of the decedent. (Emphasis added.)

Analysis

This court carefully reviews the language of the statutes and concludes that Congress did not intend the limitations period of Sec. 2504(c) to be included in the computation of the estate tax. Adjustable taxable gifts under Sec. 2001(b) (computation formula for estate tax) are defined as the total amount of taxable gifts "within the meaning of section 2503." Under Sec. 2503, there is no reference or connection to Sec. 2504(c) on valuation of gifts after the limitations period has run. Instead, Sec. 2503 precisely defines taxable gifts as the amount of gifts made during the calendar year, less the deductions as provided in Sec. 2522 et seq. Thus, under Chapter 12 (taxable gifts), the definition of taxable gifts is distinct and unconnected to the computation of valuation of those gifts after the limitations period has run. Congress, when enacting Sec. 2001(b) (computation formula for estate tax), precisely chose Sec. 2503 for the definition of adjusted taxable gifts when applied to estate taxes. Congress could have easily defined adjusted taxable gifts as the amount of taxable gifts within the meaning of "Chapter 12" (the chapter on gift tax) rather than limiting the definition to "section 2503." If Congress had chosen the language "Chapter 12," the bar against revaluation of gifts after the limitations period would be included in the estate tax computation as well. Instead, Congress carefully excised the computation method involving a limitations period prescribed for gift taxes when enacting the estate tax computation.

Additionally, when Congress enacted the formula for estate tax computation, it allowed for a credit of the aggregate amount of tax "which would have been payable under Chapter 12." Congress could have easily stated that the taxpayer would be credited the aggregate amount of tax which "had been paid under Chapter 12." If Congress had chosen such words, it would support the interpretation that computation of taxable gifts under Chapter 12 and the effect of the limitations period were an inflexible part of the estate tax computation. Instead, Congress used the language "which would have been payable under Chapter 12" supporting an interpretation that the United States could revalue the gifts and credit the taxpayer for the amount "which would have been payable" if so valued. Thus, even though the IRS revalues a gift for a higher amount, no additional gift tax is assessed because the taxpayer is correspondingly credited for the amount of gift tax that would have been payable. Under this reading of the precise statutory language, the revaluation of gifts for estate tax purposes affects only the rate of the estate tax; the taxpayer is credited after revaluation for the taxes which would have been payable under Chapter 12. The precise and carefully crafted language of the statute leads to the inescapable conclusion that gifts may be revalued for purposes of computing the estate tax rate.

This court is aware of S's well-argued position that certainty in the value of gifts is needed in the area of estate and gift taxes. This court may agree that inconsistencies and uncertainties result from revaluation of gifts after the death of the donor, but cannot agree that Congress intended the limitations period to apply to estate taxes.