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Regulation and Compliance > Federal Regulation

IRS Publishes Final Gift Tax Recovery Regulations

By Allison Bell

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NU Online News Service, July 22, 2003, 5:47 p.m. EDT – The Internal Revenue Service has published final regulations that explain how it will treat delays in recoveries of gift taxes or failures to exercise recovery rights.

The final regulations will affect donee spouses who make lifetime dispositions of all or part of a qualifying interest in qualified terminable interest property, the IRS says.

The IRS suggested in a proposed regulation published in July 2002 that it would treat delays as interest-free loans, which could lead to accounting headaches for taxpayers who were slow to make recoveries.

Some tax experts had recommended that the IRS give taxpayers a 30-day “safe harbor” to ease administrative burdens on taxpayers who fail to exercise their recovery rights immediately.

But IRS officials say creating a safe harbor is unnecessary because, under normal circumstances, the IRS exempts loans when the loans “have no significant effect on any federal tax liability of the lender or the borrower.”

But the final regulations provide that, if a delay does have a significant effect on federal tax liabilities, the delay “will be treated as a below-market loan if the loan does not provide for the payment of sufficient interest,” according to a discussion of the final written regulation written by DeAnn Malone, a staff member with the IRS Office of the Chief Counsel.

The IRS has posted the final regulations and the explanation of the regulations in the Federal Register, at //a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/pdf/03-18018.pdf

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