898 / Are gratuitous transfers by individuals of federal, state, and municipal obligations subject to federal transfer taxes?

Yes. Gratuitous transfers of obligations that are exempt from federal income tax are not exempt from federal estate tax, gift tax, or generation-skipping transfer tax, as the case may be – at least as to estates of decedents dying, gifts made, and transfers made on or after June 19, 1984. In the case of any provision of law enacted after July 18, 1984, such provision is not treated as exempting the transfer of property from such transfer taxes unless it refers to the appropriate IRC provisions.¹ Also, the removal of transfer tax exemption applies in the case of any transfer of property (or interest in property) if at any time an estate or gift tax return was filed showing such transfer as subject to federal estate or gift tax.² Congress also added that no inference was to be drawn that transfers of such obligations occurring before such time were exempt from transfer taxation.

In United States v. Wells Fargo,³ the United States Supreme Court determined that
“tax-exempt” bonds have always been subject to transfer taxes unless specifically provided otherwise by statute (even before enactment of TRA ’84, Sec. 641). This determination was based on the longstanding principle that tax exemption cannot be inferred. The differing language concerning project notes issued pursuant to Housing Acts, providing at one time for exemption from all taxation and at another for exemption from all taxation except surtax, estate, inheritance, and gift taxes, could be explained by the need to address a surtax in 1937, and not by a Congressional intent to exempt the project notes from estate taxation, the court concluded. The project notes were not exempt from transfer taxes, the court ruled, and included the notes in the decedent’s estate.