Basis include Gift Tax?

[Snaggletooth]

Does gift tax paid on property by the donor become additional basis for the donor or recipient?

What if the tax is not "paid" but applied against unified deduction?

Example: Daddy's $500,000 (basis $20,000) of beautiful Tennessee countryside is sold to Daughter for $200,000. Daddy reports a gift of $300,000, some $276,000 taxable but is offset against future unified deduction. Under TN law, he can't offset future anything, and has to pay up 7.5% of the $276,000 or $20,700.

Even though a "bargain" sale, Daddy has to report a $180,000 gain. What is the effect of the $20,700 paid to Tennessee?

a) Daddy's new basis increases from $20,000 to $40,700, thus his capital gain is reduced from $180,000 to $159,300.
b) No effect on Daddy, but Daughter's basis increases from $200,000 to $220,700.
c) No effect on Daddy or Daughter.

[Brad Imsdahl]

TTB, page 6-3 says basis for determining gain and loss is "the donor's adjusted basis at the time of the gift, adjusted for any gift tax paid.

Page 21-33 explains what that means: "Basis is increased for gift tax paid on appreciation. Basis is not increased for gift tax calculated on form 709 that is offset by the donor's gift tax credit." There is an exception for gifts prior to 1977.

So when it says gift tax paid, it means tax actually paid by the donor.