GAAP People - Gift Tax Paid

[Snaggletooth]

A building gifted to a related party corporation incurred $15,000 in gift taxes actually paid.
The corporation is allowed to increase their basis by $15,000, although the taxes were not paid by the corporation (They were paid by the donor).

How is this handled on the books of the corporation? I'm not sure, but here are some possibilities:

1. Do not add the $15,000 to the fixed assets of the corporation, thus creating a permanent $15,000 book-to-tax difference in the original values and resulting accumulated depreciation. Can be considered a timing difference if the amount will eventually become fully depreciated.

2. Add the $15,000 to the fixed assets, and credit a revenue account for GAAP purposes only. The revenue should be exempt from taxation.

3. Add the $15,000 to the fixed assets, and credit an equity account. Since gifted from a related party, maybe credit an "additional paid-in-capital" account?

Any help would be appreciated! Thanks, Snag

[New York Enrolled Agent]

A building gifted to a related party corporation incurred $15,000 in gift taxes actually paid.
The corporation is allowed to increase their basis by $15,000, although the taxes were not paid by the corporation (They were paid by the donor).

Snags

I am not an accountant - thus I will make no attempt to answer your questions.

However, I do think you need to consider that the full $15K will probably not be added to the basis. The amount of basis increase is limited to the amount of gift tax attributable to the APPRECIATION of the building in the hands of the donor. It is not a dollar for dollar add-on. See §1015(d)(6).

[Roland Slugg]

Hmmmm .... I've never heard of a gift to a corporation. Is this a done deal, with gift tax paid and everything? Seems to me what really occurred was a tax-free transfer to a corporation under §351. Basis carries over.

On the books of the receiving corporation, the building would be recorded at its basis, crediting one or more capital accounts in the same amount.

There's a big gap in my understanding of GAAP, but I don't think you can create income by having assets transferred to you ... via gift or capital contribution.

[New York Enrolled Agent]

Roland

I believe it is possible to have gifts to a corporation. I don't know if it applies in this fact pattern. The gift tax regulations give at least one example where transfers from a corporation to an individual or from an individual to a corporation may be taxable gifts from or to the individual shareholders. See Reg §25.2511-1(h)(1).

I think municipalities also can give gifts to a corporation - such as vacant land on which to build a factory. One other note to Snags. §362(c) provides that property (other than money) contributed to a corporation by a non-shareholder has a basis of zero. Since you said this was a related party corporation, I'm not sure if (or how) this section pertains to your situation.

[Snaggletooth]

Situation

The "gift" to the corporation was a sale for less than FMV.

Father owned a building and sold it to a corporation which was fully owned by his son. I believe this qualifies as a gift because it would be too easy to "create" a corporation for purposes of defeating the gift.

The building appraised for much more than father's original basis. I don't know whether this satisfies NYEAs conditions or not.

Good to hear from you guys. You are two of the best.

[BHoffman]

Hi Snags -

Just for GAAP purposes:

The building is recorded at it's FMV on the date it was booked into the Corp records. The appraisal oughta do it. Don't forget to allocate the cost of the land.

The credit would be capital contribution.