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manner to the Summit County, Ohio, auditor’s office. The fair
market value of the House exceeded $72,000 at the time of the
transfer. In each of the years 1986-90, James and Hilda claimed
Federal income tax deductions for the real property taxes paid on
the House. David and Billie Jean, however, continued to live in
the House and did not pay rent.
In 1990, Richard M. Hamlin, a neighbor of David and Billie
Jean, approached them with an offer to purchase the House for
$300,000. David discussed the offer with his father, and a
decision was made to sell the House. On September 24, 1990,
James and Hilda transferred the House to David and Billie Jean by
general warranty deed for no consideration. The transfer was
reported in this manner to the Summit County, Ohio, auditor’s
office. Two days later, David and Billie Jean sold the House to
Hamlin for $300,000. James and Hilda chose to split the gift as
permitted by section 2513 of the Internal Revenue Code, and Hilda
filed a gift tax return that reported the September 24, 1990,
transfer as a gift valued at $130,000 (i.e., $150,000 minus the
$10,000 annual exclusions for both David and Billie Jean).
On October 13, 1992, Hilda died. Her estate tax return was
filed on July 7, 1993. The estate tax return reported the 1990
transfer of the House from James and Hilda to David and Billie
Jean as a gift.
Respondent conducted an audit of petitioner’s estate tax
return and discovered that both Hilda’s 1990 gift tax return and
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