Cal. Code Regs. tit. 18 § 14071
A credit for any gift tax paid under the California Gift Tax Law on a gift is allowed against and in reduction of the amount of any inheritance tax imposed by the Inheritance Tax Law on the same transfer at the death of the donor. This credit is known as the gift tax credit. The law prescribes the method of calculation of the credit. Stated generally it provides for the ascertainment of the gift tax relating to the transfer which is to be taxed both for gift and inheritance tax purposes, and also the ascertainment of the inheritance tax relating to the transfer which is to be so taxed. The gift tax credit is the lower of these two factors. The two factors are referred to herein as (1) the gift tax on the gift, and (2) the inheritance tax on the gift. The term "gift" used herein refers to a transfer which is being taxed both for gift tax and inheritance tax purposes. It is also known as the includible gift.
In determining factor (1), the gift tax on the gift, the value of the includible gift is taken at its market value for gift tax purposes. The inheritance tax value does not enter into the calculation of this factor. If only one gift was ever made, the gift tax paid is the value of factor (1). If more than one gift was made, it is necessary to apportion the gift tax of a particular year between the gift which is being taxed for inheritance tax purposes, and the gifts of that year which are not subject to inheritance tax. If there were gifts in several years, each year is considered by itself in determining the proportion of gift tax in a particular year relating to a gift made which is also subject to inheritance tax, i.e., it is not proper to add gifts of all years together determine the proportion of total gift tax relating to one or more transfers being taxed twice, (see Example (3) of this regulation). It should be noted further that interest and penalties on the gift tax are not considered in computing the gift tax credit.
In determining factor (2), the inheritance tax on the gift, the value of the includible gift is taken at the lower of its gift tax value or its inheritance tax value. Using such value, the includible gift is reduced by the same proportion of the annual exemption allowed to the donee in the year the includible gift was made as the value of the includible gift bears to the total value at the date of gift of all gifts by the donor to the donee in that year. The resulting figure is known as the net includible gift. Also, if the includible gift was subject to any deductions for inheritance tax purposes which were not considered in arriving at its market value for gift tax purposes, e.g., inheritance tax referee's appraisal fee for appraising the includible gift at its date of death value, the net includible gift is reduced by the same proportion of such deductions as the value of the net includible gift bears to the value of all property subject to inheritance tax transferred to the donee from the donor less all appropriate inheritance tax deductions except the deductions in question. The resulting figure is known as the net reduced includible gift, (see Example (4) of this regulation). Factor (2), the inheritance tax on the gift, is the amount which bears the same proportion to the total inheritance tax on transfers to the donee from the donor as the net reduced includible gift bears to the clear market value of the property subject to inheritance tax.
If the includible gift was a remainder interest in property after a life estate, the inheritance tax value of the transfer is divided into its component parts based on the ratio of remainder value to total value at the time of the gift (see Example (2) of this regulation).
If any gift tax had been paid under the California Gift Tax Law on an includible gift before the donor died, the payment of such tax constitutes a prepayment of inheritance tax to the extent a credit for such payment is allowed against and in reduction of the amount of any inheritance tax imposed by the Inheritance Tax Law on the same transfer at the death of the donor. This prepaid inheritance tax is treated, for inheritance tax purposes, as a taxable transfer to the donee to whom the credit is allowed.
The gift tax credit is allowable even though the gift tax is paid after the donor's death. The amount of the gift tax paid after death is deductible as a debt of the decedent in determining the clear market value for the inheritance tax only to the extent that a credit is not allowed against the inheritance tax due from the donee on the includible gift. Any penalty and interest paid after death which were accrued as of the date of death of the donor are deductible as debts of the decedent for inheritance tax purposes. In addition, any California gift tax paid after death for which no credit is allowed is treated as a debt of the decedent and allowed as an inheritance tax deduction.
If a federal gift tax was paid prior to the donor's death on a transfer of property which subsequently becomes subject to both the federal estate and state inheritance taxes, the payment of the federal gift tax constitutes, for inheritance tax purposes, a prepayment of the federal estate tax to the extent a credit for such payment is allowed against the federal estate tax. If there is a probate estate, such prepaid federal estate tax is taxed as an asset of the estate according to the terms of the donor's will or the laws of succession. In a nonprobate proceeding the prepaid federal estate tax is taxable as a transfer to the transferee or transferees who will ultimately receive the benefit of the credit.
A federal gift tax due and owing at the death of a donor, but paid after death, is not deductible, for inheritance tax purposes, as a debt of the decedent to the extent a credit for such payment is allowable against the federal estate tax, when the gift tax arises from an inter vivos transfer which is also includible as a transfer subject to the federal estate tax. Any penalty and interest paid on the federal gift tax after death which were accrued as of the date of death are allowable as an inheritance tax deduction. In addition, any federal gift tax paid after death for which no federal gift tax credit is allowed against the federal estate tax is allowable as an inheritance tax deduction.
This regulation is illustrated by the following examples:
EXAMPLE (1).
A in 1973 gave B, his adult son, two gifts. Gift No. 1 was valued at $20,000 and Gift No. 2 was valued at $25,000. Both gifts were present interests. No further gifts were made. The gift tax calculation was as follows:
| Gift No. 1.......................... | ..........................$20,000 | |||
| Gift No. 2.......................... | .......................... 25,000 | |||
| Total market value of gifts.......................... | ..........................$45,000 | |||
| Less: Annual exemption.......................... | .......................... 3,000 | |||
| Net taxable gifts.......................... | ..........................$42,000 | $5,000 specific exemption | ||
| Gift tax due.......................... | ..........................$1,280 | |||
A died in 1976. He left property to B under his will which after appropriate deductions had a clear market value of $30,000. The transfer in 1973 of Gift No. 2 was also determined to be subject to inheritance tax. The transfer of Gift No. 1 was determined not to be subject to inheritance tax. Gift No. 2 was appraised as of the date of death at $22,000, and was not liable for any deductions. The gift tax due on the two gifts was paid prior to the donor's death. The inheritance tax is calculated as follows:
B, adult son
| Bequest.......................... | ..........................$30,000 | |||
| Transfer (Gift No.2).......................... | ..........................22,000 | |||
| $5,000 specific exemption | ||||
| Tax on balance.......................... | $1,761 | |||
| Prepaid inheritance tax.......................... | .......................... 686 | Less: Gift tax credit.......................... | 686 | |
| $52,686 | $1,076 |
The gift tax credit is calculated as follows:
| $25,000 | / $45,000 x $1,280 = $711 |
| $25,000 | Includible gift |
| 45,000 | Total gifts |
| 1,280 | Gift tax |
| 711 | Gift tax attributable to includible gift |
| $22,000 | / $45,000 x $3,000 = $1,467 | |
| $22,000 | Includible gift, lower value, at date of gift or death | |
| 45,000 | Total gifts, value at date of gift | |
| 3,000 | Annual exemption | |
| 1,467 | Proportionate annual exemption | |
| $22,000 | Includible gift | |
| Less 1,467 | Proportionate annual exemption | |
| $20,533 | Net includible gift |
Since the gift was not subject to deductions for inheritance tax purpose which were not considered in arriving at the market value of the property for gift tax purpose, the net includible gift of $20,533 is also the net reduced includible gift.
Algebraic formulas are used to calculate the amount of the inheritance tax on the includible gift and the amount of the prepaid inheritance tax, since both of them are not known. Following is a table of symbols used in such formulas:
A--Tax adjustment factor (see Inheritance Rate and Exemption Table in (9) of this regulation).
C--Gift tax credit, which is limited to lower of F or S.
F--First limitation, gift tax on includible gift.
N--Net includible gift.
n--Net reduced includible gift.
P--Prepaid inheritance tax.
R--Rate of tax applied to total interest (see Inheritance Rate and Exemption Table in (9) of this regulation).
S--Second limitation, inheritance tax on includible gift.
V--Total value of property taxable to donee, but excluding pre-paid inheritance tax.
The formula is:
S = n x [R - A/(V + P)]
Since this formula has two unknowns, namely, "S" and "P," it may be rewritten to simplify the computation by substituting "F" for "P" so that it will have only one unknown, as follows:
S = n x [R - A/ (V + F)]
Thus, the known values of this formula are:
| A | = | $1,400 |
| F | = | $711 |
| n | = | $20,533 |
| R | = | 0.06 |
| V | = | $52,000 ($30,000+$22,000) |
| S | = | $20,533 x [0.06-$1,400/($52,000+$711)] |
| S | = | $20,533 x 0.0334401 |
| S | = | $686 |
Since S, the inheritance tax on the includible gift, is less than F, the gift tax on the includible gift, the gift tax credit is $686. Thus, the prepaid inheritance tax will also be $686.
Proof:
C = $20,533 x [0.06-$1,400/($52,000+$686)]
C = $686
EXAMPLE (2).
X in 1973 gave Y, his adult son, a cash gift of $20,000. He also gave him a parcel of property valued at $30,000 reserving to himself a life estate. X was 69 years old at the date of gift. No prior gifts had been made. The gift tax was paid before the last day prescribed by law.
The gift tax calculation is as follows:
| Cash gift.......................... | ..........................$20,000 | |||
| Less: Annual exemption.......................... | .......................... 3,000 | |||
| $17,000 | ||||
| Remainder interest in property.......................... | .......................... 21,434 | |||
| Net taxable gifts.......................... | ..........................$38,434 | $5,000 Specific exemption | ||
| Gift tax due.......................... | ..........................$1,137 | |||
X died in 1976. He left property having a clear market value of $15,000 to Y from his probate estate. The property transferred in 1973 in which X retained a life estate was also subject to inheritance tax. The cash gift of $20,000 in 1973 was found not to be subject to inheritance tax. The property in which X retained a life estate was valued as of the date of death at $28,000. It was not chargeable with any deductions. The inheritance tax is calculated as follows:
Y adult son
| Bequest.......................... | ..........................$15,000 | $5,000 Specific exemption | |
| Transfer.......................... | ..........................28,000 | ..........................Tax on balance | $1,343 |
| Prepaid inheritance tax.......................... | .......................... 572 | Gift tax credit.......................... | -572 |
| $43,572 | $771 | ||
The gift tax credit is calculated as follows:
($21,434/$41,434) x $1,137 = $588
$21,434 Includible gift
$41,434 ($20,000 + $21,434) Total gifts
$1,137 Gift tax
$588 Gift tax attributable to includible gift
($21,434/$30,000) x $28,000 = $20,005
$21,434 Gift Tax value of remainder interest
$30,000 Gift tax value of entire parcel
$28,000 Inheritance tax value of entire parcel
$20,005 Proportionate part of inheritance tax value attributable to the remainder ($20,005/$41,434) x $3,000 = $1,448
$20,005 Includible gift, lower value, at date of gift or death
$41,434 Total gifts, value at date of gift
$3,000 Annual exemption
$1,448 Proportionate annual exemption
| $20,005 | Includible gift, lower value, at date of gift or death | ||||
| Less | 1,448 | Proportionate annual exemption | |||
| $18,557 | Net includible gift | ||||
Since the includible gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes, the net includible gift of $18,557 is also the net reduced includible gift.
S = n x [R - A/(V + F]
The known values of this formula are as follows:
| n | = | $18,557 |
| R | = | 0.04 |
| A | = | $400 |
| V | = | $43,000 ($15,000 + $28,000) |
| F | = | $588 |
| S | = | $18,557 x [0.04 - $400/($43,000 + $588)] |
| S | = | $572 |
Since S, the inheritance tax on the gift, is less than F, the gift tax on the gift, the gift tax credit is $572. Accordingly, the prepaid inheritance tax will be also $572.
EXAMPLE (3).
P made gifts to S, his adult son, in 1972, 1973, 1974 and 1975. All of the gifts were present interests. The gifts were as follows:
| 1972 | --Cash | $10,000 | |
| 1973 | --Parcel A | $7,000 | |
| --Parcel B | 8,000 | ||
| 15,000 | |||
| 1974 | --Parcel C | $12,000 | |
| 1975 | --Parcel D | $5,000 | |
| --Parcel E | 3,000 | ||
| 8,000 |
The gift tax calculations in the various years were as follows:
| 1972 | |||
| Cash.......................... | ..........................$10,000 | ||
| Annual exemption.......................... | .......................... -3,000 | ||
| $7,000 | $5,000 Specific exemption | ||
| 1972 Gift Tax.......................... | ..........................$60 |
| 1973 | |||
| Parcel A.......................... | ..........................$7,000 | ||
| Parcel B.......................... | .......................... 8,000 | ||
| ___________________________ | |||
| Total gifts.......................... | ..........................$15,000 | ||
| Annual exemptions.......................... | .......................... -3,000 | ||
| Net taxable gifts for 1973.......................... | ..........................$12,000 | ||
| Prior net taxable gifts.......................... | .......................... 7,000 | ||
| Total net taxable gifts.......................... | ..........................$19,000 | $5,000 Specific exemptions | |
| Total gift tax.......................... | $420 | ||
| Less: Tax on prior gift.......................... | 60 | ||
| 1973 gift tax.......................... | $360 | ||
| 1974 | |||
| Parcel C.......................... | ..........................$12,000 | ||
| Annual exemption.......................... | .......................... -3,000 | ||
| Net taxable gifts for 1974.......................... | ..........................$9,000 | ||
| Prior net gifts.......................... | .......................... 19,000 | ||
| Total net taxable gifts.......................... | ..........................$28,000 | $5,000 Specific exemptions | |
| Total gift tax.......................... | $720 | ||
| Less: Tax on prior gifts.......................... | 420 | ||
| 1974 gift tax.......................... | $300 | ||
| 1975 | |||
| Parcel D.......................... | ..........................$5,000 | ||
| Parcel E.......................... | .......................... 3,000 | ||
| Total gifts.......................... | ..........................$8,000 | ||
| Annual exemptions.......................... | .......................... -3,000 | ||
| Net taxable gifts for 1975.......................... | ..........................$5,000 | ||
| Prior net gifts.......................... | .......................... 28,000 | ||
| Total net taxable gifts.......................... | ..........................$33,000 | $5,000 Specific exemptions | |
| Total gift tax.......................... | $920 | ||
| Less: Tax on prior gifts.......................... | 720 | ||
| 1975 gift tax.......................... | $200 |
P died in 1976. He left property having a clear market value of $6,000 to S from his probate estate. The gift taxes were all paid prior to death. In addition the following inter vivos transfers were found to be subject to inheritance tax:
Parcel B--appraised as of date of death at $7,500
Parcel C--appraised as of date of death at $13,000
Parcel D--appraised as of date of death at $4,000
The other gifts were found not to be subject to inheritance tax. The inter vivos transfers were not liable for any deductions. The inheritance tax is computed as follows:
S, adult son
| Bequest.......................... | ..........................$6,000 | |||
| Taxable transfers: | ||||
| ..........................Parcel B | ..........................$7,500 | |||
| ..........................Parcel C | ..........................13,000 | |||
| ..........................Parcel D | ..........................4,000 | |||
| ..........................Prepaid inheritance tax | .......................... 474 | $5,000 Specific exemption | ||
| $30,974 | Tax on balance.......................... | ..........................$839 | ||
| Gift tax credit.......................... | ..........................-474 | |||
| $365 | ||||
The gift tax credit is calculated as follows:
| 1973 | $8,000 | (includible gift) / $15,000 (total gifts) x $360 | = | $192 | |
| 1974 | $12,000 | (includible gift / $12,000 (total gift) x $300 | = | 300 | |
| 1975 | $5,000 | (includible gift) / $8,000 (total gift) x $200 | = | 125 | |
| Gift tax attributable to includible gifts | $617 | ||||
The first step is to find the net reduced includible gifts, i.e., what part of the total transfers taxable at death represents amounts also taxed for gift tax purposes after considering the lower of gift tax and inheritance tax value and considering the effect of the various annual exemptions.
| 1973 | $7,500 | /$15,000 x $3,000 = $1,500 |
| $7,500 | Includible gift, lower value, at date of gift or death | |
| $15,000 | Total gifts, value at date of gift | |
| $3,000 | Annual exemption | |
| $1,500 | Proportionate annual exemption | |
| $7,500 | Includible gift | |
| Less: | 1,500 | Proportionate annual exemption |
| $6,000 | Net includible gift |
The net includible gift of $6,000 is also the net reduced includible gift, since the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes.
| 1974 | $9,000 | Net reduced includible gift |
| 1975 | $4,000 | /$8,000 x $3,000 = $1,500 |
| $4,000 | Includible gift, lower value, at date of gift or death | |
| $8,000 | Total gifts, value at date of gift | |
| $3,000 | Annual exemption | |
| $1,500 | Proportionate annual exemption | |
| $4,000 | Includible gift | |
| Less: | 1,500 | Proportionate annual exemption |
| $2,500 | Net includible gift |
The net includible gift of $2,500 is also the net reduced includible gift, since the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes.
| $6,000 | Net reduced includible gift for 1973 | |
| $9,000 | Net reduced includible gift for 1974 | |
| $2,500 | Net reduced includible gift for 1975 | |
| $17,500 | Total net reduced includible gifts |
S = n x [R - A/(V + F)]
The known values of this formula are as follows:
| n | = | $17,500 |
| R | = | 0.04 |
| A | = | $400 |
| V | = | $30,500 |
| F | = | $617 |
First Trial
| S | = | $17,500 x [0.04 - $400/($30,500 - $617)] |
| S | = | $475 |
Second Trial
| S | = | $17,500 x [0.04 - $400/($30,500 - $475)] |
| S | = | $474 |
The $474 inheritance tax attributable to the net reduced includible gifts is less than the $617 gift tax attributable to the same gifts and consequently will be the gift tax credit. The prepaid inheritance tax will be also $474.
EXAMPLE (4).
In examples (1), (2), and (3) or this regulation the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes. Consequently, the net includible gift and the net reduced includible gift were the same. This example illustrates the computation necessary if the gift is subject to a deduction for inheritance tax purposes which was not deductible in arriving at the market value of the property for gift tax purposes.
During the year 1974, R, in contemplation of death gave T, his adult son, real property valued at $250,000. The gift was a present interest, and it was subject to both federal and state gift taxes. R made no other gifts to T. The gift tax calculation was as follows:
| Real Property.......................... | ..........................$250,000 | ||
| Annual exemption.......................... | .......................... -3,000 | ||
| Net taxable gift.......................... | ..........................$247,000 | $5,000 Specific exemption | |
| Gift tax due.......................... | ..........................$17,300 |
R died in 1975. In his will he left all of his property to T which after all appropriate inheritance tax deductions amounted to $150,000. The 1974 gift to T was also subject to both federal estate and state inheritance taxes. As of the date of death the value of the 1974 gift had shrunk to $200,000. The only inheritance tax deduction for which the 1974 gift was liable was the referee's fee for the date of death appraisement of the includible gift. The federal gift tax credit was $33,700. The inheritance tax is computed as follows:
T, adult son
| Bequest.......................... | $150,000 | $5,000 Specific exemption | ||
| Transfer.......................... | $2,000,000 | Tax on balance.......................... | $34,683 | |
| Less: Appraisal fee.......................... | 200 | Gift tax credit.......................... | 17,091 | |
| 199,800 | $17,592 | |||
| Prepaid federal estate tax.......................... | 33,700 | |||
| Prepaid inheritance tax.......................... | 17,091 | |||
| $400,591 | ||||
The gift tax credit is calculated as follows:
There was only one gift so the gift tax paid is the value of factor (1), i.e., $17,300.
| $200,000/ | $250,000 x $3,000 = $2,400 |
| $200,000 | includible gift, lower value, at date of gift or death |
| $250,000 | Total gift, value at date of gift |
| $3,000 | Annual exemption |
| $2,400 | Proportionate annual exemption |
| Includible gift.......................... | $200,000 | ||||
| Less: | Proportionate annual exemption.......................... | $2,400 | |||
| Appraisal fee.......................... | 200 | ||||
| Total reduction.......................... | 2,600 | ||||
| Net reduced includible gift.......................... | $197,400 | ||||
S = n x [R - A/(V + F)]
The known values of the above formula are as follows:
| n | = | $197,400 |
| R | = | 0.14 |
| A | = | $21,400 |
| V | = | $383,500 ($150,000 + $199,800 + $33,700) |
| F | = | $617 |
First Trial
| S | = | $197,400 x [0.14 - $21,400/($383,500 + $17,300)] |
| S | = | $17,096 |
Second Trial:
Since "S" is less than "F," substitute "S" for "F" in the above formula.
| S | = | $197,400 x [0.14 - $21,400/($383,500 + $17,096)] |
| S | = | $17,091 |
Since the $17,091 inheritance tax attributable to the net reduced includible gift is less than the $17,300 gift tax attributable to same gift and consequently will be the gift tax credit. The prepaid inheritance tax will be also $17,091.
COMPUTATION OF INHERITANCE TAX USING RATES AND EXEMPTIONS EFFECTIVE FOR DECEDENTS WHO DIED ON OR AFTER JANUARY 1, 1976 AND BEFORE JANUARY 1, 1981
| Interest Before Exemption | ||||||
| Relationship | Exceeding | Not Exceeding | Rate of Tax Applied to Total Interest | Tax Adjustment Factor | ||
| R | A | |||||
| Class A-1 | 0 | $60,000 | 0 | 0 | ||
| $60,000 | 100,000 | 6% | $3,600 | |||
| Husband and Wife | 100,000 | 200,000 | 8% | 5,600 | ||
| 200,000 | 300,000 | 10% | 9,600 | |||
| EXEMPTION $60,000 | 300,000 | 400,000 | 12% | 15,600 | ||
| 400,000 | and more | 14% | 23,600 | |||
| Class A-2 | 0 | $12,000 | 0 | 0 | ||
| $12,000 | 25,000 | 3% | $360 | |||
| Minor children, minor adopted children | 25,000 | 50,000 | 4% | 610 | ||
| 50,000 | 100,000 | 6% | 1,610 | |||
| 100,000 | 200,000 | 8% | 3,610 | |||
| EXEMPTION $12,000 | 200,000 | 300,000 | 10% | 7,610 | ||
| 300,000 | 400,000 | 12% | 13,610 | |||
| 400,000 | and more | 14% | 21,610 | |||
| Class A-3 | 0 | $5,000 | 0 | 0 | ||
| Parents, grandparents, all other lineal ancestors, | $5,000 | 25,000 | 3% | $150 | ||
| adult children, minor and adult mutually ac- | 25,000 | 50,000 | 4% | 400 | ||
| knowledged children, adult adopted children, | 50,000 | 100,000 | 6% | 1,400 | ||
| natural issue or adopted children of natural children, | 100,000 | 200,000 | 8% | 3,400 | ||
| adopted children or mutually acknowledged | 200,000 | 300,000 | 10% | 7,400 | ||
| children, all other lineal descendants of the | 300,000 | 400,000 | 12% | 13,400 | ||
| decedent EXEMPTION $5,000 | 400,000 | and more | 14% | 21,400 | ||
| Class B | 0 | $2,000 | 0 | 0 | ||
| Brother, sister and issue | $2,000 | 25,000 | 6% | $120 | ||
| 25,000 | 50,000 | 10% | 1,120 | |||
| son-in-law, daughter-in-law | 50,000 | 100,000 | 12% | 2,120 | ||
| 100,000 | 200,000 | 14% | 4,120 | |||
| 200,000 | 300,000 | 16% | 8,120 | |||
| EXEMPTION $2,000 | 300,000 | 400,000 | 18% | 14,120 | ||
| 400,000 | and more | 20% | 22,120 | |||
| Class C | 0 | $300 | 0 | 0 | ||
| $300 | 25,000 | 10% | $30 | |||
| All other transferees | 25,000 | 50,000 | 14% | 1,030 | ||
| 50,000 | 100,000 | 16% | 2,030 | |||
| EXEMPTION $300 | 100,000 | 200,000 | 18% | 4,030 | ||
| 200,000 | 300,000 | 20% | 8,030 | |||
| 300,000 | 400,000 | 22% | 14,030 | |||
| 400,000 | and more | 24% | 22,030 | |||
Cal. Code Regs. Tit. 18, § 14071
Note: Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14071, Revenue and Taxation Code.