Property Acquired by Gifts

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1. In General

a. Donor's Adjusted Basis
If the taxpayer acquires property by gift, his basis in the property is the same as the adjusted basis in the hands of the donor. {§1015(a); Regs. §1.1015-1(a)(1).} If the donor acquired the property by gift, then the taxpayer's basis is the same as the adjusted basis in the hands of the donor's donor, and this pattern continues until the last preceding owner by whom the property was not acquired by gift. 

Example—Donee's Basis:
S gives land to his nephew, V. S's adjusted basis is $40,000. The land has a fair market value of $100,000. V's basis in the land is $40,000.

However, if the donor's adjusted basis in the property is greater than its fair market value at the time of the gift, a special rule applies for purposes of determining loss. Under these circumstances, the taxpayer's basis for purposes of determining loss is the fair market value of the property at the time of the gift. { It is not unconstitutional to require the donee to use the donor's adjusted basis in property acquired by the donor before 1921, even though that has the effect of taxing the donee, when he disposes of the property, on appreciation that occurred before 1921. Taft v. Bowers, 278 U.S. 470 (1929). }

Example—Different Basis for Gain or Loss
Refer to the preceding example. Assume that S's adjusted basis is $120,000. For purposes of determining loss, V's basis is $100,000. Thus, if V sells the land for $95,000, he realizes a $5,000 loss. For purposes of determining gain, V's basis is $120,000. Thus, if V sells the land for $130,000, he realizes a $10,000 gain. If V sells the land for between $100,000 and $120,000, he realizes neither gain nor loss. {See Regs. §1.1015-1(a)(2).}

b. Proof of Donor's Adjusted Basis
The Code provides that if the facts necessary to determine adjusted basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift are not known by the donee, the IRS shall if possible obtain those facts from the donor or last preceding owner. 272 If the facts cannot be obtained then the basis is the fair market value (as determined by the IRS as of the date or approximate date the donor or last preceding owner acquired the property other than by gift). 273
/Footnote/ 272 §1015(a); Regs. §1.1015-1(a)(3).
/Footnote/ 273 Id.
Note: It is inappropriate for the IRS merely to assign a basis of zero to the property, 274 unless there is reasonable justification for reaching such a conclusion. 275
/Footnote/ 274 James E. Caldwell & Co. v. Comr., 234 F.2d 660 (6th Cir. 1956), rev'g 24 T.C. 597 (1955).
/Footnote/ 275 See Cinelli v. Comr., T.C. Memo 1954-221.
To insure a fair and adequate determination of basis, persons making or receiving gifts of property should preserve and keep accessible a record of the facts needed to determine the cost of the property. 276
/Footnote/ 276 Regs. §1.1015-1(g).

c. Uniform Basis
Property acquired by gift has a single or uniform basis although more than one person may acquire an interest in the property. { Regs. §1.1015-1(b).} However, the proportions by which the multiple owners, such as life tenant and remainder holder, share the uniform basis, are adjusted to reflect the changes over time in the relative values of those interests. 

d. Time of Gift
A donee acquires an interest in property by gift, and his adjusted basis is determined on the date when the donor relinquishes dominion over the property, which is not necessarily when title passes.  Regs. §1.1015-1(c).

Example—Time of Gift
G transfers stock to a trust, to pay income to L for life, remainder to R. R's share of the uniform basis is initially made at the time of the gift to the trust, even though R does not actually acquire fee ownership of the stock until L dies.

e. Inclusion of Gift Property in Donor's Gross Estate
If a taxpayer acquires an interest in property by gift from a donor under conditions which require inclusion of the property in the donor's gross estate, the donee's basis is recomputed under the fair market value basis rules applicable to property acquired from a decedent. {Regs. §1.1015-1(d).} However, this rule does not apply if the donee has disposed of the property prior to the donor's death. 282

f. Determination of Fair Market Value
As discussed above, the fair market value of gift property must be determined if it is less than the donor's adjusted basis at the time of the gift. Fair market value is used to approximate the donor's adjusted basis when other facts are not known. For these purposes, and any other purposes requiring valuation, the fair market value of a gift is the value appraised for federal gift tax purposes. { Regs. §1.1015-1(e).}  If no federal gift tax applies, then the value for state gift tax is used. 

g. Subsequent Events Involving Donor
The donee's basis in property acquired by gift is unaffected by events that occur after the gift is made that involve the donor's relationship to the property. {Forrestal v. Comr., 120 F.2d 223 (2d Cir. 1941), aff'g 41 B.T.A. 1080 (1940).}