According to the case ‘V.C. Diedrich v. Comm., 82-1 USTC ¶9419, 50 AFTR2d 82-5054, 102 S.Ct. 2414 (USSC, 1982), “a donor who makes a gift of property on condition that the donee pay the resulting gift tax receives taxable income to the extent that the gift tax paid by the donee exceeds the donor's adjusted basis in the property transferred.” The United States Court of Appeals for the Eighth Circuit ruled that the donor did realize income. Therefore, since Joyce paid the $30,000 gift transfer tax, Edith realized an immediate economic benefit and increase in her income in the amount of the gift tax that Joyce paid. The Commissioner has treated these conditional gifts as a discharge of indebtedness through a part gift and part sale of the gift property transferred.
According to IRC § 61(a)(12), “gross income means all income from whatever source derived, including income from discharge of indebtedness.” Edith should realize gross income because she is required to treat the transaction as part sale therefore generating income of $30,000 (from Joyce) and thus realizing gross income.
Additionally, § 2502(c) states that “The tax imposed by section 2501 shall be…show more content… In § 1012 Basis of property—cost, the basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). Therefore the adjusted basis is the cost of the stock, which is
