Returned gift not subject to tax. (Income And Gift Taxes).

IRC Section 2511(a) provides that the gift tax applies to a transfer by way of gift whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

But what happens if a gift giver changes his mind and takes the gift back? At what point, if any, would the gifted and returned property be subject to gift or income tax? That was the issue addressed by the IRS in a recently released letter ruling.

Change of Heart

Soon after his wife died from Alzheimer's disease, "Parker" became concerned with his own medical situation. Wanting a "simple and orderly accounting of his affairs," he decided to deed his home to his two sons.

So he asked for--and got--an oral promise …