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United States v. Hemme

Prior to 1977, a taxpayer was allowed a lifetime exemption of $30,000 to be deducted from amounts otherwise taxable, which exemption could be claimed anytime during the taxpayer’s lifetime.

The estate tax allowed a specific exemption of $60,000.  The 1976 Tax Reform Act created a unified credit which could be offset directly against the estate or gift tax; concurrently, the $30,000 and $60,000 exemptions were eliminated.  The Act also contained a transitional rule which provided that the unified credit “shall be reduced by an amount equal to 20% of the aggregate amount allowed as a specific exemption, prior to its appeal.”  In 1976, the taxpayer made gifts, filed a gift tax return, claimed no tax to be due and the taxpayer’s $30,000 lifetime exemption.  The taxpayer died more than two years later, the gifts were required to be included as having been made “in contemplation of death” and the estate of the taxpayer then claimed the unified credit of $34,000 under the New Act.  The Internal Revenue Service contended that the credit must be reduced by 20% of the $30,000 lifetime exemption notwithstanding the fact that the gifts which absorbed such exemption were included in the taxpayer-decedent’s taxable estate.  476 U.S. 558 (1986).

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