[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR25.2523(f)-1A]

[Page 626-627]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 25_GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954--Table of Contents
 
Sec.  25.2523(f)-1A  Special rule applicable to community property transferred prior to January 1, 1982.

    (a) In general. With respect to gifts made prior to January 1, 1982, 
the marital deduction is allowable with respect to any transfer by a 
donor to the donor's spouse only to the extent that the transfer is 
shown to represent a gift of property that was not, at the time of the 
gift, held as community property, as defined in paragraph (b) of this 
section. The burden of establishing the extent to which a transfer 
represents a gift of property not so held rests upon the donor.
    (b) Definition of ``community property.'' (1) For the purpose of 
paragraph (a) of this section, the term ``community property'' is 
considered to include--
    (i) Any property held by the donor and his spouse as community 
property under the law of any State, Territory, or possession of the 
United States, or of any foreign country, except property in which the 
donee spouse had at the time of the gift merely an expectant interest. 
The donee spouse is regarded as having, at any particular time, merely 
an expectant interest in property held at that time by the donor and 
herself as community property under the law of any State, Territory, or 
possession of the United States, or of any foreign country, if, in case 
such property were transferred by gift into the separate property of the 
donee spouse, the entire value of such property (and not merely one-half 
of it), would be treated as the amount of the gift.
    (ii) Separate property acquired by the donor as a result of a 
``conversion'', after December 31, 1941, of property held by him and the 
donee spouse as community property under the law of any State, 
Territory, or possession of the United States, or of any foreign country 
(except such property in which the donee spouse had at the time of the 
``conversion'' merely an expectant interest), into their separate 
property, subject to the limitation with respect to value contained in 
subparagraph (5) of this paragraph.
    (iii) Property acquired by the donor in exchange (by one exchange or 
a series of exchanges) for separate property resulting from such 
``conversion.''
    (2) The characteristics of property which acquired a noncommunity 
instead of a community status by reason of an agreement (whether 
antenuptial or post-nuptial) are such that section 2523(f) classifies 
the property as community property of the donor and his spouse in the 
computation of the marital deduction. In distinguishing property which 
thus acquired a noncommunity status from property which acquired such a 
status solely by operation of the community property law, section 
2523(f) refers to the former category of property as ``separate 
property'' acquired as a result of a ``conversion'' of ``property held 
as such community property.'' As used in section 2523(f) the phrase 
``property held as such community property'' is used to denote the body 
of property comprehended within the community property system; the 
expression ``separate property'' includes any noncommunity property, 
whether held in joint tenancy, tenancy by the entirety, tenancy in 
common, or otherwise; and the term ``conversion'' includes any 
transaction or agreement which transforms property from a community 
status into a noncommunity status.
    (3) The separate property which section 2523(f) classifies as 
community property is not limited to that which was in existence at the 
time of the conversion. The following are illustrative of the scope of 
section 2523(f):
    (i) A partition of community property between husband and wife, 
whereby a portion of the property became the separate property of each, 
is a conversion of community property.
    (ii) A transfer of community property into some other form of 
coownership, such as a joint tenancy, is a conversion of the property.

[[Page 627]]

    (iii) An agreement (whether made before or after marriage) that 
future earnings and gains which would otherwise be community property 
shall be shared by the spouses as separate property effects a conversion 
of such earnings and gains.
    (iv) A change in the form of ownership of property which causes 
future rentals, which would otherwise have been acquired as community 
property, to be acquired as separate property effects a conversion of 
the rentals.
    (4) The rules of section 2523(f) are applicable, however, only if 
the conversion took place after December 31, 1941, and only to the 
extent stated in this section.
    (5) If the value of the separate property acquired by the donor as a 
result of a conversion did not exceed the value of the separate property 
thus acquired by the donee spouse, the entire separate property thus 
acquired by the donor is to be considered, for the purposes of this 
section, as held by him and the donee spouse as community property. If 
the value (at the time of conversion) of the separate property so 
acquired by the donor exceeded the value (at that time) of the separate 
property so acquired by the donee spouse, only a part of the separate 
property so acquired by the donor (and only the same fractional part of 
property acquired by him in exchange for such separate property) is to 
be considered, for purposes of this section, as held by him and the 
donee spouse as community property. The part of such separate property 
(or property acquired in exchange for it) which is considered as so held 
is the same proportion of it which the value (at the time of the 
conversion) of the separate property so acquired by the donee spouse is 
of the value (at that time) of the separate property so acquired by the 
donor. The following example illustrates the application of the 
provisions of this paragraph:

    Example. During 1942 the donor and his spouse partitioned certain 
real property held by them under community property laws. The real 
property then had a value of $224,000. A portion of the property, then 
having a value of $160,000, was converted into the donor's separate 
property, and the remaining portion, then having a value of $64,000, was 
converted into his spouse's separate property. In 1955 the donor made a 
gift to his spouse of the property acquired by him as a result of the 
partition, which property then had a value of $200,000. The portion of 
the property transferred by gift which is considered as community 
property is

$64,000 (value of property acquired by donee spouse)/$160,000 (value of 
property acquired by donor spouse) x $200,000 = $80,000.


The marital deduction with respect to the gift is, therefore, limited to 
one-half of $120,000 (the difference between $200,000, the value of the 
gift, and $80,000, the portion of the gift considered to have been of 
``community property''). The marital deduction with respect to the gift 
is, therefore, $60,000.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 8522, 59 FR 9660, Mar. 1, 1994]

                         Special Valuation Rules