Respective gift amounts for beneficiaries tax consequences

Under IRC Section 102(a), non-taxable gifts, bequests or inheritances are fully excludable from gross income. Getty v. Commissioner, 913 F.2d 1486 (1990). This is because, under the “origin of the claim test,” recovery of non-taxable income is in itself non-taxable. For example, in Getty v. Commissioner, the court held that a $10 million dollar lump-sum settlement of a lawsuit between competing beneficiaries of Paul Getty’s would be non-taxable since that the property in dispute was Section 102 property.

However, where the payments constitute income from Section 102 property, those payments will be fully taxable. For example, in Edwards v. Commissioner, 37 T.C. 1107 (1962) the court held that a widow who settled her claim against her husband’s estate in return for periodic trust payments was fully taxable on those payments; the court reasoned that the payments constituted income from Section 102 property—which is expressly non-excludable from gross income under Section 102(b).