Gift-tax liability undertaken by the donee is not a deductible encumbrance in valuing the gifted property.

Gift-tax liability undertaken by the donee was not deductible in computing the taxable value of the gift because the deduction applies only to liabilities or encumbrances existing before the gift. The tax liability arises only on completion of the gift and is a consequence of the transfer, not a pre-existing burden on the property. The statutory scheme places primary liability on the donor, with recovery from the donee only in specified cases, and treats the tax as a first charge only after the gift is complete. A private agreement shifting the tax burden to the donee does not convert that post-transfer liability into a deductible encumbrance.

---

---

Issues: Whether the gift-tax liability undertaken by the donee could be deducted while determining the taxable value of the gifted property.

Analysis: The deduction is available only where a liability or encumbrance existed prior to the gift. A gift-tax liability arises only upon a completed gift and is a consequence of the transfer, not a burden antecedent to it. The statutory scheme places primary liability on the donor, with recovery from the donee only in specified circumstances, and also treats the tax as a first charge only after the gift is complete. An agreement between donor and donee that the donee will bear the tax does not convert that post-gift liability into a deductible pre-existing encumbrance.

Conclusion: The gift-tax liability undertaken by the donee was not deductible in computing the value of the gift, and the allowance granted by the first appellate authority was wrongly made.

---