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  Business Valuation - Gift Tax

IRS Regulations on Adequate Disclosure of Gifts
IRS Regulations for Section 301.6501(c)-1


  • These regulations increase the importance of obtaining contemporaneous appraisals to provide the foundation for valuing gifts. There will be a growing recognition that the quality of the appraisal obtained will be a significant determining factor in whether the disclosure for a particular gift was "adequate."
  • These regulations increase the need to file gift tax returns to report any gifts of property involving valuation issues, even if the declared fair market value of the gifts are under the annual exclusion amounts. By filing a Federal gift tax form 709 and "adequately" disclosing the method of valuing the gift and any valuation discounts applied, the statute of limitations on the IRS challenge of the declared gift value is three years from the filing of the gift tax return. Either no form filing or inadequate disclosure of the determination of value permits the IRS to challenge the declared gift value at any time in the future.
  • These regulations increase the potential problems for taxpayers who do not put significant resources into determining the reported fair market value of their gifts, and properly disclosing the approach, assumptions and conclusion in that determination of value.
  • These regulations increase the potential liability for CPA-preparers of gift tax returns who do not advise the taxpayer to:
    1. Obtain a competent and reasonable appraisal of the gifted property, and,
    2. Fully disclose the approach, assumptions and conclusions in the determination of the values shown on the gift tax return.
    Kentner Sellers, LLP can help you, your clients and the taxpayers satisfy the IRS regulations on adequate disclosures of gifts.
IRS Regulations for Section 301.6501(c)-1: "If a transfer of property, other than a transfer described in paragraph (e) of this, is not adequately disclosed on a gift tax (Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return) filed for the calendar period in which the transfer occurs, then any gift tax imposed by chapter 12 of subtitle B of the Internal Revenue Code on the transfer may be assessed, or a proceeding in court for the collection of the appropriate tax may be begun without assessment, at any time."

This creates a new statute of limitations for valuation issues related to gifts made after August 5, 1997, as long as the transfer is "adequately disclosed". If a transfer by gift is not "adequately disclosed," the statute of limitations with respect to that gift never runs, and the Internal Revenue Service can assess a gift tax relative to that gift at any time in the future. This places a premium on "adequate disclosure" of gifts, especially where valuation issues are involved.

More from the Regulations:

"(f)(2) Adequate disclosure of transfers of property reported as gifts. A transfer will be adequately disclosed on the return only if it is reported in a manner adequate to apprise the Internal Revenue Service of the nature of the gift and the basis for the value so reported. Transfers reported on the gift tax return as transfers of property by gift will be considered adequately disclosed under this paragraph (f) only if the return provides a complete and accurate description of the transaction, including--
  • A description of the transferred property and any consideration received by the transferor; In other words, (a) the property being transferred must be identified, and (b) any consideration received by the giftor (sic) must be identified (so that a net gift can be established by the difference).
  • The identity of, and relationship between, the transferor and the transferee;
  • A detailed description of the method used to determine the fair market value of property transferred , including any relevant financial data and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property...
  • If the property is transferred in trust, the trust's tax identification number and a brief description of the terms of the trust; (Self explanatory, I guess, to tax advisers.)
  • Any restrictions on the transferred property that were considered in determining the fair market value of the property; and again, any restrictions applicable to the entity or interest being valued should be appropriately considered in the appraisal report.
  • A statement of the relevant facts affecting the gift tax treatment of the transfer that reasonably may be expected to apprise the Internal Revenue Service of the nature of any potential controversy concerning the gift tax treatment of the transfer, or in lieu of this statement, a concise description of the legal issue presented by the facts. In addition, a statement describing any position taken that is contrary to any temporary or final Treasury regulations or revenue rulings."

"In the case of the transfer of an interest in an entity (e.g., corporation or partnership) that is not actively traded, a description of any discount claimed in valuing the entity or any assets owned by such entity, including a statement regarding the fair market value of 100 percent of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the pro rata portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return..."

The current IRS Form 709 has a "check the box" item requiring the disclosure of whether any discounts were applied in the valuation of the interest that is the subject of a gift. This new requirement goes a step further and requires the disclosure of any discounts applied in valuing "any assets owned by such entity." For example, if a parent gifted a share of a family limited partnership to her son and declared a gift value of $20,000 after the application of a 20% discount for lack of marketability, this discount would also have to be disclosed with the gift tax Form 709.

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