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IRS
Regulations on Adequate Disclosure of Gifts
IRS Regulations for Section 301.6501(c)-1
Analysis:
- 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:
- Obtain a competent and reasonable appraisal of the gifted property, and,
- 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.
For more information, please
contact us.
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