So what does “adequately disclosed” mean? The regulations state a gift is adequately disclosed when the IRS is apprised of the nature of the gift and the basis for its value. According to the regulations, a gift is “adequately disclosed” when the Form 709 includes: (1) a description of the transferred property (including consideration received by the donor); (2) the identity of, and relationship between, the donor and each donee; (3) if a trust is involved , the trust EIN and either a brief description of the trust terms or the trust agreement; (4) either a copy of any qualified appraisals or a detailed description of the method used to determine the fair market value of the gift; and (5) a description of any position that is contrary to the regulations.
Historically, the IRS has strictly interpreted the requirements in the regulations. For example, IRS Legal Advice Memorandum 201552201F addressed whether the statute of limitations was open for gifts from a father to his daughter. The donor filed a Form 709 claiming two gifts of partnership interests in two family limited partnerships. The partnerships’ primary assets were farm land, which had been appraised by a certified appraiser. The Form 709 included a description of the gift and a description of the valuation methods for the farm land was attached. Unfortunately, the legal memorandum found that the gifts had not been adequately disclosed because, the full legal name of the partnerships was not included, the EIN of one of the partnerships was missing a digit, the appraisals were for the land not the partnership interests and the valuation was vague and did not explain the method used to determine the value reached.
In May 2023, the Tax Court addressed adequate disclosure for gift tax purposes in Schlapper v. Commissioner, T.C. Memo 2023-65. In Schlapper, the taxpayer funded a universal variable life insurance policy, benefitting his nephews, with cash and 100 shares of EMG stock in 2006. In 2012 and 2013, the taxpayer participated in the IRS Offshore Voluntary Disclosure Program (OVDP) and included with his submission a “protective” 2006 Form 709 reporting the transfer of the EMG stock. The taxpayer contended that he was not subject to gift tax in 2006 because he did not intend to reside permanently in the United States until he obtained citizenship in 2008. In 2016, the IRS notified the taxpayer that the 2006 Form 709 was selected for examination regarding the taxpayer’s claim of nondomiciliary status in 2006, as well as the gift of the EMG stock. The taxpayer signed a Form 872 agreeing to extend the time period to assess tax to Nov. 30, 2017. The IRS concluded that no completed gift was made in 2006, but instead the gift was completed in 2007, for which no Form 709 had been filed. The taxpayer disagreed with the IRS and withdrew from the OVDP. In 2019, the IRS issued a notice of deficiency for 2007 for a gift tax liability over $4 million plus penalties over $4 million for late filing and late payment. The taxpayer filed a petition with the Tax Court arguing that the notice of deficiency was issued beyond the statute of limitations because his 2006 gift tax return included Schedule F of his 2006 Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, which showed the balance sheet of EMG. He argued that this document, along with his protective filing attachment and his Offshore Entity Statement, constituted adequate disclosure and thus started the statute of limitation. The IRS argued that the taxpayer failed to satisfy the adequate disclosure requirements in the regulations.
The Tax Court held that while the taxpayer may not have strictly complied with all the requirements in the regulations, he substantially complied by providing sufficient information to apprise the IRS of the nature of the transaction. Therefore, because the taxpayer had adequately disclosed the gifts on his 2006 gift tax return, the period of limitation to assess the gift tax started when the return was filed in 2013. The IRS was barred from assessing gift tax because it issued the notice of deficiency in 2019, more than three years after the filing plus the agreed-upon one-year extension pursuant to Form 872.
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