In Legal Advice Issued by Field Attorneys 20152201F the IRS conclude disclosures related to a gift were inadequate on the gift tax return that was filed by the taxpayer. That is important because, under IRC §6501(c)(9) if there is inadequate disclosure of a gift on a gift tax return the statute of limitations stays open indefinitely.
Reg. §301.6501(c)-1(f)(2) provides that adequate disclosure of a gift on a gift tax return consists of the following:
- A description of the transferred property and any consideration received by the transferor;
- The identity of, and relationship between, the transferor and each transferee;
- If the property is transferred in trust, the trust's tax identification number and a brief description of the terms of the trust, or in lieu of a brief description of the trust terms, a copy of the trust instrument;
- Unless a qualified appraisal (as defined by Reg. §301.6501(c)-1(f)(3)) is included with the return, a detailed description of the method used to determine the fair market value of property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that were utilized in determining the value of the interest, any restrictions on the transferred property that were considered in determining the fair market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property.
- In the case of a transfer of an interest that is actively traded on an established exchange, such as the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, or a regional exchange in which quotations are published on a daily basis, including recognized foreign exchanges, recitation of the exchange where the interest is listed, the CUSIP number of the security, and the mean between the highest and lowest quoted selling prices on the applicable valuation date will satisfy all of the requirements of this paragraph (f)(2)(iv).
- In the case of the transfer of an interest in an entity (for example, a corporation or partnership) that is not actively traded, a description must be provided of any discount claimed in valuing the interests in the entity or any assets owned by such entity.
- In addition, if the value of the entity or of the interests in the entity is properly determined based on the net value of the assets held by the entity, a statement must be provided 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. If 100 percent of the value of the entity is not disclosed, the taxpayer bears the burden of demonstrating that the fair market value of the entity is properly determined by a method other than a method based on the net value of the assets held by the entity.
- If the entity that is the subject of the transfer owns an interest in another non-actively traded entity (either directly or through ownership of an entity), the information required by this rule must be provided for each entity if the information is relevant and material in determining the value of the interest; and
- A statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer.
The taxpayer had included the following single paragraph as the disclosure of information with the gift tax return regarding the transfer of two partnership interests:
Partnership interests were given in (Taxpayer ID: —————————————————————) and in (Taxpayer ID: [)]. The assets ————————————————————————————of the partnership were primarily farm land. The land was independently appraised by a certified appraiser. Discounts of % were taken for minority —-interests, lack of marketability, etc[.], to obtain a fair market value of the gift.
The EIN reported for one of the partnerships was in error, missing a digit. As well, the descriptions used what the IRS described as “incorrect” abbreviated names for the entities that were gifted and omitted the LP (limited partnership) and LLP (limited liability partnership) designations. The return also did not state whether the interests transferred were general, limited or limited liability interests.
The IRS concludes that the overall disclosure, not surprisingly, falls far short of what the regulation requires. Specifically it concluded with regard to the description given:
This valuation description does not include “a detailed description of the method used to determine the fair market value of the property transferred, including any financial data ... utilized in determining the value of the interests.” § 301.6501-1(f)(2)(iv). This description recites that Donor had the land appraised, not that he had the partnership or the donated partnership interest appraised. The description does not identify “any restrictions on the transferred property that were considered in determining the fair market value”. Id.
This description further suggests (by asserting that the assets are primarily farm land and that the land was appraised) that and are properly valued based upon ————the net value of their assets. Id. If that is the case, the return's valuation description is not “detailed” as required by the regulation. There is no financial data (e.g., actual land values) used in determining the value of the gifts. Id. There is no explanation of the method (e.g., comparable sales) used to determine the value nor any explanation of either how the % discount breaks down between different discount types or the basis —-for the discounts taken. The “etc” in the return's description suggests that unlisted discounts were applied to the gifts. Id. There is also no statement regarding the 100 percent value of either or , even though both entities appear to be valued based ————upon their net assets.
Donor's return arguably identifies the partnership (because the complete EIN ——will lead to the unabbreviated partnership name), but it does not adequately identify the partnership, and it fails to describe adequately the method used to determine the ——interests' fair market values. Thus, the statute of limitations exception inI.R.C. § 6501(c)(9) applies to assessing gift tax based upon the Form 709. The Service ———may assess such tax at any time.
However, the memorandum does remind the agent that requested the ruling that if the IRS does not assess within the standard three year statute, the agency will bear the burden of proof in showing the statute is still open. That is noted because the taxpayer was refusing to agree to sign an extension of the statute and the standard three year period was going to expire just about a month after the memorandum was written.
This case serves as a warning attaching short descriptions of the nature of gifts to a gift tax return whenever the items transferred have values that would be subject to dispute, as would the items here. As well, it is important to proof the disclosure that is given to insure that full legal names are used, the type of entity is clear and that employer identification numbers are correct.