The Internal Revenue Service
Adequate Disclosure of Gifts
IRC Section 6501(c)(9)
By Robert R. Wietzke, CPA*, CVA
OH
Statute of Limitations for Revaluing Gifts
According to the final regulation, issued December 3, 1999, the statute of limitation for
assessment of gift tax is three years from the time the return is filed.
Before the Tax Reform Act of 1997 the IRS could revalue a gift at any
time after the filing if the donor did not pay a gift tax for that
particular gift (this circumstance would occur if the donor used a
portion of their unified credit). In addition, the Tax Court held that a
gift could be revalued for purposes of computing the decedent's estate.
In other words, gift tax revaluation was open-ended at the Service's
discretion, and could occur many years after a gift had been made.
The new rules place a time limit of three years on the
revaluation of gifts as long as adequate disclosure rules are met or
satisfied. However, be aware that if the IRS challenges the valuation
during the limitation period, the taxpayer's opportunity to contest it
also ends with the limitation period. Thus, it is important to be aware
of the limitation period and to act if there is an indication that the
IRS may challenge your appraisal.
Adequate Disclosure of Transfers of Property Reported
as Gifts - IRC Section 301.6501-1(f)(2)
Adequate disclosure, according to the finalized
regulations, will be met if the taxpayer attaches to the return a
statement which contains the following information (quoted from the
final regulation, IRC Section 301.6501-1(f)(2)):
| (I) |
A description of the
transferred property and any consideration received by
the transferor. |
| (II) |
The identity of, and
relationship between, the transferor and each
transferee. |
| (III) |
The tax ID number and a
brief description of the terms of any trust or a copy of
the trust instrument. |
|
(IV) |
A detailed description of
the method used to determine the fair market value of
property transferred, including any financial data that
was 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 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 NYSE, the
American Stock Exchange, the NASDAQ, 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 in this paragraph
(f)(2)(iv) must be provided for each entity if the
information is relevant and material in determining the
value of the interest. |
|
(V) |
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. |
Submission of Appraisals in Lieu of Information
Required under Paragraph 301.6501(f)(2)(iv)
The requirements noted in item iv. above sound
cumbersome for the typical taxpayer. The good news is that the final
regulations allow the attachment of a business valuation report in lieu
of the information required under paragraph (f)(2)(iv). The regulations
set forth the requirements for the appraisal and the appraiser (quoted
from the final regulation, IRC Section 301.6501-1(f)(3)):
|
(1) |
The appraisal
is prepared by an appraiser who satisfies all of the
following requirements: |
| |
(A) |
The appraiser is an
individual who holds himself or herself out to the
public as an appraiser or performs appraisals on a
regular basis. |
| |
(B) |
Because of an appraiser's
qualifications, as described in the appraisal that
details the appraiser's background, experience,
education, and membership, if any, in professional
appraisal associations, the appraiser is qualified to
make appraisals of the type of property being valued. |
| |
(C) |
The appraiser is not the
donor or the donee of the property or a member of the
family of the donor or donee, or any person employed by
the donor, the donee, or a member of the family of
either. |
|
(2) |
The appraisal
contains all of the following: |
| |
(A) |
The date of the transfer,
the date on which the transferred property was
appraised, and the purpose of the appraisal. |
| |
(B) |
A description of the
property. |
| |
(C) |
A description of the
appraisal process employed. |
| |
(D) |
A description of the
assumptions, hypothetical conditions, and any limiting
conditions and restrictions on the transferred property
that affect the analyses, opinion, and conclusions |
| |
(E) |
The information
considered in determining the appraised value, including
in the case of an ownership interest in a business, all
financial data that was used in determining the value of
the interest that is sufficiently detailed so that
another person can replicate the process and arrive at
the appraised value. |
| |
(F) |
The procedures followed,
and the reasoning that supports the analyses, opinions,
and conclusions. |
| |
(G) |
The valuation method
utilized, the rationale for the valuation method, and
the procedure used in determining the fair market value
of the asset transferred. |
| |
(H) |
The specific basis for
the valuation, such as specific comparable sales or
transactions, sales of similar interests, asset-based
approaches, merger-acquisition transactions, etc. |
Go Back to
Articles
|
