Adequate Disclosures Presented by: Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP Green Bay, WI 920.739.3345 [email protected] [email protected]

Adequate DisclosuresPresented by:Robert S. Keebler, CPA, MSTVirchow, Krause & Company, LLPGreen Bay, WI [email protected]

Advisors Forum CPE Series Teleconference

mailto:[email protected]

© 2008 Robert S. Keebler, CPA, [email protected]

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• Statute of limitations is ordinarily three years Statute of limitations is ordinarily three years after the later of:after the later of:– The date the return was filed The date the return was filed

OROR– The date the return was due The date the return was due

• Time period increases to six years after the Time period increases to six years after the later of filing or due date if amounts omitted later of filing or due date if amounts omitted from the return exceed 25% of the amount from the return exceed 25% of the amount reportedreported

Statute of Limitations for Assessing Statute of Limitations for Assessing Additional Gift TaxAdditional Gift Tax

BackgroundBackground


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• IRS cannot increase the amount of the initial giftIRS cannot increase the amount of the initial gift• IRS cannot increase the amount of a future gift IRS cannot increase the amount of a future gift

based on an increase in the amount of the initial based on an increase in the amount of the initial giftgift

• IRS cannot increase the amount of adjusted IRS cannot increase the amount of adjusted taxable gift included in the estate as a result of taxable gift included in the estate as a result of the giftthe gift

BackgroundBackgroundEffects of Running of the StatuteEffects of Running of the Statute


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• Pre-1990Pre-1990– No disclosure requirementsNo disclosure requirements

• Special valuation rules of Chapter 14Special valuation rules of Chapter 14– Statute of limitations would not run with respect to a Statute of limitations would not run with respect to a

gift subject to the special valuation rules under § gift subject to the special valuation rules under § 2701 or § 2702 unless there was adequate disclosure 2701 or § 2702 unless there was adequate disclosure

– Without adequate disclosure, additional tax could be Without adequate disclosure, additional tax could be assessed or a proceeding in court for collection of tax assessed or a proceeding in court for collection of tax without assessment could be commenced at any timewithout assessment could be commenced at any time

Disclosure RequirementsDisclosure Requirements


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• For gifts subject to §§ 2701 and 2702, a return For gifts subject to §§ 2701 and 2702, a return must provide the following information: must provide the following information: – A description of the transactionsA description of the transactions– The identity of, and relationship between, the The identity of, and relationship between, the

transferor, transferee, and all other persons involvedtransferor, transferee, and all other persons involved– A detailed description of the method used to A detailed description of the method used to

determine the amount of the giftdetermine the amount of the gift

Disclosure RequirementsDisclosure Requirements


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• Added new disclosure rules for gifts not Added new disclosure rules for gifts not subject to Chapter 14subject to Chapter 14

• Applies to gifts made after August 5, 1997Applies to gifts made after August 5, 1997

Disclosure RequirementsDisclosure RequirementsTaxpayer Relief Act of 1997Taxpayer Relief Act of 1997


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• If a gift is adequately disclosed on a gift tax If a gift is adequately disclosed on a gift tax return it may not be revalued by the IRS for gift return it may not be revalued by the IRS for gift or estate tax purposes after the statute of or estate tax purposes after the statute of limitations has runlimitations has run

• A transfer will be adequately disclosed if it is A transfer will be adequately disclosed if it is reported in a manner adequate to apprise the reported in a manner adequate to apprise the IRS of the nature of the gift and the value so IRS of the nature of the gift and the value so reportedreported

• Two more specific adequate disclosure safe Two more specific adequate disclosure safe harbors are:harbors are:– Detailed Description Safe HarborDetailed Description Safe Harbor– Appraisal Safe HarborAppraisal Safe Harbor

Disclosure Requirements for Disclosure Requirements for Gifts Not Subject to Chapter 14Gifts Not Subject to Chapter 14


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Information Required for Information Required for Both Safe HarborsBoth Safe Harbors

• A description of the transferred property and any A description of the transferred property and any consideration received by the transferorconsideration received by the transferor

• The identity of, and relationship between, the The identity of, and relationship between, the transferor and each transferee transferor and each transferee

• If the property is transferred in trust, the trust's tax If the property is transferred in trust, the trust's tax identification number and a brief description of the identification number and a brief description of the terms of the trust, or in lieu of a brief description of terms of the trust, or in lieu of a brief description of the trust terms, a copy of the trust instrumentthe trust terms, a copy of the trust instrument

• A statement describing any position taken that is A statement describing any position taken that is contrary to any proposed, temporary or final contrary to any proposed, temporary or final Treasury regulations or revenue rulings published Treasury regulations or revenue rulings published at the time of the transferat the time of the transfer


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Information Required for Information Required for Detailed Description Safe HarborDetailed Description Safe Harbor

• The following additional information is required:The following additional information is required:− Any financial data (e.g., balance sheets, etc. with Any financial data (e.g., balance sheets, etc. with

explanations of any adjustments) that were utilized explanations of any adjustments) that were utilized in determining the value of the property interestin determining the value of the property interest

− Any restrictions on the transferred property that were Any restrictions on the transferred property that were considered in determining the fair market value of considered in determining the fair market value of the propertythe property

− A description of any discounts, such as discounts for A description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of blockage, minority or fractional interests, and lack of marketability, claimed in valuing the propertymarketability, claimed in valuing the property


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– In the case of a transfer of an interest that is actively In the case of a transfer of an interest that is actively traded on an established exchange, the following traded on an established exchange, the following information will satisfy all additional requirements:information will satisfy all additional requirements:• Recitation of the exchange where the interest is listedRecitation of the exchange where the interest is listed• The CUSIP number of the securityThe CUSIP number of the security• The mean between the highest and lowest quoted selling The mean between the highest and lowest quoted selling

pricesprices− For an interest in an entity that is not actively For an interest in an entity that is not actively

traded, the following rules applytraded, the following rules apply• A description of any discounts claimed in valuing the A description of any discounts claimed in valuing the

assets assets • If the value of the entity or of the interests in the entity is If the value of the entity or of the interests in the entity is

properly determined based on the net value of the assets properly determined based on the net value of the assets held by the entity, an additional statement must be held by the entity, an additional statement must be providedprovided

Information Required for Information Required for Detailed Description Safe HarborDetailed Description Safe Harbor


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Information Required for Information Required for Appraisal Safe HarborAppraisal Safe Harbor

• An appraisal can be submitted in lieu of the An appraisal can be submitted in lieu of the information required for the detailed information required for the detailed description safe harbordescription safe harbor

• The appraisal must be prepared by a qualified The appraisal must be prepared by a qualified appraiserappraiser


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• The appraisal must contain:The appraisal must contain:− The date of the transfer, the date on which the The date of the transfer, the date on which the

transferred property was appraised, and the purpose transferred property was appraised, and the purpose of the appraisal.of the appraisal.

− A description of the propertyA description of the property− A description of the appraisal process employedA description of the appraisal process employed− A description of the assumptions, hypothetical A description of the assumptions, hypothetical

conditions, and any limiting conditions and conditions, and any limiting conditions and restrictions on the transferred propertyrestrictions on the transferred property

− The information considered in determining the The information considered in determining the appraised valueappraised value



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• The appraisal must contain (cont.):The appraisal must contain (cont.):− The appraisal procedures followed, and the reasoning The appraisal procedures followed, and the reasoning

that supports the analyses, opinions, and conclusionsthat supports the analyses, opinions, and conclusions− The valuation method utilized, the rationale for the The valuation method utilized, the rationale for the

valuation method, and the procedure used in valuation method, and the procedure used in determining the fair market value of the asset determining the fair market value of the asset transferredtransferred

− The specific basis for the valuation, such as specific The specific basis for the valuation, such as specific comparable sales or transactions, sales of similar comparable sales or transactions, sales of similar interests, asset-based approaches, merger-interests, asset-based approaches, merger-acquisition transactions, etcacquisition transactions, etc



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Non-Gift Completed TransfersNon-Gift Completed Transfers• Completed transfers to members of the transferor’s Completed transfers to members of the transferor’s

family that are made in the ordinary course of family that are made in the ordinary course of business business − Transfers are deemed to be adequately disclosed even if the Transfers are deemed to be adequately disclosed even if the

transfer is not reported on a gift tax return if the transfer is transfer is not reported on a gift tax return if the transfer is properly reported by all parties for income tax purposes properly reported by all parties for income tax purposes

• Other property transfers reported as non-gift transfers Other property transfers reported as non-gift transfers must satisfy two requirements to be considered must satisfy two requirements to be considered adequately disclosed:adequately disclosed:− The general information required for both safe harbors must The general information required for both safe harbors must

be providedbe provided− There must be an explanation of why the transfer is not a gift There must be an explanation of why the transfer is not a gift

under Chapter 12 of the Codeunder Chapter 12 of the Code


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Adequate Disclosure of Adequate Disclosure of Incomplete TransfersIncomplete Transfers

• Adequate disclosure of a transfer that is reported Adequate disclosure of a transfer that is reported as a completed gift on the gift tax return as a completed gift on the gift tax return commences the running of the statute of commences the running of the statute of limitations even if the transfer is ultimately limitations even if the transfer is ultimately determined to be incomplete for gift tax purposes determined to be incomplete for gift tax purposes

• If such a transfer is adequately disclosed, after the If such a transfer is adequately disclosed, after the running of the statutory period the transfer will be running of the statutory period the transfer will be included in the donor’s gross estate only to the included in the donor’s gross estate only to the extent that a completed gift would be so includedextent that a completed gift would be so included


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Adequate Disclosure of Adequate Disclosure of Incomplete TransfersIncomplete Transfers

• If the transfer is reported as an incomplete gift, the If the transfer is reported as an incomplete gift, the statutory period will not begin to run even if the statutory period will not begin to run even if the transfer is ultimately determined to be a completed transfer is ultimately determined to be a completed gift regardless of whether the transfer is gift regardless of whether the transfer is adequately disclosedadequately disclosed

• Additional gift tax may be assessed on the transfer Additional gift tax may be assessed on the transfer for up to three years after the donor files a return for up to three years after the donor files a return reporting the transfer as a completed gift with reporting the transfer as a completed gift with adequate disclosureadequate disclosure


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Gifts Made On or Gifts Made On or Before August 5, 1997Before August 5, 1997

• Prior law remains in effectPrior law remains in effect• Prior gifts could be revalued for gift tax purposes Prior gifts could be revalued for gift tax purposes

after the statute of limitations had run only if gift tax after the statute of limitations had run only if gift tax was paid or assessed for the taxable period during was paid or assessed for the taxable period during which the gift was made which the gift was made

• TRA 1997 eliminated this requirement by amending TRA 1997 eliminated this requirement by amending IRC § 2504(c) to apply to all taxable gifts and not IRC § 2504(c) to apply to all taxable gifts and not just those for which gift tax was paid or assessed. just those for which gift tax was paid or assessed.

• After August 5, 1997 the statute of limitations also After August 5, 1997 the statute of limitations also applies to gifts that merely use some of the donor’s applies to gifts that merely use some of the donor’s applicable exclusion amountapplicable exclusion amount


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• Tax eliminated by application of the unified credit Tax eliminated by application of the unified credit was not treated as paid or assessed for this purpose was not treated as paid or assessed for this purpose

• Even if revaluation was barred for gift tax purposes, Even if revaluation was barred for gift tax purposes, prior gifts could be revalued for purposes of prior gifts could be revalued for purposes of determining the amount of an adjusted taxable gift determining the amount of an adjusted taxable gift on the estate tax return on the estate tax return

• The Tax Court applied the The Tax Court applied the Smith Smith rule to annual rule to annual exclusion gifts that were improperly claimed, holding exclusion gifts that were improperly claimed, holding that the IRS could add them back in computing that the IRS could add them back in computing adjusted taxable giftsadjusted taxable gifts

Gifts Made On or Gifts Made On or Before August 5, 1997Before August 5, 1997


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Substantial ComplianceSubstantial Compliance• What if taxpayer meets most, but not all, of the What if taxpayer meets most, but not all, of the

requirements in one of the safe harbors?requirements in one of the safe harbors?− If the disclosure was still adequate “to apprise the If the disclosure was still adequate “to apprise the

IRS of the nature of the gift and the value so IRS of the nature of the gift and the value so reported” under the general rule of Reg. § reported” under the general rule of Reg. § 301.6501(c)-1(f)(2), the taxpayer would have a 301.6501(c)-1(f)(2), the taxpayer would have a strong argument that the return should commence strong argument that the return should commence the running of the statute of limitations.the running of the statute of limitations.

− The safe harbors could be seen as non-exclusive The safe harbors could be seen as non-exclusive ways to satisfy the general ruleways to satisfy the general rule

− Cautious taxpayers will want to qualify for one of the Cautious taxpayers will want to qualify for one of the safe harborssafe harbors


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Procedural IssuesProcedural Issues• To revalue an adequately disclosed gift, the IRS To revalue an adequately disclosed gift, the IRS

must issue a final notice of re-determination must issue a final notice of re-determination within the applicable statute of limitationswithin the applicable statute of limitations , , even even if the re-determination does not create gift tax if the re-determination does not create gift tax payable payable

• The taxpayer can challenge the re-determined The taxpayer can challenge the re-determined amount to petitioning the Tax Court for a amount to petitioning the Tax Court for a declaratory judgment on the value of gifts, declaratory judgment on the value of gifts, including the amount of applicable exclusion including the amount of applicable exclusion amount used on a transferamount used on a transfer


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Procedural IssuesProcedural Issues• Failure to disclose on a timely filed return can Failure to disclose on a timely filed return can

sometimes be correctedsometimes be corrected− An original return would evidently start the statute An original return would evidently start the statute

even if it is filed late even if it is filed late − A timely-filed amended return should start the A timely-filed amended return should start the

statute statute − A late-filed amended return would not start the A late-filed amended return would not start the

statute statute − Filing of a false return, a fraudulent return or no Filing of a false return, a fraudulent return or no

return at all will not start the statute of limitationsreturn at all will not start the statute of limitations


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Documents

Adequate Disclosures Presented by: Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP Green Bay, WI 920.739.3345 [email protected] [email protected]