Transfer tax valuation finality and prop. regs. on the "adequate disclosure" of gifts.

• Author: Vail, Daniel T.
• Position: IRS regulations

Certain legislative changes included in the Taxpayer Relief Act of 1997 (TRA '97) and in the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) purported to offer greater certainty in the area of gift tax valuation. Secs. 2504(c) and 2001(f) provide that the IRS is prohibited from revaluing gifts made in prior years in calculating subsequent gift or estate tax liability. The intent of these provisions is to lend a certain finality to the values assigned to gifts made years ago.

Despite these ostensibly favorable changes to the transfer tax law, recently issued proposed regulations would make achieving this "finality" somewhat difficult. Secs. 2504(c) and 2001(f) require that, for the Service to be barred from revaluing a gift, the applicable statute of limitations (SOL) on assessment has to have expired for such gift. Sec. 6501(c)(9) (also amended by the TRA '97), in turn, provides that for the girl tax SOL to begin running on a gift, the value of such gift has to have been "adequately disclosed" to the IRS.

What constitutes adequate disclosure for Secs. 6501(c)(9), 2504(c) and 2001(f) purposes? Recently issued proposed regulations interpreting these sections contain requirements that appear to make adequate disclosure somewhat difficult. Consequently, if the proposed rules become final (without certain significant revisions), triggering the running of the gift tax SOL, achieving transfer tax valuation finality and filing a gift tax return may all become more difficult.

Sec. 6501(c)(9)

Prior to the TRA '97 and the IRSRRA '98, Sec. 6501 provided that the period of assessment of gift tax for a calendar period generally expired three years from the date a gift tax return for that period was deemed to have been filed. This SOL applied to all gifts made in a calendar period for which a return was filed. Thus, even gifts not reported on a gift tax return for that period were covered by the rule.

However, Sec. 6501 was amended in 1990 to provide an exception to the general SOL provision for gifts covered by the special valuation rules of Sees. 2701 and 2702. For these types of gifts, Sec. 6501(c)(9) extended the period of assessment of gift: tax indefinitely. This open-ended SOL prevailed unless such Secs. 2701 and 2702 gifts were disclosed on a gift tax return in a way that was "adequate to apprise" the IRS of the nature of the transfer at issue.

This requirement, known as the "adequate disclosure" rule, was recently...