New gift tax SOL rules incorporate Chapter 14 disclosure requirements.

• Author: Korte, David B.
• Position: Statute of limitations, IRC Chapter 14

The Taxpayer Relief Act of 1997 (TRA '97) added a new requirement for proper gift reporting. Amended Sec. 6501 (c)(9) now provides that the value of any item disclosed in a gift tax return or in a statement attached to the return, in a manner adequate to apprise the IRS of the nature of the item, may not be redetermined after expiration of the three-year statute of limitations (SOL). However, gift tax may be assessed, or a proceeding in court for the collection of the gift tax may begin without assessment, at any time if a transfer is not adequately disclosed. The provision is intended to extend the pre-TRA '97 disclosure requirements for gifts subject to Chapter 14's special valuation rules to all gifts.

Regs. Sec. 301.6501(c)-1(e) provides the following disclosure requirements for transfers subject to Chapter 14:

(i) A description of the transactions, including a description of transferred and retained interests and the method (or methods) used to value each;

(ii) The identity of, and relationship between, the transferor, transferee, all other persons participating in the transactions, and all parties related to the transferor holding an equity interest in any entity involved in the transaction; and

(iii) A detailed description (including all actuarial factors and discount rates used) of the method used to determine the amount of the gift arising from the transfer (or taxable event), including, in the case of an equity interest that is not actively traded, the financial and other data used in determining value. Financial data should generally include balance sheets and statements of net earnings, operating results, and dividends paid for each of the five years immediately before the valuation date.

Clearly, not all gifts will require this much detail, but with no guidance available, how should these disclosure requirements be applied? Given the diversity of gifts and the various types of assets that will be transferred, gift tax return preparers face practical issues in applying the Chapter 14 adequate disclosure standard.

Regs. Sec. 301.6501(c)-1(e)(i), which deals with the description of the transaction and valuation methods, does not pose significant problems. Information regarding the valuation of any asset should...