Husband's fraud will not toll limitations period for spouse's split-gift tax return.

• Author: Fiore, Nicholas J.

Taxpayer T'S husband H owned 100% of an S corporation's issued and outstanding stock. H is a highly sophisticated, well-known businessman. H gifted 48% of his stock to his children. T and H then timely filed separate gift tax returns. H hired a return preparer to prepare Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for himself and T, and gave the return preparer false information as to the stock's value. On each Form 709, H and T identically valued the aggregate shares and split the value in accordance with Sec. 2513. On H's Form 709, T indicated her consent to the split gift. Similarly, H indicated his consent to split the gift by signing T's Form 709. Neither T nor H paid any gift tax on the split gift. More than three years have passed since the filing of the gift tax returns.

The IRS maintains that the stock's fair market value (FMV) substantially exceeded the amounts reported on T's and H's gift tax returns. The Service proposes to issue gift-tax deficiency notices to T and H, asserting a Sec. 6663 fraud penalty against H because it determined that he intentionally undervalued the stock on Form 709. The IRS does not intend to assert the fraud penalty against T, because it has no evidence establishing fraudulent intent on her part.

The limitations period on the assessment of H's gift tax liability remains open based on fraud, despite the passage of more than three years from filing of his gift tax return. The Service raised the question of whether it can rely on H's fraud as a defense to the argument that the limitations period for assessing deficiencies has expired with respect to T's gift tax liability.

Analysis

Under Sec. 2502(c), a donor pays gift tax. As an exception to the general rule, Sec. 2513(a)(1) provides that, if each spouse consents, a gift made by one spouse to any person other than his spouse would be considered as made half by him and half by his spouse. Consequently, both spouses are treated as a donor under Sec. 2513(a), and each is obligated to pay any resulting gift tax liability. By consenting to split-gift treatment under Sec. 2513(a)(2), the entire gift tax liability of each spouse for that tax year is joint and several.

Under Sec. 6501, the Service must assess tax within three years after a taxpayer files his return, whether or not he files such return on or after the date prescribed. As an exception, Sec. 6501(c)(1) provides that, in the case of a fraudulent return with the...