Inadequate disclosure of gifts of closely held business interests.

• Author: Lerman, Jerry L.

Recently published Chief Counsel Advice (CCA) 200221010 illustrates the importance of adequately disclosing gifts, so that the statute of limitations (SOL) begins to run on the gift date. The Taxpayer Relief Act of 1997 overrides the general three-year SOL for gift tax purposes and, under Sec. 6501(c)(9), provides that the SOL does not run unless a taxpayer discloses the gift in a manner that adequately apprises the IRS of the gift's nature and the basis for its reported value.

If the taxpayer does not adequately disclose this information on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, the IRS can make an assessment, even after death. This rule applies to all gifts, but its effect is especially severe for a non-readily marketable asset (such as a closely held business interest); years later, the IRS could increase its value, resulting in an unexpected (and unwelcome) tax bill.

Gathering information to prepare Form 709 (especially if a transfer involves a closely held business) is often difficult and expensive. Among other things, the taxpayer has to obtain an appraisal by a qualified, independent appraiser. When the taxpayer is reluctant to bear this expense and files Form 709 with only minimal information, he or she is not filing an adequate return; as a result, the SOL remains open indefinitely

Facts

In CCA 200221010, a taxpayer gifted an interest in a limited liability company (LLC) to a trust. He described the gift on Form 709 as "[c]lass B units in ABC LLC. Units acquired on 4/6/97 for $200,000 cash." The return reflected the date of the gift and a gift tax value of $200,000. The IRS later determined that the gift's value was actually $14 million, with a potential gift: tax liability in excess of $7 million. The taxpayer maintained that the SOL had expired, which barred assessment of the tax, because the IRS initiated its examination more than three years after he filed Form 709. Prior to assessing the tax, the local IRS office sought guidance from the National Office on the SOL issue.

Analysis

Although the IRS acknowledged that if the taxpayer had adequately disclosed the gift, the SOL would have expired, it continued to maintain that the taxpayer did not properly disclose the gift under Sec. 6501(c)(9), leaving the SOL open. In noting the absence of gift tax cases interpreting the "adequate disclosure" standard, the Service first looked to income tax cases. It found that to avoid an extension of the...