SOL for assessing gift tax extended.

• Author: Murphy, Scott P.
• Position: Statute of limitations

In light of Kirkman O'Neal II, 102 TC No. 28 (1994), practitioners who advise clients on gifting programs of highly appreciated property (e.g., stock of a closely held family business) that also involve the valuation of such property must go one step further in advising both the donor and the donee of the time period in which the IRS has to issue a deficiency notice for a gift tax or generation-skipping transfer tax.

Sec. 6501(a), which applies only to the donor, sets a three-year limitation period from the time the return is filed for the Service to assess additional tax. Secs. 6324(b) and 6901(c) make the donee personally liable, up to the amount of the gift, for any additional tax assessed and add a one-year limitation period from the expiration of the donor's three-year period of limitation within which the IRS may assess additional tax to the donee.

In O'Neal, the key issue centered on when the Sec. 6901(c) one-year limitation period was in force. In 1987, Mr. and Mrs. O'Neal gave large amounts of highly appreciated stock in the family-owned business to their children and grandchildren. The O'Neals filed timely gift tax returns, paying all tax due. The valuation of the stock was based on a buy/sell agreement that contained a right of first refusal clause; the stock was valued at a price determined by this clause. Mr. O'Neal died shortly after the returns were filed. The Service audited both the Federal estate tax return and the gift tax return. The IRS did not assert any deficiency against the donor's gift tax return prior to the running of the statute of limitations (SOL) (although the opportunity to do so was there). However, just before the SOL would have run under Sec. 6901(c), the Service assessed a deficiency against the donee. The donee contended that the Service must first assert a deficiency against the donor before it can extend the liability to the transferee/donee.

Sec. 6324(b) reads, "If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift." The Tax Court looked at this language and decided that there is no requirement that the IRS first assess the donor before personal liability runs to...