[Federal Register Volume 63, Number 245 (Tuesday, December 22, 1998)]
[Proposed Rules]
[Pages 70701-70707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33648]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20, 25 and 301
[REG-106177-98]
RIN 1545-AW20
Adequate Disclosure of Gifts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to
changes made by the Taxpayer Relief Act of 1997 and the Internal
Revenue Service Restructuring and Reform Act of 1998 regarding the
valuation of prior gifts in
[[Page 70702]]
determining estate and gift tax liability, and the period of
limitations for assessing and collecting gift tax. The proposed
regulations affect individual donors and the estates of those donors.
This document also provides notice of a public hearing on these
proposed regulations.
DATES: Written and electronic comments must be received by March 22,
1999. Outlines of topics to be discussed at the public hearing
scheduled for Wednesday, April 28, 1999, must be received by Wednesday,
April 7, 1999.
ADDRESSES: Send submissions to CC:DOM:CORP:R [REG-106177-98] room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC
20044. Submissions may also be hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R [REG-106177-
98], Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, at 10
a.m., Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, William L.
Blodgett, (202) 622-3090; concerning submissions and the hearing, and/
or to be placed on the building access list to attend the hearing,
LaNita Van Dyke, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Introduction
This document proposes to amend the Estate and Gift Tax Regulations
(26 CFR parts 20 and 25) under sections 2001 and 2504 relating to the
value of prior gifts for purposes of computing the estate and gift tax.
This document also proposes to amend the Procedure and Administration
Regulations relating to the period for assessment and collection of
gift tax under section 6501.
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
February 22, 1999. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in this proposed regulation is
proposed Sec. 301.6501(c)-1(f) of the Procedure and Administration
Regulations. This information is required by statute in order to
commence the period of limitations on assessment. This information will
be used to identify gift tax issues relating to the reported transfers.
The collection of information is mandatory. The likely respondents are
individuals.
The reporting burden contained in Sec. 301.6501-1(f) is reflected
in the burden of Form 709, U.S. Gift (and Generation-Skipping Transfer)
Tax Return.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax information are confidential, as required by 26 U.S.C. 6103.
Background
Under the unified estate and gift tax system, a single rate
schedule is applied to an individual's cumulative gifts and bequests.
Gift tax is computed by determining a tax on the total of the gifts
made by the donor in the current calendar year plus the gifts made in
prior years (prior taxable gifts). The tax computed is then reduced by
the tax that would have been payable on the prior taxable gifts. The
result (after taking into account the applicable credit amount under
section 2505) is the gift tax on the current gifts. Similarly, the
estate tax is computed by determining a tax on the value of the
decedent's taxable estate plus the value of lifetime gifts (adjusted
taxable gifts) made by the decedent. The tax computed is then reduced
by the gift tax that would have been payable on the adjusted taxable
gifts. The result (after allowing for various credits) is the estate
tax on the taxable estate.
The Statute of Limitations for Assessment of Gift Tax Under Section
6501(c)(9) of the Internal Revenue Code
Prior to the Taxpayer Relief Act of 1997 (the 1997 Act) and the
Internal Revenue Service Restructuring and Reform Act of 1998 (the 1998
Act), the period for 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 be filed. The statute of limitation protection
extended to all gifts made in a calendar period for which a return was
filed, including gifts not reported on the gift tax return for the
period. An exception to this general rule applied for gifts subject to
the special valuation rules of sections 2701 and 2702. For gifts
subject to these rules, section 6501(c)(9) extends the period of
assessment indefinitely unless the gifts were disclosed on the gift tax
return in a manner adequate to apprise the IRS of the nature of the
transfer.
Under the 1997 and 1998 Acts, this adequate disclosure requirement
was extended to all gifts, whether or not subject to section 2701 or
2702. Consequently, the period of assessment will not close for any
gift made in a calendar year ending after August 5, 1997, or with
respect to any increase in gift tax required under section 2701(d),
that is not adequately disclosed on a gift tax return.
The proposed regulations provide a list of information that, if
applicable to a transaction, must be reported on a gift tax return, or
a statement attached thereto, in order for the transaction to be
considered adequately disclosed to cause the period for assessment to
commence. The required information must completely and accurately
describe the transaction and include: the nature of the transferred
property; the parties involved; the value of the transferred property;
and how the value
[[Page 70703]]
was determined, including any discounts or adjustments used in valuing
the transferred property.
Specific rules are provided in the case of transfers of entities
that are not actively traded that own interests in other non-actively
traded entities. Comments are requested on how these rules should be
applied when the required information is not available to the donor.
In addition, the return must disclose the facts affecting the gift
tax treatment of the transaction in a manner that reasonably may be
expected to apprise the IRS of the nature of any potential controversy
regarding the gift tax treatment of the transfer. In lieu of this
statement, the taxpayer may provide a statement of any legal issue
presented by the facts. Finally, the taxpayer must also provide a
statement of any position taken by the taxpayer that is contrary to any
temporary or final Treasury regulation or any revenue ruling. These
standards are based on those currently employed under Sec. 6662 in
determining whether an item is adequately disclosed under that section,
such that accuracy-related penalties will not be imposed.
The proposed regulations contain examples that illustrate adequate
disclosure under these standards.
Under the proposed regulations, adequate disclosure of a transfer
that is reported as a completed gift on the gift tax return will
commence the running of the statute of limitations under section
6501(c)(9) even if the transfer is ultimately determined to be an
incomplete gift. Thus, if the donor reports a transfer on the gift tax
return as a completed gift for gift tax purposes, the period for
assessing a gift tax with respect to the transfer will commence. If the
IRS does not examine the transaction reported on the gift tax return
prior to the expiration of the running of the statute of limitations,
the transaction will be treated as a completed gift as reported on the
gift tax return. If the IRS, upon examination, disagrees with the
donor's characterization of the transaction, and the issue remains
unresolved through the administrative process, the donor will be sent a
final notice of determination and the donor will be able to seek a
declaratory judgment on the matter pursuant to section 7477.
On the other hand, if a donor initially reports a transfer as an
incomplete gift, even if adequately disclosed, the statute of
limitations does not commence to run until the donor reports the
transfer as a completed gift. The IRS would have three years from the
date of filing of the subsequent gift tax return disclosing the
completed gift to make any assessment with respect to the gift.
As discussed below, the 1997 and 1998 Act amendments to sections
2001 and 2504 curtail the IRS' ability to redetermine the value of a
gift in computing the estate or gift tax, after the statute of
limitations expires. However, the adequate disclosure requirement
contained in section 6501(c)(9) is intended to afford the IRS the
reasonable opportunity to identify in a timely manner and with a
minimum expenditure of resources returns that present issues that merit
further examination. Accordingly, the information required is intended
to enable the IRS to identify issues, if any, without imposing an undue
burden on taxpayers.
The proposed regulations conform the regulations to the new
statutory rules for gifts made in calendar years ending after August 5,
1997, if such gift tax return is filed after the regulations are
published as final regulations. In the interim period, the statutory
provisions apply.
Valuation of Prior Gifts for Gift Tax Purposes
Prior to the 1997 and 1998 Acts, section 2504(c) provided that if a
gift tax had been paid or assessed with respect to the calendar period
in which the gift occurred and the statute of limitations on assessment
for the prior gift had expired, then the value of any gift made in such
calendar period could not be adjusted for purposes of determining the
total amount of prior taxable gifts that the individual had made. This
prohibition on adjustments applied even if a particular gift was not
disclosed on the gift tax return. This rule continues to apply for
gifts made prior to August 6, 1997.
Under section 2504(c) as amended by the 1997 and 1998 Acts, if a
gift was adequately disclosed such that the time has expired for
assessing gift tax for a preceding calendar period under section 6501,
then the value of such gift made in the prior calendar period cannot be
adjusted (regardless of whether or not a gift tax has been assessed or
paid for a prior calendar period). Rather, the value of the gift is the
value as finally determined for gift tax purposes, as defined in
section 2001(f). A similar rule applies with respect to any increase in
taxable gifts required under section 2701(d) (pertaining to the
transfer of applicable retained interests under section 2701).
Section 2504(c) applies only to adjustments involving issues of
valuation. Thus, even after the 1997 and 1998 amendments to section
2504(c), adjustments to prior taxable gifts may be made if the
adjustment is not related to the valuation of the gift; e.g., the
erroneous inclusion or exclusion of property for gift tax purposes. See
Rev. Rul. 76-451 (1976-2 C.B. 304). This result is consistent with the
legislative history to the 1997 Act which emphasizes that the statutory
change imposes a prohibition on revaluing certain gifts. The House
Committee report states that a gift for which the limitations period
has passed cannot be revalued for purposes of determining the
applicable estate tax bracket and available unified credit. H.R. Rep.
No. 148, 105th Cong., 1st Sess. 359 (1997).
The proposed regulations conform the regulations to the new
statutory rules for gift tax returns filed after the regulations are
published as final regulations. In the interim period, the statutory
provisions apply.
Valuation of Prior Gifts for Estate Tax Purposes
Prior to the enactment of the 1997 and 1998 Acts, there was no
estate tax provision corresponding to section 2504(c). Therefore, even
where the period of assessment expired for a calendar period, and gift
tax was paid or assessed for that period, the value of any gifts made
in that period could be adjusted for purposes of determining the estate
tax liability. The statutory change and these proposed regulations
preserve that treatment for gifts made prior to August 6, 1997.
Section 2001(f) was added by the 1997 Act and amended by the 1998
Act. Under section 2001(f) as amended, if the time has expired for
assessing gift tax for a preceding calendar period under section 6501,
then the value of the gift, for purposes of computing the estate tax
liability, is the value of the gift as finally determined for gift tax
purposes. A similar rule applies for any increase in taxable gifts
required under section 2701(d). Under the statute, the value of a gift
is finally determined if: the value is shown on a gift tax return and
the IRS does not contest the value before the period for assessing gift
tax expires; or, before the period for assessing gift tax expires, the
value is specified by the IRS and the taxpayer does not contest the
specified value; or, the value is determined by a court or pursuant to
a settlement agreement between the taxpayer and the IRS.
As discussed above, the provision only limits the IRS' ability to
make adjustments related to the value of a gift. Thus, the IRS is not
precluded from making adjustments that are not related to value, such
as the erroneous inclusion or exclusion of property for gift tax
purposes.
[[Page 70704]]
The proposed regulations conform the current regulations to the
statutory change for gift tax returns filed after the regulations are
published as final regulations. In the interim period, the statutory
provisions apply.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because these
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Small Business
Administration for comment on their impact on small business.
Comment and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to electronic and written comments (a
signed original and eight (8) copies) that are timely submitted to the
IRS. The IRS and Treasury specifically request comments on the clarity
of the proposed regulations and how it may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for Wednesday, April 28, 1999,
at 10 a.m. in Room 2615 of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time to
be devoted to each topic (a signed original and eight (8) copies) by
Wednesday, April 7, 1999.
A period of 10 minutes will be allocated to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting information. The principal author of these regulations is
William L. Blodgett, Office of Assistant Chief Counsel (Passthroughs
and Special Industries), IRS. However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 20
Estate taxes, reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 20 is proposed to be amended as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Paragraph 1. The authority citation for part 20 continues to read
in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 20.2001-1 is revised to read as follows:
Sec. 20.2001-1 Valuation of adjusted taxable gifts and section 2701(d)
taxable events.
(a) Adjusted taxable gifts made prior to August 6, 1997. For
purposes of determining the value of adjusted taxable gifts as defined
in section 2001(b), if the gift was made prior to August 6, 1997, the
value of the gift may be adjusted at any time, even if the time within
which a gift tax may be assessed has expired under section 6501. This
paragraph (a) also applies to adjustments involving issues other than
valuation.
(b) Adjusted taxable gifts and section 2701(d) taxable events
occurring after August 5, 1997. For purposes of determining the value
of adjusted taxable gifts as defined in section 2001(b), if, under
section 6501, the time has expired within which a gift tax may be
assessed under chapter 12 of the Internal Revenue Code (or under
corresponding provisions of prior laws) with respect to a gift made
after August 5, 1997, and during a preceding calendar period (as
defined in Sec. 25.2502-1(c)(2) of this chapter), or with respect to an
increase in taxable gifts required under section 2701(d) and
Sec. 25.2701-4 of this chapter, then the value of the gift will be the
value as finally determined for gift tax purposes under chapter 12 of
the Internal Revenue Code. This paragraph (b) does not apply to
adjustments involving issues other than valuation. See Sec. 25.2504-
1(d) of this chapter.
(c) Finally determined. For purposes of paragraph (a) of this
section, the value of a gift is finally determined for gift tax
purposes if--
(1) The value is shown on a gift tax return, or on a statement
attached to the return, and the Internal RevenueService does not
contest the value before the time has expired under section 6501 within
which gift taxes may be assessed;
(2) The value is specified by the Internal Revenue Service before
the time has expired under section 6501 within which gift taxes may be
assessed on the gift and such specified value is not timely contested
by the taxpayer;
(3) The value is finally determined by a court of competent
jurisdiction; or
(4) The value is determined pursuant to a settlement agreement
entered into between the taxpayer and the Internal Revenue Service.
(d) Definitions. For purposes of paragraph (b) of this section, the
value is finally determined by a court of competent jurisdiction when
the court enters a final decision, judgment, decree or other order
passing on the valuation that is not subject to appeal. See, for
example, section 7481 regarding the finality of a decision by the U.S.
Tax Court. Also, for purposes of paragraph (b) of this section, a
settlement agreement means any agreement entered into by the Internal
Revenue Service and the taxpayer that is binding on both. The term
includes a closing agreement under section 7121, a compromise under
section 7122, and an agreement entered into in settlement of litigation
involving a valuation issue.
(e) Expiration of period of assessment. For purposes of determining
if the time has expired within which a tax may be assessed under
chapter 12 of the Internal Revenue Code, see Sec. 301.6501(c)-1(e) and
(f) of this chapter.
(f) Examples. The following examples illustrate the rules of this
section:
Example 1. (i) Facts. A owns Blackacre and B, A's child, owns
Whiteacre. In 1999, A and B exchange ownership of these properties.
On A's federal gift tax return, Form 709, for the 1999 calendar
year, the transfer of Blackacre to B is adequately disclosed under
Sec. 301.6501(c)-1(f)(2) of this chapter. A reports the transfer as
nontaxable, representing that the fair market values of Whiteacre
and Blackacre, at the time of the transfer, were equal. A dies after
the period of assessment for the transfer has expired.
[[Page 70705]]
(ii) Application of the rule limiting adjustments to valuation
issues. The fair market values of Blackacre and Whiteacre at the
time of the transfer are valuation issues. Because A filed the
return adequately disclosing the transfer, the period of assessment
with respect to A's transfer has expired, notwithstanding the fact
that no gift tax return was required to be filed. Therefore, the
Internal Revenue Service is precluded from revaluing Blackacre and
Whiteacre in determining the amount of A's adjusted taxable gifts in
computing A's estate tax liability.
Example 2. (i) Facts. In 1999, A transfers stock in a closely-
held corporation to an irrevocable trust. Under the terms of the
trust, the trustee has the discretion to accumulate trust net income
or distribute it among A's children. At A's death, the trust is to
terminate and the trust corpus is to be paid to A's surviving issue.
On A's federal gift tax return, Form 709, filed for the 1999
calendar year, the transfer is adequately disclosed under
Sec. 301.6501(c)-1(f)(2) of this chapter. A claims an annual
exclusion under section 2503(b) for the transfer. A dies after the
period of assessment for the transfer has expired.
(ii) Application of the rule limiting adjustments to valuation
issues. Because the period of assessment has closed on the transfer
due to adequate disclosure, the Internal Revenue Service is
precluded from revaluing the transferred stock for purposes of
assessing gift tax. Therefore, the value of the transfer as reported
on A's 1999 Federal gift tax return may not be redetermined for
purposes of determining A's adjusted taxable gifts. However, the
applicability of the annual exclusion to the transfer is a question
of law and not of valuation. Accordingly, although the Internal
Revenue Service may not assess or collect additional gift tax on the
1999 transfer (because the period of assessment has closed), the
Internal Revenue Service is not precluded from challenging the
annual exclusion claimed by A for purposes of determining A's
adjusted taxable gifts in computing the estate tax liability.
(g) Effective dates. Paragraph (a) of this section applies to
transfers of property by gift made prior to August 6, 1997, if the
estate tax return for the donor/decedent's estate is filed after this
document is published as a final regulation in the Federal Register.
Paragraphs (b) through (f) of this section apply to transfers of
property by gift made after August 5, 1997, if the gift tax return for
the calendar period in which the gift is made is filed after this
document is published as a final regulation in the Federal Register.
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
Par. 3. The authority citation for part 25 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 4. Section 25.2504-2 is revised to read as follows:
Sec. 25.2504-2 Valuation of certain gifts for preceding calendar
periods.
(a) Gifts made before August 6, 1997. If the time has expired
within which a tax may be assessed under chapter 12 of the Internal
Revenue Code (or under corresponding provisions of prior laws) on the
transfer of property by gift made during a preceding calendar period,
as defined in Sec. 25.2502-1(c)(2), the gift was made prior to August
6, 1997, and a tax has been assessed or paid for such prior calendar
period, the value of the gift, for purposes of arriving at the correct
amount of the taxable gifts for the preceding calendar periods (as
defined under Sec. 25.2504-1(a)), is the value used in computing the
tax for the last preceding calendar period for which a tax was assessed
or paid under chapter 12 of the Internal Revenue Code or the
corresponding provisions of prior laws. However, this rule does not
apply where no tax was paid or assessed for the prior calendar period.
Furthermore, this rule does not apply to adjustments involving issues
other than valuation. See Sec. 25.2504-1(d).
(b) Gifts made or section 2701(d) taxable events occurring after
August 5, 1997. If the time has expired under section 6501 within which
a gift tax may be assessed under chapter 12 of the Internal Revenue
Code (or under corresponding provisions of prior laws) on the transfer
of property by gift made during a preceding calendar period, as defined
in Sec. 25.2502-1(c)(2), or with respect to an increase in taxable
gifts required under section 2701(d) and Sec. 25.2701-4, and the gift
was made, or the section 2701(d) taxable event occurred, after August
5, 1997, the value of the gift or the amount of the increase in taxable
gifts, for purposes of determining the correct amount of taxable gifts
for the preceding calendar periods (as defined in Sec. 25.2504-1(a)),
is the value that is finally determined for gift tax purposes (within
the meaning of Sec. 20.2001-1(c) of this chapter). This rule does not
apply to adjustments involving issues other than valuation. See
Sec. 25.2504-1(d). For an illustration of this rule, see the examples
under Sec. 20.2001-1(f) of this chapter. For purposes of determining if
the time has expired within which a gift tax may be assessed, see
Sec. 301.6501(c)-1(e) and (f) of this chapter.
(c) Example. The following example illustrates the rules of
paragraphs (a) and (b) of this section:
Example. (i) Facts. In 1996, A transfers closely-held stock to
B, A's child. A timely filed a federal gift tax return reporting the
1996 transfer to B. No gift tax was assessed or paid as a result of
application of A's available unified credit. In 1999, A transfers
additional closely-held stock to B. A's federal gift tax return
reporting the 1999 transfer is timely filed and the transfer is
adequately disclosed under Sec. 301.6501(c)-1(f)(2) of this chapter.
In 2003, A transfers additional property to B and timely files a
federal gift tax return reporting the gift.
(ii) Application of the rule limiting adjustments to valuation
of prior gifts. Under section 2504(c), in determining A's 2003 gift
tax liability, the value of A's 1996 gift can be adjusted for
purposes of computing the value of prior taxable gifts, since that
gift was made prior to August 6, 1997, and therefore, the provisions
of paragraph (a) of this section apply. However, A's 1999 transfer
was adequately disclosed on a timely filed gift tax return and,
thus, under Sec. 25.2504-1(b), the value of the 1999 gift by A may
not be adjusted for purposes of computing the value of prior taxable
gifts in determining A's 2003 gift tax liability.
(d) Effective dates. Paragraph (a) of this section applies to
transfers of property by gift made prior to August 6, 1997. Paragraphs
(b) and (c) of this section apply to transfers of property by gift made
after August 5, 1997, if the gift tax return for the calendar period in
which the transfer is reported is filed after this document is
published as a final regulation in the Federal Register.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 5. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 6. Section 301.6501(c)-1 is amended by:
1. Revising the heading to paragraph (e).
2. Adding paragraph (f).
The revision and addition reads as follows:
Sec. 301.6501(c)-1 Exceptions to general period of limitations on
assessment and collection.
* * * * *
(e) Gifts subject to chapter 14 of the Internal Revenue Code not
adequately disclosed on the return--
* * * * *
(f) Gifts made after August 5, 1997, not adequately disclosed on
the return--(1) In general. If a transfer of property, other than a
transfer described in paragraph (e) of this section, is not adequately
disclosed on a gift tax return (Form 709 United States Gift (and
Generation-Skipping Transfer) Tax Return) filed for the calendar period
in which the transfer occurs, then any gift tax imposed by chapter 12
of subtitle B of the Internal Revenue Code on the transfer may be
assessed, or a proceeding in court for the collection of the
appropriate tax may be begun without assessment, at any time.
[[Page 70706]]
(2) Adequate disclosure of transfers of property reported as gifts.
A transfer will be adequately disclosed on the return only if it is
reported in a manner adequate to apprise the Internal Revenue Service
of the nature of the gift and the basis for the value so reported.
Transfers reported on the gift tax return as transfers of property by
gift will be considered adequately disclosed under this paragraph (f)
only if the return provides a complete and accurate description of the
transaction including--
(i) A description of the transferred property and any consideration
received by the transferor;
(ii) The identity of, and relationship between, the transferor and
the transferee;
(iii) A detailed description of the method used to determine the
fair market value of property transferred, including any relevant
financial data and a description of any discounts, such as discounts
for blockage, minority or fractional interests, and lack of
marketability, claimed in valuing the property. In the case of the
transfer of an interest in an entity (e.g., a corporation or
partnership) that is not actively traded, a description of any discount
claimed in valuing the entity or any assets owned by such entity,
including a statement regarding the fair market value of 100 percent of
the entity (determined without regard to any discounts in valuing the
entity or any assets owned by the entity), the pro rata portion of the
entity subject to the transfer, and the fair market value of the
transferred interest as reported on the return. If the entity that is
the subject of the transfer owns an interest in another non-actively
traded entity (either directly or through ownership of an entity), the
information required in this paragraph (f)(2)(iii) must be provided for
each entity and the assets owned by each entity;
(iv) If the property is transferred in trust, the trust's tax
identification number and a brief description of the terms of the
trust;
(v) Any restrictions on the transferred property that were
considered in determining the fair market value of the property; and
(vi) A statement of the relevant facts affecting the gift tax
treatment of the transfer that reasonably may be expected to apprise
the Internal Revenue Service of the nature of any potential controversy
concerning the gift tax treatment of the transfer, or in lieu of this
statement, a concise description of the legal issue presented by the
facts. In addition, a statement describing any position taken that is
contrary to any temporary or final Treasury regulations or revenue
rulings.
(3) Adequate disclosure of non-gift completed transfers or
transactions. Completed transfers, all or a portion of which are
reported as not constituting a transfer by gift (for example, a
transaction in the ordinary course of business), will be considered
adequately disclosed under this paragraph (f) only if the following
information is provided on or attached to the return--
(i) The information required for adequate disclosure under
paragraph (f)(2) of this section; and
(ii) An explanation as to why the transfer is not a transfer by
gift under chapter 12 of the Internal Revenue Code.
(4) Adequate disclosure of incomplete transfers. Adequate
disclosure of a transfer that is reported as a completed gift on the
gift tax return will commence the running of the statute of limitations
for assessment of gift tax on the transfer, even if the transfer is
ultimately determined to be an incomplete gift for purposes of
Sec. 25.2511-2 of this chapter. For example, if an incomplete gift is
reported as a completed gift on the gift tax return and is adequately
disclosed, the period for assessment of the gift tax will begin running
when the return is filed, as determined under section 6501(b). On the
other hand, if the transfer is reported as an incomplete gift and
adequately disclosed, the period for assessing a gift tax with respect
to the transfer will not commence to run even if the transfer is
ultimately determined to be a completed gift. In that situation, the
gift tax with respect to the transfer may be assessed at any time, up
until three years after the donor files a return reporting the transfer
as a completed gift.
(5) Examples. The following examples illustrate the rules of this
paragraph (f):
Example 1. (i) Facts. In 1999, A transfers 100 shares of common
stock of XYZ Corporation to A's child. The common stock of XYZ
Corporation is actively traded on a major stock exchange. For gift
tax purposes, the fair market value of one share of XYZ common stock
on the date of the transfer, determined in accordance with
Sec. 25.2512-2(b) of this chapter (based on the mean between the
highest and lowest quoted selling prices), is $150.00. On A's
federal gift tax return, Form 709, for the 1999 calendar year, A
reports the gift as 100 shares of common stock of XYZ Corporation
with a value for gift tax purposes of $15,000. A specifies the date
of the transfer, recites that the stock is publicly traded, and
identifies the stock exchange on which the stock is traded.
(ii) Application of the adequate disclosure standard. A has
adequately disclosed the transfer. Therefore, the period of
assessment for the transfer under section 6501 will run from the
time the return is filed (as determined under section 6501(b)).
Example 2. (i) Facts. On December 30, 1999, A transferred
closely-held stock to B, A's child. A determined that the value of
the transferred stock, on December 30, 1999, was $9,000. A made no
other transfers to B, or any other donee, during 1999. On A's
federal gift tax return, Form 709, filed for the 1999 calendar year,
A provides the information required under paragraph (f)(2) of this
section (including the method used to determine the fair market
value of the stock and a description of discounts claimed) such that
the transfer is adequately disclosed. A claims an annual exclusion
under section 2503(b) for the transfer.
(ii) Application of the adequate disclosure standard. Because
the transfer was adequately disclosed under paragraph (f)(2) of this
section, the period of assessment for the transfer will expire as
prescribed by section 6501(b), notwithstanding that if A's valuation
of the closely-held stock was correct, A was not required to file a
gift tax return reporting the transfer under section 6019. After the
period of assessment has expired on the transfer, the Internal
Revenue Service is precluded from revaluing the transferred stock
for purposes of assessing gift tax or for purposes of determining
the estate tax liability. Therefore, the value of the transfer as
reported on A's 1999 federal gift tax return may not be redetermined
for purposes of determining A's prior taxable gifts (for gift tax
purposes) or A's adjusted taxable gifts (for estate tax purposes).
Example 3. (i) Facts. A owns 100 percent of the common stock of
X, a closely-held corporation. X does not hold an interest in any
other entity that is not actively traded. In 1999, A transfers 20
percent of the X stock to B and C, A's children, in a transfer that
is not subject to the special valuation rules of section 2701. The
transfer is made outright with no restrictions on ownership rights,
including voting rights and the right to transfer the stock. The
reported value of the transferred stock incorporates the use of
minority discounts and lack of marketability discounts. No other
discounts were used in arriving at the fair market value of the
transferred stock or any assets owned by X. A reports the transfer
on a federal gift tax return, Form 709, for the 1999 calendar year.
On the return, A provides a statement reporting the fair market
value of 100 percent of X (before taking into account any
discounts), the pro rata portion of X subject to the transfer, and
the reported value of the transfer. A also attaches a statement
regarding the determination of value that includes a discussion of
the discounts claimed and how the discounts were determined.
(ii) Application of the adequate disclosure standard. A has
provided sufficient information such that the transfer will be
considered adequately disclosed and the period of assessment for the
transfer under section 6501 will run from the time the return is
filed (as determined under section 6501(b)).
Example 4. (i) Facts. A owns a 70 percent limited partnership
interest in PS. PS owns
[[Page 70707]]
40 percent of the stock in X, a closely-held corporation. The assets
of X include a 50 percent general partnership interest in PB. PB
owns an interest in commercial real property. None of the entities
(PS, X, or PB) is actively traded. In 1999, A transfers a 25 percent
limited partnership interest in PS to B, A's child. On the federal
gift tax return, Form 709, filed for the 1999 calendar year, A
reports the transfer of the 25 percent limited partnership interest
in PS and that the fair market value of 100 percent of PS is $y and
that the value of 25 percent of PS is $z, reflecting marketability
and minority discounts with respect to the 25 percent interest.
However, A does not disclose that PS owns 40 percent of X, and that
X owns 50 percent of PB and that, in arriving at the $y fair market
value of 100 percent of PS, discounts were claimed in valuing PS's
interest in X, X's interest in PB, and PB's interest in the
commercial real property.
(ii) Application of the adequate disclosure standard. Because A
has failed to comply with requirements of paragraph (f)(2) of this
section regarding PS's interest in X, X's interest in PB, and PB's
interest in the commercial real property, the transfer will not be
considered adequately disclosed and the period of assessment for the
transfer under section 6501 will remain open indefinitely.
(6) Effective date. This paragraph (f) is applicable to gifts made
in calendar years ending after August 5, 1997, if the gift tax return
for such calendar year is filed after this document is published as a
final regulation in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-33648 Filed 12-21-98; 8:45 am]
BILLING CODE 4830-01-P
