[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Rules and Regulations]
[Pages 67767-67773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30944]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20, 25, 301 and 602
[TD 8845]
RIN 1545-AW20
Adequate Disclosure of Gifts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to changes
made to Internal Revenue Code sections 2001, 2504, and 6501 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 determining estate and gift tax liability, and the period of
limitations for assessing and collecting gift tax. These regulations
are necessary because section 6501(c)(9) now requires that a gift must
be adequately disclosed on a gift tax return in order to commence the
running of the period of limitations on assessment with respect to the
gift. Once the period of limitations expires, the amount of that gift
as reported on the return may not be adjusted for purposes of
determining future gift and estate tax liability. The regulations
provide guidance on what constitutes adequate disclosure for purposes
of the statute.
DATES: These regulations are effective December 3, 1999.
FOR FURTHER INFORMATION CONTACT: William L. Blodgett, (202) 622-3090
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1637. Responses to this collection of information
are mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number.
The reporting burden contained in Sec. 301.6501(c)-1(f) is
reflected in the burden for Form 709, ``U.S. Gift (and Generation-
Skipping Transfer) Tax Return.''
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and 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.
Books or records relating to this collection of information must be
retained as long as their contents may be material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On December 22, 1998, the IRS published in the Federal Register (63
FR 70701) a notice of proposed rulemaking under sections 2001 and 2504
relating to the value of prior gifts for purposes of computing the
estate and gift tax, and under section 6501 relating to the period for
assessment and collection of gift tax. Written comments responding to
the notice of proposed rulemaking were received and a hearing was held
on April 28, 1999, at which time oral testimony was presented. This
document adopts final regulations with respect to this notice of
proposed rulemaking. A summary of the principal comments received and
the revisions made in response to those comments is provided below.
1. Requirements for Adequate Disclosure
Under section 6501(c)(9), the period of limitations on the
assessment of gift tax with respect to a gift will commence to run only
if the gift is adequately disclosed on the gift tax return. The
proposed regulations provide a list of information required to satisfy
the adequate disclosure standard.
In general, the comments objected to the quantity, detail, and
nature of the information required under the proposed regulations. In
some cases, information required in the proposed regulations is not
required in the final regulations. However, Treasury and the IRS
continue to believe that the adequate disclosure rule was intended to
afford the IRS a viable means to identify the returns that should be
examined, with a minimum expenditure of resources. Further, the more
complete and comprehensive the information filed with the return is,
the more readily the IRS will be able to identify the returns that
should not be examined, thus saving taxpayers needless expenditures of
time and money.
Several commentators suggested that the language in Sec. 301.6501-
1(f)(2) of the proposed regulations imposed two requirements for
adequate disclosure. That is, the taxpayer had to provide information
adequate to apprise the IRS of the nature of the gift, etc. and in
addition, the taxpayer had to provide the information listed in the
regulation. In response to these comments, the final regulations
clarify that the adequate disclosure requirement is satisfied if the
information listed in the regulation is provided.
Some commentators argued that Congress intended that the new
adequate disclosure requirements be the same as the existing disclosure
requirements under prior section 6501(c)(9) for pre-August 5, 1997
gifts of property subject to the special valuation rules of sections
2701 and 2702. Therefore, the commentators suggested that the IRS adopt
the disclosure requirements under Sec. 301.6501(c)-1(e)(2) for
transfers of those interests. This suggestion was not adopted. The IRS
and Treasury believe it is necessary to expand on those disclosure
requirements to address the broader range of transfers covered by the
new legislation, as well as transactions and entities that may not have
been prevalent when the prior regulations were promulgated.
Under the proposed regulations, if property is transferred in
trust, taxpayers are required to provide a brief description of the
terms of the trust. In response to comments, the final regulations
provide that taxpayers may submit a complete copy of the trust document
in lieu of a description of the trust terms.
The proposed regulations require the submission of a detailed
description of the method used in determining the fair
[[Page 67768]]
market value of the property, including ``any relevant financial
data.'' Commentators contended that ``any relevant financial data'' is
a subjective concept that lacks specificity. Rather, the regulations
should specify exactly what financial data must be submitted, such as
balance sheets, net earnings statements, etc. In response to these
comments, the final regulations require that any financial data that
was used in valuing the interest must be submitted. This ensures that
the information requested is available and was deemed relevant by the
person valuing the interest.
Several commentators expressed concern over the requirement in the
proposed regulations that, if a less-than-100-percent interest in a
non-actively traded entity is transferred, the taxpayer must submit a
statement regarding the fair market value of 100 percent of the entity
determined without regard to any discounts. It was contended that a
less-than-100-percent interest in an operating company may not be
valued based on a pro rata portion of the value of 100 percent of the
entity; rather the appraiser often will determine the value based on
indicia other than the value of the entire entity, such as the price/
earnings ratio of stock in comparable publicly-traded entities. Because
the entire entity is not valued in these situations, valuing 100
percent of the entity would not be relevant. One comment stated that
this requirement would be reasonable in valuing an interest in
nonactively-traded entities, such as entities holding securities or
real estate, since in those cases the value of an interest in the
entity would be determined based on a pro rata portion of the value of
100 percent of the entity. In response to these comments, the final
regulations do not require a statement of the fair market value of 100
percent of the entity (without regard to any discounts), if the value
of the interest in the entity is properly determined without using the
net asset value of the entire entity. If 100 percent of the value of
the entity is not disclosed, the taxpayer bears the burden of
demonstrating that the fair market value of the entity is properly
determined by a method other than a method based on the net value of
the assets held by the entity.
The proposed regulations also require valuation information for
each entity (and its assets) that is owned or controlled by the entity
subject to the transfer. Comments indicated that this requirement would
be difficult to satisfy, because in some cases the information would
not be within the control of the taxpayer and the entity subject to the
transfer would not normally be required to maintain the financial
records with respect to lower-tiered entities. The comments suggested
that information on the lower-tiered entities should be required only
to the extent such information is essential to a reasonable appraisal
of the interest transferred and is in the personal control of the
taxpayer. Many commentators suggested that the regulations require the
submission of only that information that a qualified and competent
appraiser would use in valuing the interest. In response to these
comments, the final regulations provide that the information on the
lower-tiered entities must be submitted if the information is relevant
and material in determining the value of the interest in the entity.
Finally, comments suggested that a properly completed appraisal
would contain all the information that is material and relevant to the
valuation of the transferred property and, therefore, should be
sufficient to satisfy any disclosure requirement. Accordingly, under
the final regulations, an appraisal satisfying specific requirements
may be submitted in lieu of a detailed description of the method used
to determine the fair market value and in lieu of information regarding
tiered entities.
The proposed regulations require a statement of relevant facts that
would apprise the IRS of the nature of any potential gift tax
controversy concerning the transfer, or instead of that statement, a
concise description of the legal issue presented by the facts. This
requirement is similar to the disclosure required to avoid the
accuracy-related penalty under section 6662. It was intended to enable
the IRS to easily identify issues presented so that the IRS could
evaluate whether an examination is warranted during the initial review
of the gift tax return. Commentators indicated that the requirement was
too subjective and open-ended, since it would be difficult for a
practitioner to identify or anticipate ``any'' potential controversy.
In response to these comments, that requirement has been eliminated
from the final regulations. The proposed regulations also require that
the taxpayer submit a statement describing any position taken that is
contrary to any temporary or final regulations or any revenue ruling.
Commentators were concerned that this requirement could be interpreted
as including both regulations and revenue rulings that are published
after the gift tax return is filed that interpret earlier IRS
positions. In response to these comments, the final regulations limit
the required statement to positions taken that are contrary to any
proposed, temporary or final regulation, and any revenue ruling
published at the time the transfer occurred.
Commentators also noted that, under the proposed regulations, if a
taxpayer failed to provide, for example, one item of information, the
adequate disclosure requirement would not be satisfied, regardless of
the significance of the item. The comments suggested that ``substantial
compliance'' with the requirements of the regulations or a good-faith
effort to comply should be deemed actual compliance. This suggestion
was not adopted in view of the difficulty in defining and illustrating
what would constitute substantial compliance. However, it is not
intended that the absence of any particular item or items would
necessarily preclude satisfaction of the regulatory requirements,
depending on the nature of the item omitted and the overall adequacy of
the information provided.
In response to comments, a rule was added regarding the application
of the adequate disclosure rules in the case of ``split gifts'' under
section 2513. Under this rule, gifts attributed to the non-donor spouse
are deemed to be adequately disclosed if the gifts are adequately
disclosed on the return filed by the donor spouse.
2. Finality With Respect to Adequately Disclosed Gifts
Under the proposed regulations, if a transfer is adequately
disclosed on the gift tax return, and the period for assessment of gift
tax has expired, then the IRS is foreclosed from adjusting the value of
the gift under section 2504(c) (for purposes of determining the current
gift tax liability) and under section 2001(f) (for purposes of
determining the estate tax liability). However, the IRS is not
precluded from making adjustments involving legal issues, even if the
gift was adequately disclosed. This position was based on longstanding
regulations applying section 2504(c) and relevant case law.
Comments suggested that this rule is contrary to Congressional
intent in enacting section 2001(f) and amending section 2504(c) to
provide a greater degree of finality with respect to the gift and
estate tax statutory scheme. In response to these comments, the final
regulations preclude adjustments with respect to all issues related to
a gift once the gift tax statute of limitations expires with respect to
that gift.
3. Non-Gift Transactions
Under the proposed regulations, a completed transfer that did not
[[Page 67769]]
constitute a gift would be considered adequately disclosed if the
taxpayer submitted the information required for adequate disclosure and
an explanation describing why the transfer was not subject to the gift
tax. One commentator suggested that the adequate disclosure requirement
should be waived if the taxpayer reasonably, in good faith, believes
the transfer is not a gift (for example, a salary payment made to a
child employed in a family business). Another commentator noted that
the standard for adequate disclosure is higher for a ``non-gift'' than
it is for a gift transaction since, in the non-gift situation, the
donor must provide all the information required by the regulation and a
statement why the transaction is not a gift. Another comment requested
more guidance for reporting non-gift business transactions. In response
to the comments, the final regulations limit the information required
in a non-gift situation. In addition, the final regulations provide
that completed transfers to members of the transferor's family (as
defined in section 2032A(e)(2)) in the ordinary course of operating a
business are deemed to be adequately disclosed, even if not reported on
a gift tax return, if the item is properly reported by all parties for
income tax purposes. For example, in the case of a salary payment made
to a child of the donor employed in the donor's business, the
transaction will be treated as adequately disclosed for gift tax
purposes if the salary payment is properly reported by the business and
the child on their income tax returns. This exception only applies to
transactions conducted in the ordinary course of operating a business.
It does not apply, for example, in the case of a sale of property
(including a business) by a parent to a child.
4. Effective Date Provisions
Several comments were received regarding clarification of the
statutory effective date rules.
One comment requested clarification of the effective date of
section 6501(c)(9), as amended. The Taxpayer Relief Act of 1997
provides that the amendments to section 6501(c)(9) (commencing the
running of the period of limitations only if the gift is adequately
disclosed) apply to gifts made in calendar years ending after August 5,
1997 (that is, all gifts made in calendar year 1997 and thereafter).
However, the underlying legislative history indicates that the
amendment to section 6501(c)(9) applies ``to gifts made in calendar
years after the date of enactment [August 5, 1997]''. H.R. Conf. Rep.
No. 220, 105th Cong., 1st Sess. 408 (1997). Notwithstanding this
statement in the legislative history, the statutory language is clear
that the section as amended applies to all gifts made during the 1997
calendar year, and thereafter. In the final regulations, the statutory
effective date language is restated in a manner that makes it clear
that section 6501(c)(9) as amended applies to all gifts made after
December 31, 1996.
Another comment suggested clarification of the application of the
adequate disclosure rules and the interaction between sections 2504(c)
and 6501(c)(9) with respect to gifts made between January 1, 1997, and
August 6, 1997, since section 2504(c) as amended applies only to gifts
made after August 5, 1997, but section 6501(c)(9) as amended applies to
all gifts made in 1997. In response to this comment, an example has
been added under Sec. 25.2504-2(c) involving a situation where a gift
is made prior to August 6, 1997, that is not adequately disclosed on
the return filed for 1997. The example clarifies that the period for
assessment with respect to the pre-August 6, 1997 gift does not
commence to run because the gift is not adequately disclosed.
Accordingly, a gift tax may be assessed with respect to the gift at any
time, and notwithstanding the effective date for section 2504(c), that
1997 gift can be adjusted as a part of prior taxable gifts in
determining subsequent gift tax liability. Further, the 1997 gift can
be adjusted as part of taxable gifts under section 2001 in determining
estate tax liability.
Finally, in response to another comment, an example has been added
illustrating the application of the effective date rules in a similar
fact pattern, where the gifts are made in a calendar year prior to
1997. The example illustrates that the IRS may not revalue the gifts,
for purposes of determining prior taxable gifts for gift tax purposes,
if a gift tax was paid and assessed with respect to the calendar year,
and the period for assessment has expired. Since the gifts were made
prior to 1997, the rules of section 2504(c) and section 6501 prior to
amendment apply. However, the IRS may adjust the gifts for purposes of
determining adjusted taxable gifts for estate tax purposes.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 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, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small
business.
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
26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 20, 25, 301 and 602 are 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
[[Page 67770]]
valuation for gifts made prior to August 6, 1997.
(b) Adjusted taxable gifts and section 2701(d) taxable events
occurring after August 5, 1997. For purposes of determining the amount
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, or with respect to an increase in taxable gifts
required under section 2701(d) and Sec. 25.2701-4 of this chapter, then
the amount of the taxable gift will be the amount as finally determined
for gift tax purposes under chapter 12 of the Internal Revenue Code and
the amount of the taxable gift may not thereafter be adjusted. The rule
of this paragraph (b) applies to adjustments involving all issues
relating to the gift, including valuation issues and legal issues
involving the interpretation of the gift tax law.
(c) Finally determined. For purposes of paragraph (b) of this
section, the amount of a taxable gift as finally determined for gift
tax purposes is--
(1) The amount of the taxable gift as shown on a gift tax return,
or on a statement attached to the return, if the Internal Revenue
Service does not contest such amount before the time has expired under
section 6501 within which gift taxes may be assessed;
(2) The amount as specified by the Internal Revenue Service before
the time has expired under section 6501 within which gift taxes may be
assessed on the gift, if such specified amount is not timely contested
by the taxpayer;
(3) The amount as finally determined by a court of competent
jurisdiction; or
(4) The amount as 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
amount is finally determined by a court of competent jurisdiction when
the court enters a final decision, judgment, decree or other order with
respect to the amount of the taxable gift 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 the amount of the taxable gift.
(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) 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
December 3, 1999. Paragraphs (b) through (e) 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 December 3, 1999.
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. In Sec. 25.2504-1, a sentence is added at the end of
paragraph (d) to read as follows:
Sec. 25.2504-1 Taxable gifts for preceding calendar periods.
* * * * *
(d) * * * However, see Sec. 25.2504-2(b) regarding certain gifts
made after August 5, 1997.
Par. 5. Section 25.2504-2 is revised to read as follows:
Sec. 25.2504-2 Determination of 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 amount of the taxable 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 amount that is finally determined for gift
tax purposes (within the meaning of Sec. 20.2001-1(c) of this chapter)
and such amount may not be thereafter adjusted. The rule of this
paragraph (b) applies to adjustments involving all issues relating to
the gift including valuation issues and legal issues involving the
interpretation of the gift tax law. 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) Examples. The following examples illustrate the rules of
paragraphs (a) and (b) of this section:
Example 1. (i) Facts. In 1996, A transferred closely-held stock
in trust for the benefit of 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 the gift tax annual exclusion and
the application of A's available unified credit. In 2001, A
transferred additional closely-held stock to the trust. A's Federal
gift tax return reporting the 2001 transfer was timely filed and the
transfer was adequately disclosed under Sec. 301.6501(c)-1(f)(2) of
this chapter. In computing the amount of taxable gifts, A claimed
annual exclusions with respect to the transfers in 1996 and 2001. 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 prior gifts. Under section 2504(c), in
determining A's 2003 gift tax liability, the amount of A's 1996 gift
can be adjusted for purposes of computing prior taxable gifts, since
that gift was made prior to August 6, 1997, and therefore, the
provisions of paragraph (a) of this section apply. Adjustments can
be made with respect to the valuation of the gift and legal issues
presented (for example, the availability of the annual exclusion
with respect to the gift). However, A's 2001 transfer was adequately
disclosed on a timely filed gift tax return and, thus, under
paragraph (b) of this section, the amount of the 2001 taxable gift
by A may not be adjusted (either with respect to the valuation of
the gift or any legal issue) for
[[Page 67771]]
purposes of computing prior taxable gifts in determining A's 2003
gift tax liability.
Example 2. (i) Facts. In 1996, A transferred closely-held stock
to B, A's child. A timely filed a Federal gift tax return reporting
the 1996 transfer to B and paid gift tax on the value of the gift
reported on the return. On August 1, 1997, A transferred additional
closely-held stock to B in exchange for a promissory note signed by
B. Also, on September 10, 1997, A transferred closely-held stock to
C, A's other child. On April 15, 1998, A timely filed a gift tax
return for 1997 reporting the September 10, 1997, transfer to C and,
under Sec. 301.6501(c)-1(f)(2) of this chapter, adequately disclosed
that transfer and paid gift tax with respect to the transfer.
However, A believed that the transfer to B on August 1, 1997, was
for full and adequate consideration and A did not report the
transfer to B on the 1997 Federal gift tax return. In 2002, 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 prior
gifts. Under section 2504(c), in determining A's 2002 gift tax
liability, the value of A's 1996 gift cannot be adjusted for
purposes of computing the value of prior taxable gifts, since that
gift was made prior to August 6, 1997, and a timely filed Federal
gift tax return was filed on which a gift tax was assessed and paid.
However, A's prior taxable gifts can be adjusted to reflect the
August 1, 1997, transfer because, although a gift tax return for
1997 was timely filed and gift tax was paid, under Sec. 301.6501(c)-
1(f) of this chapter the period for assessing gift tax with respect
to the August 1, 1997, transfer did not commence to run since that
transfer was not adequately disclosed on the 1997 gift tax return.
Accordingly, a gift tax may be assessed with respect to the August
1, 1997, transfer and the amount of the gift would be reflected in
prior taxable gifts for purposes of computing A's gift tax liability
for 2002. A's September 10, 1997, transfer to C was adequately
disclosed on a timely filed gift tax return and, thus, under
paragraph (b) of this section, the amount of the September 10, 1997,
taxable gift by A may not be adjusted for purposes of computing
prior taxable gifts in determining A's 2002 gift tax liability.
Example 3. (i) Facts. In 1994, A transferred closely-held stock
to B and C, A's children. A timely filed a Federal gift tax return
reporting the 1994 transfers to B and C and paid gift tax on the
value of the gifts reported on the return. Also in 1994, A
transferred closely-held stock to B in exchange for a bona fide
promissory note signed by B. A believed that the transfer to B in
exchange for the promissory note was for full and adequate
consideration and A did not report that transfer to B on the 1994
Federal gift tax return. In 2002, 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 prior
gifts. Under section 2504(c), in determining A's 2002 gift tax
liability, the value of A's 1994 gifts cannot be adjusted for
purposes of computing prior taxable gifts because those gifts were
made prior to August 6, 1997, and a timely filed Federal gift tax
return was filed with respect to which a gift tax was assessed and
paid, and the period of limitations on assessment has expired. The
provisions of paragraph (a) of this section apply to the 1994
transfers. However, for purposes of determining A's adjusted taxable
gifts in computing A's estate tax liability, the gifts may be
adjusted. See Sec. 20.2001-1(a) of this chapter.
(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 December 3, 1999.
Par. 6. In Sec. 25.2511-2, paragraph (j) is revised to read as
follows:
Sec. 25.2511-2 Cessation of donor's dominion and control.
* * * * *
(j) If the donor contends that a power is of such nature as to
render the gift incomplete, and hence not subject to the tax as of the
calendar period (as defined in Sec. 25.2502-1(c)(1)) of the initial
transfer, see Sec. 301.6501(c)-1(f)(5) of this chapter.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 7. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8. 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 December 31, 1996, 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''), or in a statement attached
to the 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.
(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)(2) if the return (or a statement attached to the return) provides
the following information--
(i) A description of the transferred property and any consideration
received by the transferor;
(ii) The identity of, and relationship between, the transferor and
each transferee;
(iii) If the property is transferred in trust, the trust's tax
identification number and a brief description of the terms of the
trust, or in lieu of a brief description of the trust terms, a copy of
the trust instrument;
(iv) Except as provided in Sec. 301.6501-1(f)(3), a detailed
description of the method used to determine the fair market value of
property transferred, including any financial data (for example,
balance sheets, etc. with explanations of any adjustments) that were
utilized in determining the value of the interest, any restrictions on
the transferred property that were considered in determining the fair
market value of the property, 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 a
transfer of an interest that is actively traded on an established
exchange, such as the New York Stock Exchange, the American Stock
Exchange, the NASDAQ National Market, or a regional exchange in which
quotations are published on a daily basis, including recognized foreign
exchanges, recitation of the exchange where the interest is listed, the
CUSIP number of the security, and the mean between the highest and
lowest quoted selling prices on the applicable valuation date will
satisfy all of the requirements of this paragraph (f)(2)(iv). In the
case of the transfer of an interest in an entity (for example, a
corporation or partnership) that is not actively traded, a description
must be provided of any discount claimed in valuing the interests in
the entity or any assets owned by such entity. In addition, if the
value of the entity or of the interests in the entity is properly
determined based on the net value of the assets held by the entity, a
statement must be provided 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
[[Page 67772]]
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 100 percent of the value of the entity is
not disclosed, the taxpayer bears the burden of demonstrating that the
fair market value of the entity is properly determined by a method
other than a method based on the net value of the assets held by the
entity. 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)(iv) must be provided for each entity if the
information is relevant and material in determining the value of the
interest; and
(v) A statement describing any position taken that is contrary to
any proposed, temporary or final Treasury regulations or revenue
rulings published at the time of the transfer (see Sec. 601.601(d)(2)
of this chapter).
(3) Submission of appraisals in lieu of the information required
under paragraph (f)(2)(iv) of this section. The requirements of
paragraph (f)(2)(iv) of this section will be satisfied if the donor
submits an appraisal of the transferred property that meets the
following requirements--
(i) The appraisal is prepared by an appraiser who satisfies all of
the following requirements:
(A) The appraiser is an individual who holds himself or herself out
to the public as an appraiser or performs appraisals on a regular
basis.
(B) Because of the appraiser's qualifications, as described in the
appraisal that details the appraiser's background, experience,
education, and membership, if any, in professional appraisal
associations, the appraiser is qualified to make appraisals of the type
of property being valued.
(C) The appraiser is not the donor or the donee of the property or
a member of the family of the donor or donee, as defined in section
2032A(e)(2), or any person employed by the donor, the donee, or a
member of the family of either; and
(ii) The appraisal contains all of the following:
(A) The date of the transfer, the date on which the transferred
property was appraised, and the purpose of the appraisal.
(B) A description of the property.
(C) A description of the appraisal process employed.
(D) A description of the assumptions, hypothetical conditions, and
any limiting conditions and restrictions on the transferred property
that affect the analyses, opinions, and conclusions.
(E) The information considered in determining the appraised value,
including in the case of an ownership interest in a business, all
financial data that was used in determining the value of the interest
that is sufficiently detailed so that another person can replicate the
process and arrive at the appraised value.
(F) The appraisal procedures followed, and the reasoning that
supports the analyses, opinions, and conclusions.
(G) The valuation method utilized, the rationale for the valuation
method, and the procedure used in determining the fair market value of
the asset transferred.
(H) The specific basis for the valuation, such as specific
comparable sales or transactions, sales of similar interests, asset-
based approaches, merger-acquisition transactions, etc.
(4) Adequate disclosure of non-gift completed transfers or
transactions. Completed transfers to members of the transferor's
family, as defined in section 2032A(e)(2), that are made in the
ordinary course of operating a business are deemed to be adequately
disclosed under paragraph (f)(2) of this section, even if the transfer
is not reported on a gift tax return, provided the transfer is properly
reported by all parties for income tax purposes. For example, in the
case of salary paid to a family member employed in a family owned
business, the transfer will be treated as adequately disclosed for gift
tax purposes if the item is properly reported by the business and the
family member on their income tax returns. For purposes of this
paragraph (f)(4), any other completed transfer that is reported, in its
entirety, as not constituting a transfer by gift will be considered
adequately disclosed under paragraph (f)(2) of this section only if the
following information is provided on, or attached to, the return--
(i) The information required for adequate disclosure under
paragraphs (f)(2)(i), (ii), (iii) and (v) 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.
(5) 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 period 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 to run
when the return is filed, as determined under section 6501(b). Further,
once the period of assessment for gift tax expires, the transfer will
not be subject to inclusion in the donor's gross estate for estate tax
purposes. On the other hand, if the transfer is reported as an
incomplete gift whether or not 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 with adequate
disclosure.
(6) Treatment of split gifts. If a husband and wife elect under
section 2513 to treat a gift made to a third party as made one-half by
each spouse, the requirements of this paragraph (f) will be satisfied
with respect to the gift deemed made by the consenting spouse if the
return filed by the donor spouse (the spouse that transferred the
property) satisfies the requirements of this paragraph (f) with respect
to that gift.
(7) Examples. The following examples illustrate the rules of this
paragraph (f):
Example 1. (i) Facts. In 2001, 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 2001 calendar year, A
reports the gift to A's child of 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, identifies the stock exchange on which the stock is
traded, lists the stock's CUSIP number, and lists the mean between
the highest and lowest quoted selling prices for the date of
transfer.
(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, 2001, A transfers closely-
held stock to B, A's child. A determined that the value of the
transferred stock, on December 30, 2001, was $9,000. A made no other
transfers to B, or any other donee, during 2001. On A's Federal gift
tax return, Form 709, for the 2001
[[Page 67773]]
calendar year, A provides the information required under paragraph
(f)(2) of this section 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 is 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 redetermining the amount of the
gift for purposes of assessing gift tax or for purposes of
determining the estate tax liability. Therefore, the amount of the
gift as reported on A's 2001 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 2001, 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. Based
on generally applicable valuation principles, the value of X would
be determined based on the net value of the assets owned by X. 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. On A's Federal gift tax
return, Form 709, for the 2001 calendar year, A provides the
information required under paragraph (f)(2) of this section
including 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 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
and, based on generally applicable valuation principles, the value
of each entity would be determined based on the net value of the
assets owned by each entity. In 2001, A transfers a 25 percent
limited partnership interest in PS to B, A's child. On the Federal
gift tax return, Form 709, for the 2001 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. The
information on the lower tiered entities is relevant and material in
determining the value of the transferred interest in PS.
Accordingly, because A has failed to comply with requirements of
paragraph (f)(2)(iv) 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.
Example 5. The facts are the same as in Example 4 except that A
submits, with the Federal tax return, an appraisal of the 25 percent
limited partnership interest in PS that satisfies the requirements
of paragraph (f)(3) of this section in lieu of the information
required in paragraph (f)(2)(iv) of this section. Assuming the other
requirements of paragraph (f)(2) of this section are satisfied, the
transfer is considered adequately disclosed and the period for
assessment for the transfer under section 6501 will run from the
time the return is filed (as determined under section 6501(b) of
this chapter).
Example 6. A owns 100 percent of the stock of X Corporation, a
company actively engaged in a manufacturing business. B, A's child,
is an employee of X and receives an annual salary paid in the
ordinary course of operating X Corporation. B reports the annual
salary as income on B's income tax returns. In 2001, A transfers
property to family members and files a Federal gift tax return
reporting the transfers. However, A does not disclose the 2001
salary payments made to B. Because the salary payments were reported
as income on B's income tax return, the salary payments are deemed
to be adequately disclosed. The transfer of property to family
members, other than the salary payments to B, reported on the gift
tax return must satisfy the adequate disclosure requirements under
paragraph (f)(2) of this section in order for the period of
assessment under section 6501 to commence to run with respect to
those transfers.
(8) Effective date. This paragraph (f) is applicable to gifts made
after December 31, 1996, for which the gift tax return for such
calendar year is filed after December 3, 1999.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 9. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 10. In Sec. 602.101, paragraph (b) is amended in the table by
revising the entry for 301.6501(c)-1 to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
301.6501(c)-1............................................. 1545-1241
1545-1637
* * * * *
------------------------------------------------------------------------
Bob Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: November 18, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-30944 Filed 12-2-99; 8:45 am]
BILLING CODE 4830-01-U
