Adequate Disclosure of Gifts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 20, 25, 301 and 602 [TD 8845]
RIN 1545-AW20

TITLE: Adequate Disclosure of Gifts

AGENCY : Internal Revenue Service (IRS), Treasury.

ACTION : Final regulations.

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 eduction 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 �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 �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
�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 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
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, 105 Cong., 1 Sess. 408 (1997).
Notwithstanding this th st 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.11 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 �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:

�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 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 �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 �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 �25.2504-1, a sentence is added at the end of paragraph
(d) to read as follows:

�25.2504-1 Taxable gifts for preceding calendar periods.

* * * * *

(d) * * * However, see �25.2504-2(b) regarding certain gifts made
after August 5, 1997.

Par. 5. Section 25.2504-2 is revised to read as follows:

�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 �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 �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
�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 �25.2502-1(c)(2), or with respect to an increase in taxable gifts
required under section 2701(d) and �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
�25.2504-1(a)), is the amount that is finally determined for gift
tax purposes (within the meaning of �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
�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 �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.18 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 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 �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 �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
�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 �25.2511-2, paragraph (j) is
revised to read as follows:

�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 �25.2502-1(c)(1)) of the initial
transfer, see �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:

�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 �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 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 �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..24

(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
�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 �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 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 �602.101, paragraph (b) is amended in the table by
revising the entry for 301.6501(c)-1 to read as follows:

�602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

301.6501(c)-1.............................1545-1241 1545-1637

* * * * *

Bob Wenzel
Deputy Commissioner of Internal Revenue.
Approved: 11/18/99
Jonathan Talisman
Acting Assistant Secretary of the Treasury

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

1999 Regulations Main | IRS Regulations Main | Home