Federal Gift Tax

GIFTS. The taxpayer owned two family farm limited partnerships and transferred interests in the partnerships to a daughter. The taxpayer filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, which identified the gifts by the Employer Identification Number (EIN) of each partnership and an abbreviated name, although the EIN of one partnership was incomplete. Attached to the return was a one-page supplement which stated that the assets of the partnerships consisted primarily of farm land, the land was appraised by a certified appraiser and the appraised value was reduced for minority interests, lack of marketability and other discounts. The IRS requested an extension of the assessment period for the gifts but the taxpayer refused, claiming that the return was properly done.  Absent an exception, the IRS must assess the amount of any gift tax within three years after Form 709 is filed. I.R.C. § 6501(a). In the case of a gift that is required to be “shown” on a return, but which is not shown, the gift tax may be assessed at any time. I.R.C. § 6501(c)(9). The issue in this ruling was whether the taxpayer had provided sufficient information to apprise the IRS of the nature of the gift.  Under Treas. Reg. §301.6501(c)-1(f)(2), an adequately disclosed gift requires (1) a description of the property and any consideration received by the donor, (2) the identity and relationship of the donor and donee, and (3) a detailed description of the method used to determine the fair market value of property transferred. The return should also describe any position contrary to proposed, temporary or final regulations. The IRS agreed that the identity and relationship of the donor and donee were identified in the return. Although the return did not fully disclose the identity of the partnerships, the return did provide the EIN for one partnership and the IRS could identify that entity by its EIN. However, the IRS found that the EIN for the other partnership was inaccurate because it omitted one number; therefore, that partnership was not adequately identified by the return. The IRS also found that the valuation description was flawed in several respects. The valuation information identified an appraisal only of the land and not of the partnerships or the gifted partnership interests. The return did not include financial data which was used in the valuation process. The return did not identify any restrictions on the transfer of the gifted property. The return did not include the appraisal method, such as use of comparables or book value, used by the appraiser. Finally, the return did not include any apportionment of the discounts for lack of marketability or minority interests. The IRS ruled that the return failed to adequately disclose the donor’s transfer of interests in the partnerships. In particular, the return failed sufficiently to identify one of the partnerships and failed to sufficiently describe the method and information used to determine the fair market value of the partnership interests. Therefore, the IRS was not limited by the three year limitation period on assessments and could assess additional gift tax based upon those transfers at any time. F.A.A. 20152201F, Aug. 24, 2015.

The case summary is from Vol 26 No. 18 of the Agricultural Law DigestClick here for information on how to subscribe to the Digest.

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