National Association of Estate Planners and Councils

December, 2015 Newsletter
Provided by Leimberg Information Services

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Paul Hood & IRS Field Attorney Advice 20152201F: Documentation on Gift Tax Return Did Not Rise to th

What is extraordinary about the facts of this situation is that errors were made in identifying the partnerships in which interests were given.  In fact, the person who prepared the gift tax return failed to put all of the numbers of each partnership’s taxpayer identification number, being off by one digit, making it impossible for the IRS to be able to check those partnerships. In addition, the appraisals apparently only valued the land held by each partnership.  They did not value the partnership interests transferred to the donee.   

Malpractice, anyone? Now, in fairness to the return preparer, we must remember that this is the IRS’s version of the facts, so we can take it with a grain of salt.  However, if the IRS is right on the facts, they’re probably also right on the application of the law, with the result being an open-ended gift tax statute of limitations, which has to be on the gift tax return preparer.”

 

We close the week with Paul Hood’s analysis of IRS Field Attorney Advice 20152201F

L. Paul Hood, Jr. received his J.D. from Louisiana State University Law Center in 1986 and Master of Laws in Taxation from Georgetown University Law Center in 1988. Paul is a frequent speaker, is widely quoted and his articles have appeared in a number of publications, including BNA Tax Management Memorandum, CCH Journal of Practical Estate Planning, Estate Planning, Valuation Strategies, Digest of Federal Tax Articles, Loyola Law Review, Louisiana Bar Journal, Tax Ideas and Charitable Gift Planning News. Presently, He has spoken at programs sponsored by a number of law schools, including Duke, Georgetown, NYU, Tulane, Loyola (N.O.) and LSU, as well as many other professional organizations, including AICPA and NACVA. From 1996-2004, Paul served on the Louisiana Board of Tax Appeals, a three member board that has jurisdiction over all Louisiana state tax matters. Paul is a co-author with Steve Leimberg of The Tools and Techniques of Charitable Planning and The Tools & Techniques of Estate Planning for Modern Families, both of which are published by The National Underwriter.  

Here is his commentary: 

EXECUTIVE SUMMARY:  

This commentary discusses IRS Field Attorney Advice 20152201F, which pertains to the gift tax statute of limitations.  In the ruling, the IRS determined that the documentation of the gift on the gift tax return didn’t rise to the level of disclosure required to trigger the beginning of the gift tax statute of limitations, meaning that the IRS could assess gift tax at any time. 

FACTS:   

This ruling was all in response to the estate’s refusal to extend the gift tax statute of limitations.  Remember that the estate tax statute of limitations can’t be extended. When the IRS is running up against the deadline for filing a statutory notice of deficiency, they usually stop everything, including appeals, and just issue the statutory notice of deficiency, which gets you a right to go into the Tax Court without having to first pay the tax at issue or sue for refund in either the U.S. district court or the U.S. Court of Federal Claims. And, of course, when IRS District Counsel receives your Tax Court petition and sees that the case never went to Appeals, it goes back to Appeals. 

What is extraordinary about the facts of this situation is that errors were made in identifying the partnerships in which interests were given.  In fact, the person who prepared the gift tax return failed to put all of the numbers of each partnership’s taxpayer identification number, being off by one digit, making it impossible for the IRS to be able to check those partnerships.  The facts of the ruling are as follows:

Donor attached one additional document to the Form 709: a one-paragraph supplement with the heading “Valuation of gifts.”  The supplement stated that:  

Partnership interests were given in (Taxpayer ID: ------------------------------------------) and in (Taxpayer ID: [)]. The assets --------------------------------------------------------of the partnership were primarily farm land. The land was independently appraised by a certified appraiser. Discounts of % were taken for minority ---interests, lack of marketability, etc[.], to obtain a fair market value of the gift.

The appraisals apparently only valued the land held by each partnership.  They did not value the partnership interests transferred to the donee.  The IRS estate tax attorney handling the examination of the gift tax return and Donor’s estate tax return requested an IRS valuation engineer to appraise the land and partnership interests that the Donor gave to his daughter.  She expected that report by the end of March, 2015.

This ruling was issued on March 13, 2015, so the IRS estate tax attorney was probably running up against a statute of limitations deadline and needed some swift guidance, which she got from the IRS National Office. The IRS ruled that the disclosures in the audited gift tax return didn’t rise to the level ofsubstantial disclosure for purposes of starting the gift tax statute of limitations, meaning that the IRS had all of the time in the world to issue a deficiency notice and didn’t need the estate of the donor to agree to extend the gift tax statute of limitations.

Absent an exception, the Service must assess the amount of any gift tax within three years after Form 709 is filed.  IRC Sec. 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.  This has been the law since 1997.  IRC Sec. 6501(c)(9).  This exception does not apply to a gift that is disclosed on the return or in a statement attached to the return in a matter that is “adequate to apprise the [IRS] of the nature” of the gift.  Treas. Reg. Sec. 301.6501(c)-1(f)(2) sets forth the types of disclosures that are required in order to start the running of the gift tax statute of limitations. These items include:

(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) 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 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 . . . . ; 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.

There’s an alternative way to comply, and that is to simply attach a complete appraisal to the gift tax return. The Donor didn’t do this.

COMMENT:

Malpractice, anyone? Now, in fairness to the return preparer, we must remember that this is the IRS’s version of the facts, so we can take it with a grain of salt.  However, if the IRS is right on the facts, they’re probably also right on the application of the law, with the result being an open-ended gift tax statute of limitations, which has to be on the gift tax return preparer.

Personally, my gift tax returns, and I filed a bunch of them, always included all of the appraisals in full.  I used this strategy as a sort of audit repellant.  I also always hired very good appraisers of whatever type(s) of property was involved.  No summary reports-only a full-blown valuation report, with all of the appendices included. 

My gift tax returns often resembled phone books in a fairly large city.  If the LLC or limited partnership interested that were given involved real estate held inside of the entity, appraisals of the real estate and the limited partnership or LLC interests were also included.  Why take a chance on failing to meet the adequate disclosure standard?  How do you explain that failure to a client and not get sued?  In my opinion, there’s no good reason for doing so. 

A significant part of my strategy was to force the IRS gift tax examiner to have to work hard on the file in order to get any additional money out of the donors. This strategy worked flawlessly every time.  Not that the IRS folks are lazy, but if you submit a fully documented gift or estate tax return, chances are pretty good that the estate tax attorney will move on to lower hanging fruit. 

If, as rumored, the Treasury Department issues new regulations under IRC Sec. 2704(b), it’s probably a good idea to include the statement that the appraisal may be contrary to those regulations.

 

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVEDIFFERENCE!

 

Paul Hood 

 

CITE AS:  

LISI Estate Planning Newsletter #2350 (October 1, 2015) at http://www.leimbergservices.com  Copyright 2015 L. Paul Hood, Jr. Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Written Permission.  

All NAEPC-affiliated estate planning councils are eligible to receive a discounted subscription rate to the Leimberg LISI service. Please see more information about the offering. You may also contact your local council office / board member to find out whether they are offering the service as a member benefit.

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