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A gift tax return is only required to be filed when the value of the gift exceeds the annual gift tax exclusion, which is currently $13,000 per donee. A husband and wife can therefore each give $26,000 per child (i.e. $13,000 each) per year. The gifting of property, which may be revaluation by the IRS at a later date, can present some unique challenges described below.

Limiting the Revaluation of Gifts
In general, the IRS must assess gift tax within three years of the due date of the return or the actual filing date, whichever is later. If no return is filed, or if a return fails to adequately disclose the gift, then the IRS can revalue the gift at any time. This means it can assess additional gift taxes or revalue the gift for purposes of determining estate taxes on the donor. Recently, the IRS provided guidance on how amended gift tax returns affect the running of the statute of limitations.

The Taxpayer Relief Act of 1997 created a new rule for determining when the IRS can revalue a gift for estate and gift tax purposes. For gifts made in calendar years ending after Aug. 5, 1997, the IRS cannot revalue any gift that is adequately disclosed on a gift tax return once the assessment period for that return has expired (Code @ 6501(c)(9)). For example, if an individual reports the value of a gift as $100,000 on a gift tax return, that value continues to be used for purposes of computing estate taxes when the individual dies after the assessment period on that gift has tolled.
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Adequate Disclosure
In order to obtain this revaluation protection, the gift must be adequately disclosed to the IRS. Generally, this means that the nature of the gift and the basis for its value is explained on a gift tax return (Reg. @ 301.6501(c)-1(f)(2)).

More specifically, the return, or a statement attached to the return, must contain the following information:

A description of the transferred property (and any consideration received by the donor).
The identity of, and relationship between, the donor and each donee.
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 description, a copy of the trust instrument.
A detailed description of the method used to determine the fair market value of the property. This includes any financial data, such as balance sheets, used in determining value.
If applicable, a statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations of IRS revenue rulings.
Instead of providing a description of valuation methodology, the donor may attach an appraisal by a qualified appraiser to the return. It would seem that the qualification requirements for the appraiser as well as the required appraisal contents are the same as those required to substantiate the value of charitable gifts.

Note: Adequate disclosure protection does not apply when the return is false or fraudulent and is filed with the attempt to evade tax.

Amending Returns
When a donor files a gift tax return but fails to include all required disclosure information, then the statute of limitations starts to run from the date on which the donor submits the missing information. To do this, a donor must file an amended return, identifying the gift and providing all required information that had not been included on or with the original gift tax return (Rev. Proc. 2000-34, IRB 2000-34, 186). The amended return should be filed in the same IRS service center in which the original return was filed. The donor should note at the top of the first page of the amended return "Amended Form 709 for gift(s) made in (the calendar year in which the gift was made) - In accordance with Rev. Proc. 2000-34."

This revenue procedure applies to amended returns filed after Aug. 21, 2000, to comply with the adequate disclosure requirements.

Preventing Revaluation
A gift tax return is only required to be filed when the value of the gift exceeds the annual gift tax exclusion, which is currently $13,000 per donee. However, in order to start the running of the statue of limitations, it may be advisable to file a return even when none is required. For example, a parent makes a gift of an interest in the family business to each of his three children. He believes that each gift is valued at $8,000 so no return is required. But if he does not file a return, the IRS may later charge that the gifts were in fact over the exclusion amount so that he is liable for penalties for non-filing as well as having to use up part of his estate and gift tax exemption amount (currently $1 million) or, if already used up, additional gift taxes.

Filing a protective return may be especially advisable when donors use valuation discounts to determine the amount of the gift. For example, donors may discount the value of gifts of interests in a family limited partnership (FLP) as much as 40 percent to account for lack of marketability and/or minority interests. If the IRS disagrees with this discount, non-filing penalties, erosion of the exemption amount and additional taxes may result.

Shoreline's Competitive Edge
Whatever your estate planning need, Shoreline Wealth and Investment Management can assist you in obtaining the best in tax planning advice.

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If you'd like more information about how diversified investment advisors can help you achieve your financial objectives through personalized wealth or retirement and risk management strategies, please contact us. We welcome the opportunity to discuss your unique needs and how we may best meet them.

This page (formatted for versions 10.0 and higher of Internet Explorer) is updated regularly so check in from time-to-time to see new articles and updates. You can click on any underlined words on each page to see a specific wealth management topic in the left margin of each page.

Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

The information contained in this web site is neither an offer nor solicitation of any security or service.


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