(This Post is for my estate planning /tax law nerd buddies who worry over matters such as this:)
Some time ago I made a presentation to the Columbia Estate Planning Council concerning adequate disclosure with regard to transactions which were not meant to be gifts. The following recent Field Service advice underscores the need for care in making “adequate disclosure” under the provisions of IRC section 6501(c)(9). In this case the failure to sufficiently describe the property and explain the methodology used in determining its value caused the disclosure to fail the adequate disclosure rule.
From Trusts and Estates Magazine March 2016
• Field Attorney Advice concludes that inadequate disclosure of gift of partnership interests on gift tax return kept the statute of limitations from running—In FAA 20152201F, the IRS held that the taxpayer’s disclosure on a gift tax return was inadequate and, as a result, didn’t cause the statute of limitations to run. The taxpayer had made two gifts of partnership interests. On the Form 709, he noted the percentage interest given, the name of the partnerships and their employer identification numbers (EINs). He attached a short supplemental paragraph to the gift tax return titled “Valuation of Gifts.” The supplement stated that the partnerships held farm land that was appraised by a certified appraiser and that an overall discount was applied for minority interests and lack of marketability. The taxpayer’s attorney noted in correspondence with the IRS that the taxpayer had provided the appraisals of real estate, appraisals of discounts and partnership agreements to the IRS.
The IRS held that the disclosure wasn’t adequate. Treasury Regulations Section 301.6501(c) provides the rules on what constitutes adequate disclosure on a gift tax return that will start the statute of limitations running. These rules require, among other items, a description of the property transferred. The partnership names were abbreviated on the Form 709, and both EINs were missing one digit. The description didn’t include the type of interests transferred (general or limited partnership interests or limited liability company interests). While these more formalistic errors were certainly problematic, the IRS also explained that the Treasury regulations require “a detailed description of the method used to determine the fair market value of the property transferred.” The appraisal valued the farm land but not the partnership interests. The valuation description attached to the Form 709 didn’t describe the valuation method used to value the farm land, identify any restrictions that were considered in valuing the partnership interests or break down the type of discount and the basis for each.
This FAA shows the importance of obtaining a complete appraisal that meets the requirements of the adequate disclosure regulations. Providing basic facts, generic conclusions and the partnership agreements may not be enough: The IRS wants to see the methodology and reasoning behind the valuation. (emphasis supplied)