Adequate disclosure on gift tax returns: A requirement for more than gifts

Editor: Jeffrey N. Bilsky, CPA

Professionals are currently advising clients amid the so–called “great wealth transfer”; new IRS campaigns focused on high–income/high–wealth taxpayers; and the approaching sunset of favorable provisions of the Tax Cuts and Jobs Act, P.L. 115–97. Despite the challenges and uncertainty in today’s wealth–transfer planning environment, planners continue to assist growing numbers of clients in completing gifts and other estate planning transactions. As many of these transactions will be reported on gift tax returns — and in recognition of the Tax Court decision in Schlapfer,T.C. Memo. 2023–65 — now is an ideal time to review the adequate–disclosure rules for gift tax returns.

Reporting gifts on Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return, requires planning and deliberate consideration of the content of descriptions, elections, and disclosures. In addition to gifts, taxpayers often have advantageous opportunities to voluntarily report various nongift transactions on gift tax returns. Practitioners working with clients to complete planning and related tax returns should ensure the adequate disclosure of requisite information to avoid adverse transfer tax outcomes that may otherwise occur years after a transaction took place.

Adequate disclosure on gift tax returns

Taxpayers may be subject to the risk that an IRS examination could increase (or create) a gift tax or estate tax liability many years after a gift is made. Practitioners can help clients limit this risk through the proper completion and timely filing of Form 709.

In general, the IRS is precluded from revaluing a gift for gift and estate tax purposes if the transfer was “adequately disclosed” on a gift tax return and the applicable statute–of–limitation period (typically three years under Sec. 6501(a)) has expired. This general rule has been in place since the enactment of the Taxpayer Relief Act of 1997 (TRA), P.L. 105–34, which modified several relevant Code sections. The TRA amended Sec. 6501(c)(9), which provides two important rules: (1) If a gift is required to be shown on a gift tax return but is not reported, gift tax on the transfer may be assessed at any time; and (2) the indefinite period of time for assessment will not apply if the gift is disclosed on a gift tax return “in a manner adequate to apprise the Secretary of the nature of” the gift. As a result, even when a taxpayer files a gift tax return, if a particular transfer is excluded from the return (or is included but not adequately disclosed), the IRS may later argue the period for challenging the value of, and assessing tax on, the transfer remains open.

The TRA also amended Sec. 2504(c) and added subsection (f) to Sec. 2001, which together provide that once the statute–of–limitation period has expired for an adequately disclosed gift, the “finally determined” value of the gift must be used (and not revalued) when calculating a future gift or estate tax liability. Under Sec. 2001(f)(2), the “finally determined” value is: (1) the value of a gift reported on a gift tax return, if the IRS does not contest the value within the statute–of–limitation period; (2) a value asserted by the IRS that the taxpayer does not contest within the statute–of–limitation period; (3) a value determined by a court; or (4) a value agreed to in a settlement agreement.

The final regulations on the adequate disclosure of gifts (T.D. 8845), effective Dec. 3, 1999, outline the information required to satisfy the adequate–disclosure standard. Specifically, Regs. Sec. 301.6501(c)-1(f)(2) provides that a gift reported on a gift tax return will be considered adequately disclosed if the return and accompanying attachments include:

• A description of the transferred property and any consideration received by the transferor;
• The identity of, and relationship between, the transferor and each transferee;
• 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;
• A detailed description of the method used to determine the fair market value (FMV) of property transferred, including any financial data utilized in determining the value, any restrictions on the transferred property that were considered in determining the FMV of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interest, and lack of marketability, claimed in valuing the property; and
• 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.

The regulations provide additional specific requirements for interests in entities. Practitioners should take advantage of the safe harbors provided by the regulations. For example, appraisal reports that meet the requirements of Regs. Sec. 301.6501(c)-1(f)(3) can be attached to gift tax returns in lieu of the preparer attempting to separately gather and present the valuation information necessary for adequate disclosure. For transfers of interests in businesses or other private entities, practitioners should consider obtaining and attaching a qualified appraisal report that meets the criteria outlined in the regulations. Similarly, to limit the risk that the IRS may later assert an inadequate disclosure of trust terms on a gift tax return, preparers should consider attaching copies of trust instruments instead of attempting to summarize the instrument’s terms. Before finalizing returns, practitioners should compare the descriptions of transactions and valuation methodology shown on returns to the requirements in the regulations.

Nongift disclosures

Taxpayers may have an opportunity to report more than traditional gifts on Form 709. In fact, advisers can help clients mitigate future gift and estate tax liabilities arising out of prior transactions by the timely reporting of certain nongift transfers or transactions on gift tax returns. Regs. Sec. 301.6501(c)-1(f)(4) confirms that nongift completed transactions may be reported on gift tax returns in satisfaction of adequate–disclosure requirements. The key to these disclosures is the inclusion of the regulation’s required items, including an explanation of why the transaction does not constitute a gift. With proper disclosure, clients may achieve some degree of certainty that nongift transactions will not be challenged later and treated as having a gift component.

In practice, gift tax return preparers can disclose on the return the details of an initial sale of property to an irrevocable trust. Alternatively, a nongift disclosure can be made of a subsequent purchase of assets by the grantor of an irrevocable grantor trust or of a substitution of assets of equal value between a grantor and a grantor trust.

Nongift disclosures should be considered anytime there are significant payments or other transactions between related parties and the value of transferred property may be subject to scrutiny. These disclosures may be made even for years in which a client is not otherwise required to file a gift tax return (see Regs. Sec. 301.6501(c)-1(f)(7), Example (2)). A nongift disclosure may provide significant benefits to clients seeking to guard against future IRS challenges of the value of consideration in a sale transaction or even the form of the transaction itself. Advisers can assist clients by encouraging nongift disclosures on gift tax returns, including as a supplement to the strategic use of formula gifts, when appropriate.

IRS guidance and 2023 Tax Court ruling

In its preamble to the adequate–disclosure final regulations, the IRS noted that it received comments (regarding the proposed regulations) expressing concern that if a taxpayer failed to provide just one item, the adequate–disclosure requirement would not be satisfied regardless of the significance of the item. Commentators suggested that the final regulations adopt a “substantial compliance” standard, i.e., a good–faith effort. While the IRS did not adopt a substantial–compliance standard in the final regulations, the preamble noted that the IRS does not intend the absence of any particular item to necessarily prevent adequate disclosure.

Subsequent IRS guidance has taken a stricter view of the standard. In Chief Counsel Advice (CCA) 200221010, the IRS determined that the statute of limitation remained open on gifts made to irrevocable trusts because the donor, who made gift transfers of limited liability company (LLC) units to the trusts, did not identify on Form 709 the number of LLC units (or corresponding percentage or nature of the class of the units) transferred. In CCA 201024059, the IRS also determined that the statute of limitation did not run on a gift of closely held business stock due to the donor’s omission on Form 709 of information regarding the method used to determine the value of the stock, including support for valuation discounts.

In a 2015 Field Service Advice (FSA) memorandum (FSA 20152201F), the IRS determined that adequate disclosure was not made on a gift tax return that reported the donor’s outright gifts of limited partnership interests to his daughter. The IRS focused on the omission of one digit of a partnership’s taxpayer identification number and the fact that partnership names were abbreviated. In addition, while appraisals were provided with the return, the reports did not value the partnership interests but instead valued the real property held in the partnerships.

Finally, in FSA 20172801F, the IRS again concluded that a taxpayer failed to satisfy adequate–disclosure requirements. In that case, a taxpayer had made gifts in each of seven years. The taxpayer did not file a Form 709 for years 1 through 6. While the taxpayer did file a Form 709 to report gifts made in year 7, the description on the return lacked detail regarding the transferred property and omitted a description of the method used to determine the value of the property.

The IRS has issued memoranda that reinforce the benefits of fulfilling the adequate–disclosure requirements. In CCA 201643020, the IRS concluded that, when a taxpayer filed a gift tax return to report a current–year gift but did not report prior–year gifts, the statute of limitation ran for the current–year gift and related gift tax, even though the tax calculated on the current–year gift was incorrect due to the omission of prior–year gifts. Similarly, in CCA 201614036, the IRS determined that the statute of limitation will run on gifts adequately disclosed on future gift tax returns if the only defect in the returns is the understatement of prior–year gifts, even if that results in underreported gift tax for the subsequent years.

More recently, a Tax Court decision determined that substantial compliance with the adequate–disclosure requirements was sufficient to begin the statute–of–limitation period. In Schlapfer, the taxpayer, a Swiss national, had moved to the United States in 1979 and become a U.S. citizen in 2008. In 2012, he decided to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP), created for U.S. taxpayers to remediate unfiled tax returns and filings, including disclosures of non–U.S. assets; related income; and payment of tax, interest, and penalties. In 2013, as part of the OVDP process, the taxpayer submitted a 2006 Form 709 with a larger package of returns. The return reported a gift value of approximately $6 million, although the taxpayer included a protective filing statement asserting that he was not domiciled in the United States when the gift was made and thus his gift of non–U.S. corporation stock was not subject to U.S. gift tax.

The IRS later argued that because the gift reported on the 2006 return (1) was in fact made in 2007, (2) certain descriptions were inexact, and (3) some information was not shown on the return (although related details were included within other items in the OVDP package), the taxpayer failed to satisfy the strict requirements of adequate disclosure, and the statute of limitation did not run. In 2019, the IRS issued a notice of deficiency for 2007, assessing a gift tax liability of $4,429,949 and an additional $4,319,200 in penalties.

However, the court determined that the taxpayer substantially complied with adequate–disclosure requirements and ruled that the 2006 gift tax return (and other OVDP documents) included sufficient detail to apprise the IRS of the existence and nature of the gift. The 2006 gift tax return and other items in the OVDP submission package together satisfied the adequate–disclosure requirements, so the court held that the IRS was time–barred from assessing gift tax on the 2007 gift.

Practical considerations for preparing gift tax returns

Preparers of gift tax returns mindful of adequate–disclosure requirements should consider the following suggestions:

• Help to educate clients regarding the types of transfers and activities that may be gifts and ensure that all potential gifts are disclosed to advisers; it is important for practitioners to be aware of all transfers to avoid triggering a six-year statute-of-limitation period (applicable under Sec. 6501(e)(2) if a gift tax return omits one or more gifts with a value exceeding 25% of the total value of the gifts).
• Preparers may include an index at the front of a gift tax return that lists each item attached to the return, including nongift disclosure explanatory statements; appraisal reports and other valuation information; calculations supporting split-interest gifts; Forms 712, Life Insurance Statement, for life insurance contracts; trust instruments; election statements; and similar documentation.
• The description on Form 709, Schedule A, Computation of Taxable Gifts, (and attachments) should include sufficient and specific language to satisfy the requirements of adequate disclosure, including Regs. Sec. 301.6501(c)-1(f)(2)(iv).
• Do not overlook the question on Form 709, Schedule A, that asks whether the value of any item listed on the return reflects a valuation discount, and, if applicable, confirm that an appropriate explanation of the discount is included with the return.
• Advisers should consider opportunities to disclose nongift transfers or transactions on gift tax returns, including sales of property to irrevocable grantor trusts.
• Do not disregard the reporting of “small” transfers valued at less than the gift tax annual exclusion amount ($19,000 in 2025), particularly transfers of interests in private business entities or other hard-to-value assets, the value of which may later be challenged.
• Encourage professional valuations, speak with appraisers, and review appraisal deliverables to confirm satisfaction of the requirements of Regs. Sec. 301.6501(c)-1(f)(3).
• Remember that, if a married couple elects gift splitting under Sec. 2513 and the donor spouse meets the adequate-disclosure requirements with their gift tax return, the requirements will be satisfied with respect to the gift deemed made by the consenting spouse, under Regs. Sec. 301.6501(c)-1(f)(6).
• Carefully consider the current reporting of incomplete gifts and any need for subsequent reporting; under Regs. Sec. 301.6501(c)-1(f)(5), if a transfer is reported on a return as an incomplete gift (whether or not it is adequately disclosed on the return), the statute-of-limitation period for assessing gift tax will not begin even if the transfer is ultimately determined to be a completed gift.
• Use a gift tax return checklist.
• If a gift tax return was filed and there is concern that the original return does not satisfy the adequate-disclosure requirements, consider filing an amended return; taxpayers can file an amended Form 709 to adequately disclose gifts and commence the statute-of-limitation period (Rev. Proc. 2000-34).

To best help clients limit the risk of future disputes over gifts; the value of transfers; and resulting gift, estate, and generation–skipping transfer tax liabilities, advisers must consider the adequate–disclosure requirements and work with clients to satisfy them through proper preparation and filing of gift tax returns.

Editor Notes

Jeffrey N. Bilsky, CPA, is managing principal, National Tax Office, with BDO USA LLP in Atlanta.

For additional information about these items, contact Bilsky at jbilsky@bdo.com.

Contributors are members of or associated with BDO USA LLP.