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Seattle, WA 98101-1514
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Take Advantage of New Gift Tax Statute of Limitations
Estate Planner Mar-Apr 1999
Until recently, an anomaly in the Internal Revenue Code statute
of limitation for gifts allowed the Internal Revenue Service (IRS)
to attack the value of a gift in determining the amount of the estate
tax. Now, under the the Taxpayer Relief Act of 1997, once the gift
tax statute of limitations has run out, gifts that are adequately
reported on a gift tax return may not be revalued by the IRS for
the purpose of computing the estate tax.
For estate tax purposes lifetime gifts are added back to determine
the taxable estate, and credit is then given for any gift tax paid.
Before the act, the value of a gift was the amount reported when
the gift tax was assessed or paid and the statute of limitations
(generally three years) had run out. The statute of limitations
prevented an IRS attack on the value of gifts reported on gift tax
returns for gift tax purposes. But, because it didn't prevent an
attack on the value of the gift by the IRS for estate tax purposes,
the IRS could redetermine the value of a prior gift, increasing
the estate tax. The effect was slightly offset by the estate receiving
a credit for the gift tax that would have been paid if the higher
value had been reported on the gift tax return.
Under the Act
Legislation in 1998 has clarified that the finally determined value
of the gift (i.e., the value when the statute of limitations lapses)
controls the value used in determining the amount of a taxable gift
even if no gift tax was paid or assessed on the gift. So, if the
IRS does not issue a final notice of redetermination of value within
the applicable statute of limitations, then it may not revalue a
gift that has been adequately disclosed on a gift tax return. It
is a good idea to make gift disclosures in enough detail so they
won't be attacked by the IRS as inadequate. Even after the changes
made by the Act, the statute of limitations will not run on a gift
that is not adequately disclosed.
Another benefit under the new law is that you may request a hearing
before the U.S. Tax Court on the valuation of gifts, and the court
can issue a declaratory judgment to determine the value of gifts.
The court may make such judgments even where the gift is sheltered
from tax by the applicable exclusion amount.
Not all of the changes under the act relating to the valuation
of gifts are favorable. The six-year statute of limitations that
applied to "substantial omissions" regarding the reporting
of gifts (the omission of over 25% of the total amount of gifts
reported on the return) applies only if the gifts were adequately
disclosed. Otherwise, an unlimited statute of limitations now applies.
And if no return is filed, there continues to be no applicable statute
of limitations for gift tax purposes.
Also, the relief only applies to gifts made after August 5, 1997,
so those made earlier remain subject to attack for estate tax purposes
even after the gift tax statute of limitations has run.
Although the generation-skipping transfer (GST) tax statute of
limitations may not run until much later, by allocating the GST
exemption on a timely filed gift tax return, the value of the property
will be determined on the running of the gift tax statute of limitations
for the purpose of determining the GST exclusion ratio.
The fact that the IRS can no longer revalue gifts for either gift
or estate tax where no gift tax is owed or assessed and where the
statute of limitations has run provides welcome relief from the
uncertainty that previously existed. But continue to properly and
adequately report gifts when made, because other changes in the
law expand the statute of limitations in some situations to six
years and an unlimited time in others.
Please let us know if you have any questions about properly filing
gift returns and about the changes in the IRS statute of limitations
for gifts. We would welcome the opportunity to help you take advantage
of the new laws.