Take a look at this memorable prose:
Sec 6501(c) (9) Gift tax on certain gifts not shown on
return.
If any gift of property the value of which
(or any increase in taxable gifts required under section 2701(d) which) is required
to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b) ), and is not shown
on such return, any tax imposed by chapter 12 on such gift may be assessed, or
a proceeding in court for the collection of such tax may be begun without
assessment, at any time. The preceding sentence shall not apply to any item
which is disclosed in such return, or in a statement attached to the return, in
a manner adequate to apprise the Secretary of the nature of such item.
I get it: if you never disclose the gift, the IRS can
come after you until the end of time. The reverse is what concerns us today: if
you disclose the gift “in a manner adequate,” then the IRS does not have until
the end of time.
Gift tax cases can be … idiosyncratic, to be diplomatic.
All tax is personal, but gift tax can be Addams Family idiosyncratic.
Ronald Schlapfer (RS) was a Swiss-born businessman. He had ties to both Switzerland and the United States. He owned a life insurance policy issued in 2006.The policy in turn owned all the stock in EMG, a Panamanian company previously owned by RS.
It was 2006 and RS was a nonresident of the U.S. He
gifted his interest in EMG to his mother, aunt and uncle.
He obtained U.S. citizenship in 2008.
Got it: he gifted before he became subject to U.S.
gift tax.
In 2013 – and after obtaining his citizenship – RS decided
to play it safe and submitted an offshore voluntary disclosure filing with the
IRS. It included a gift tax return for 2006, which informed the IRS of the gift
to his family. The return included the following:
“A
protective filing is being submitted. On July 6, 2006, taxpayer made a gift of controlled
foreign company stock valued at $6,056,686 per U.S. Treasury Regulation
25.2501-1(B). The taxpayer is not subject to U.S. gift tax as he did not intend
to reside permanently in the United States until citizenship was obtained in
2008.”
COMMENT: In this situation, a protective filing means that the taxpayer is unsure if a filing is even required but is submitting one, nonetheless. It is an attempt to backstop penalties and other bad things that could happen from a failure to file.
COMMENT: International practice has become increasingly paranoid for many years now. The IRS seems convinced that every UBER driver has unreported foreign accounts, and one’s failure to follow arbitrary and obscure rules are a per se admission of culpability. In this case, for example, there was technical doubt whether the gift was reportable as the transfer of a life insurance policy or as the transfer of a company owned by that policy. Why was there doubt? Well, the IRS itself created it. Rest assured, whichever way you chose the IRS would fall the other way.
The IRS disagreed that the gift occurred in 2006.
There was a hitch in the transfer, and the attorney did not resolve the matter
until 2007. RS in turn argued that 2007 was but a scrivener’s error. According
to well-trod ground, a scrivener’s error is considered administrative, not
substantive, and does not mark the actual date of the underlying transaction.
Sometime in here RS agreed to extend the limitations
period.
In 2019 the IRS issued the statutory notice of
deficiency (SNOD). That is also called a 90-day letter, and it meant that the
next step was Tax Court - if RS wanted to further pursue the matter.
Off to Tax Court they went.
RS’ argument was simple: the statute of limitations
had expired.
The IRS argued that the gift was not adequately
disclosed.
The IRS argued that disclosure requires the following:
· Description
of the property gifted, and any consideration received by the donor.
· The
identity and relationship between the parties.
· There
is additional disclosure for property is transferred in trust.
· A
detailed explanation of how one arrived at the fair market value of the property
gifted.
· Whether
one has taken a position contrary to any Regulations or rulings
The IRS was trying to catch RS in the first
requirement above: a description of the property gifted.
Was it an insurance policy, ownership in a company, or
something else?
Here is the Court:
While Schlapfer may have failed to describe the gift in the correct way, he provided enough information to identify the underlying property that was transferred.”
RS won his case. The IRS had blown the statute of
limitations.
Our case this time was Schlapfer v Commissioner,
T.C. Memo 2023-65.