U.S. Tax Court Holds That a Taxpayer’s Substantial Compliance with Treas. Reg. §301.6501(C)-1(F)(2) Is Sufficient to Constitute Adequate Disclosure on Gift Tax Returns

In general, the Internal Revenue Service (“IRS”) has three years from the filing of a gift tax return to examine and assess additional tax on adequately disclosed gifts. If a gift is not adequately disclosed, the three-year statute of limitations will not begin to run, and the IRS may assess gift tax at any time. In Schlapfer v. Commissioner (T.C. Memo 2023-65), the U.S. Tax Court clarified what constitutes adequate disclosure of a gift on a gift tax return.

In Schlapfer, the Taxpayer funded a life insurance policy with cash and stock then subsequently assigned the policy to his mother, aunt, and uncle. The assignment was initiated in 2006. However, due to a scrivener’s error, the assignment was not properly completed until 2007. The Taxpayer reported the assignment as a gift on his 2006 gift tax return. In disclosure of such gift, the Taxpayer reported a gift of stock to his mother (which stemmed from the assignment of the life insurance policy to his mother, aunt, and uncle). In 2016, the IRS opened an examination of the 2006 gift tax return and determined that the gift was not adequately disclosed. In 2019, the IRS issued a notice of deficiency.

The Taxpayer challenged the IRS determination, arguing that the gift was adequately disclosed on his 2006 gift tax return and the three-year statute of limitations had run. The IRS asserted that the gift was not adequately disclosed because (i) the Taxpayer failed to strictly satisfy all elements of Treas. Reg. §301.6501(c)-1(f)(2), and (ii) such gift should have been reported on a 2007 gift tax return, as that is when the gift was actually complete.

While the Tax Court conceded that Taxpayer failed to strictly comply with the requirements of Treas. Reg. §301.6501(c)-1(f)(2), it held that a taxpayer’s disclosure is considered adequate so long as it is sufficiently detailed to alert the Commissioner and his agents as to the nature of the transaction so that a decision to select the return for audit may be a reasonably informed one. Further, the Court found that the elements listed in Treas. Reg. §301.6501(c)-1(f)(2) merely “act as guidance” to inform taxpayers on how to satisfy adequate disclosure.

The Court found that the Taxpayer’s 2006 gift tax return disclosure (i) sufficiently alerted the IRS of the underlying property transferred, (ii) sufficiently alerted the IRS that the gift was to a member or members of his family, and (iii) provided additional financial documents that appraised the Commissioner of the method used to calculate the fair market value of the property transferred. Ultimately, such disclosure was found to “strictly or substantially compl[y]” with the adequate disclosure requirements even if it may not have strictly satisfied Treas. Reg. §301.6501(c)-1(f)(2).

In considering whether the statute of limitations started with filing of the Taxpayer’s 2006 gift tax return, the Court determined that the timing of the gift was immaterial to its analysis. The Court relied on Treas. Reg. §301.6501(c)-1(f)(5) finding that so long as the transfer was adequately disclosed as a completed gift, the statute of limitations would begin to run even if it is later determined that the gift was incomplete. The Court thus concluded that the IRS could not assess additional gift tax as it had failed to issue its notice of deficiency within the three-year statute of limitations.

The outcome of Schlapfer reinforces the importance of providing full and adequate disclosure for all gifts reported on a gift tax return. Such disclosure starts the three-year statute of limitations and prevents the IRS from subsequently assessing additional gift tax. Taxpayers that make transfers requiring the filing of a gift tax return should work closely with tax advisors to ensure adequate disclosure of such transfers as part of their overall tax planning.

If you have any questions on what constitutes adequate disclosure, lifetime gifting, or the filing of gift tax returns, please contact Melanie E. Cuddyre at mcuddyre@leechtishman.com or 412.261.1600.

Melanie is an Attorney with Leech Tishman and a member of the Estates & Trusts Practice Group, as well as the Nonprofits & Tax-Exempt Organizations and Tax Groups. Melanie is based in the Pittsburgh office and is licensed to practice in both Florida and Pennsylvania.

Leech Tishman’s Facebook Page: https://www.facebook.com/leechtishman

Leech Tishman’s Twitter: https://twitter.com/LeechTishman

Leech Tishman’s Company Page on LinkedIn: https://www.linkedin.com/company/leech-tishman

Leech Tishman Fuscaldo & Lampl, LLC is a national, full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, entertainment & sports, healthcare, hospitality, and life sciences industries. With offices in Lakewood Ranch, Leech Tishman also has offices in Chicago, Los Angeles, Philadelphia, Pittsburgh, Washington, D.C., and Wilmington, DE.