Statutes of Limitation in Tax Matters Gift Tax Returns

We often are asked about statutes of limitations on tax returns. This memorandum deals with gift tax returns (Form 709). In the case of gift tax returns the statute of limitations applies after three years.

The purpose of a statute of limitations is to put an end to something. The taxpayer should be able to know that the government cannot pursue him for taxes due after a certain period of time. In order to trigger the statute of limitations, the taxpayer must file the gift tax return and must adequately disclose the gift on the gift tax return.

If no gift tax return is filed, the statute does not apply. Thus, if a taxpayer fails to file a gift tax return, the IRS can pursue him indefinitely.

If the taxpayer files a gift tax return with inadequate information, the statute of limitations does not apply. The IRS Chief Counsel has recently discussed the case of a taxpayer who made gifts of stock in a closely held corporation.

On the 709 the taxpayer did not disclose how he determined the value of the stock, and he did not describe the discounts (for lack of marketability and lack of control) which he took. The Chief Counsel took the position that the statute of limitations did not apply in this case.

Assuming that a 709 is filed and a gift is fully disclosed, after three years has passed the curtain drops on that gift tax return and the government may not reopen it for federal gift tax purposes. However, the gift may be revalued for federal estate tax purposes.

If the IRS examines a gift tax return when the taxpayer's estate tax return is being audited, and determines that the gift was undervalued, the IRS may increase the "adjusted taxable gifts" on the federal estate tax return. In computing the estate tax then due, the IRS must credit the taxpayer with the gift tax which the taxpayer would have paid if he had valued the gift at the higher amount determined by the IRS, notwithstanding that the taxpayer did not pay any gift tax but paid a lesser gift tax.

The estate is charged with a larger amount of adjusted taxable gifts, but at the same time is credited with the difference in the tax actually paid (if any) and the tax that would have been due at the higher value. If the adjustment in the amount of adjusted taxable gifts bumps the estate into a higher tax bracket, this may increase the estate tax. However, if the estate is already in the highest tax bracket, revaluing the adjusted taxable gifts will not make any difference.

If a Form 709 is filed, adequate detail should be provided, so that the statute of limitations will run on the return. My practice is to furnish a considerable amount of detail, on the grounds that it is better to furnish too much than too little. The downside of not furnishing adequate detail can be substantial.