[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Rules and Regulations]
[Pages 67767-67773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30944]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20, 25, 301 and 602

[TD 8845]
RIN 1545-AW20


Adequate Disclosure of Gifts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to changes 
made to Internal Revenue Code sections 2001, 2504, and 6501 by the 
Taxpayer Relief Act of 1997 and the Internal Revenue Service 
Restructuring and Reform Act of 1998 regarding the valuation of prior 
gifts in determining estate and gift tax liability, and the period of 
limitations for assessing and collecting gift tax. These regulations 
are necessary because section 6501(c)(9) now requires that a gift must 
be adequately disclosed on a gift tax return in order to commence the 
running of the period of limitations on assessment with respect to the 
gift. Once the period of limitations expires, the amount of that gift 
as reported on the return may not be adjusted for purposes of 
determining future gift and estate tax liability. The regulations 
provide guidance on what constitutes adequate disclosure for purposes 
of the statute.

DATES: These regulations are effective December 3, 1999.

FOR FURTHER INFORMATION CONTACT: William L. Blodgett, (202) 622-3090 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1637. Responses to this collection of information 
are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    The reporting burden contained in Sec. 301.6501(c)-1(f) is 
reflected in the burden for Form 709, ``U.S. Gift (and Generation-
Skipping Transfer) Tax Return.''
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this collection of information must be 
retained as long as their contents may be material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On December 22, 1998, the IRS published in the Federal Register (63 
FR 70701) a notice of proposed rulemaking under sections 2001 and 2504 
relating to the value of prior gifts for purposes of computing the 
estate and gift tax, and under section 6501 relating to the period for 
assessment and collection of gift tax. Written comments responding to 
the notice of proposed rulemaking were received and a hearing was held 
on April 28, 1999, at which time oral testimony was presented. This 
document adopts final regulations with respect to this notice of 
proposed rulemaking. A summary of the principal comments received and 
the revisions made in response to those comments is provided below.

1. Requirements for Adequate Disclosure

    Under section 6501(c)(9), the period of limitations on the 
assessment of gift tax with respect to a gift will commence to run only 
if the gift is adequately disclosed on the gift tax return. The 
proposed regulations provide a list of information required to satisfy 
the adequate disclosure standard.
    In general, the comments objected to the quantity, detail, and 
nature of the information required under the proposed regulations. In 
some cases, information required in the proposed regulations is not 
required in the final regulations. However, Treasury and the IRS 
continue to believe that the adequate disclosure rule was intended to 
afford the IRS a viable means to identify the returns that should be 
examined, with a minimum expenditure of resources. Further, the more 
complete and comprehensive the information filed with the return is, 
the more readily the IRS will be able to identify the returns that 
should not be examined, thus saving taxpayers needless expenditures of 
time and money.
    Several commentators suggested that the language in Sec. 301.6501-
1(f)(2) of the proposed regulations imposed two requirements for 
adequate disclosure. That is, the taxpayer had to provide information 
adequate to apprise the IRS of the nature of the gift, etc. and in 
addition, the taxpayer had to provide the information listed in the 
regulation. In response to these comments, the final regulations 
clarify that the adequate disclosure requirement is satisfied if the 
information listed in the regulation is provided.
    Some commentators argued that Congress intended that the new 
adequate disclosure requirements be the same as the existing disclosure 
requirements under prior section 6501(c)(9) for pre-August 5, 1997 
gifts of property subject to the special valuation rules of sections 
2701 and 2702. Therefore, the commentators suggested that the IRS adopt 
the disclosure requirements under Sec. 301.6501(c)-1(e)(2) for 
transfers of those interests. This suggestion was not adopted. The IRS 
and Treasury believe it is necessary to expand on those disclosure 
requirements to address the broader range of transfers covered by the 
new legislation, as well as transactions and entities that may not have 
been prevalent when the prior regulations were promulgated.
    Under the proposed regulations, if property is transferred in 
trust, taxpayers are required to provide a brief description of the 
terms of the trust. In response to comments, the final regulations 
provide that taxpayers may submit a complete copy of the trust document 
in lieu of a description of the trust terms.
    The proposed regulations require the submission of a detailed 
description of the method used in determining the fair

[[Page 67768]]

market value of the property, including ``any relevant financial 
data.'' Commentators contended that ``any relevant financial data'' is 
a subjective concept that lacks specificity. Rather, the regulations 
should specify exactly what financial data must be submitted, such as 
balance sheets, net earnings statements, etc. In response to these 
comments, the final regulations require that any financial data that 
was used in valuing the interest must be submitted. This ensures that 
the information requested is available and was deemed relevant by the 
person valuing the interest.
    Several commentators expressed concern over the requirement in the 
proposed regulations that, if a less-than-100-percent interest in a 
non-actively traded entity is transferred, the taxpayer must submit a 
statement regarding the fair market value of 100 percent of the entity 
determined without regard to any discounts. It was contended that a 
less-than-100-percent interest in an operating company may not be 
valued based on a pro rata portion of the value of 100 percent of the 
entity; rather the appraiser often will determine the value based on 
indicia other than the value of the entire entity, such as the price/
earnings ratio of stock in comparable publicly-traded entities. Because 
the entire entity is not valued in these situations, valuing 100 
percent of the entity would not be relevant. One comment stated that 
this requirement would be reasonable in valuing an interest in 
nonactively-traded entities, such as entities holding securities or 
real estate, since in those cases the value of an interest in the 
entity would be determined based on a pro rata portion of the value of 
100 percent of the entity. In response to these comments, the final 
regulations do not require a statement of the fair market value of 100 
percent of the entity (without regard to any discounts), if the value 
of the interest in the entity is properly determined without using the 
net asset value of the entire entity. If 100 percent of the value of 
the entity is not disclosed, the taxpayer bears the burden of 
demonstrating that the fair market value of the entity is properly 
determined by a method other than a method based on the net value of 
the assets held by the entity.
    The proposed regulations also require valuation information for 
each entity (and its assets) that is owned or controlled by the entity 
subject to the transfer. Comments indicated that this requirement would 
be difficult to satisfy, because in some cases the information would 
not be within the control of the taxpayer and the entity subject to the 
transfer would not normally be required to maintain the financial 
records with respect to lower-tiered entities. The comments suggested 
that information on the lower-tiered entities should be required only 
to the extent such information is essential to a reasonable appraisal 
of the interest transferred and is in the personal control of the 
taxpayer. Many commentators suggested that the regulations require the 
submission of only that information that a qualified and competent 
appraiser would use in valuing the interest. In response to these 
comments, the final regulations provide that the information on the 
lower-tiered entities must be submitted if the information is relevant 
and material in determining the value of the interest in the entity.
    Finally, comments suggested that a properly completed appraisal 
would contain all the information that is material and relevant to the 
valuation of the transferred property and, therefore, should be 
sufficient to satisfy any disclosure requirement. Accordingly, under 
the final regulations, an appraisal satisfying specific requirements 
may be submitted in lieu of a detailed description of the method used 
to determine the fair market value and in lieu of information regarding 
tiered entities.
    The proposed regulations require a statement of relevant facts that 
would apprise the IRS of the nature of any potential gift tax 
controversy concerning the transfer, or instead of that statement, a 
concise description of the legal issue presented by the facts. This 
requirement is similar to the disclosure required to avoid the 
accuracy-related penalty under section 6662. It was intended to enable 
the IRS to easily identify issues presented so that the IRS could 
evaluate whether an examination is warranted during the initial review 
of the gift tax return. Commentators indicated that the requirement was 
too subjective and open-ended, since it would be difficult for a 
practitioner to identify or anticipate ``any'' potential controversy. 
In response to these comments, that requirement has been eliminated 
from the final regulations. The proposed regulations also require that 
the taxpayer submit a statement describing any position taken that is 
contrary to any temporary or final regulations or any revenue ruling. 
Commentators were concerned that this requirement could be interpreted 
as including both regulations and revenue rulings that are published 
after the gift tax return is filed that interpret earlier IRS 
positions. In response to these comments, the final regulations limit 
the required statement to positions taken that are contrary to any 
proposed, temporary or final regulation, and any revenue ruling 
published at the time the transfer occurred.
    Commentators also noted that, under the proposed regulations, if a 
taxpayer failed to provide, for example, one item of information, the 
adequate disclosure requirement would not be satisfied, regardless of 
the significance of the item. The comments suggested that ``substantial 
compliance'' with the requirements of the regulations or a good-faith 
effort to comply should be deemed actual compliance. This suggestion 
was not adopted in view of the difficulty in defining and illustrating 
what would constitute substantial compliance. However, it is not 
intended that the absence of any particular item or items would 
necessarily preclude satisfaction of the regulatory requirements, 
depending on the nature of the item omitted and the overall adequacy of 
the information provided.
    In response to comments, a rule was added regarding the application 
of the adequate disclosure rules in the case of ``split gifts'' under 
section 2513. Under this rule, gifts attributed to the non-donor spouse 
are deemed to be adequately disclosed if the gifts are adequately 
disclosed on the return filed by the donor spouse.

2. Finality With Respect to Adequately Disclosed Gifts

    Under the proposed regulations, if a transfer is adequately 
disclosed on the gift tax return, and the period for assessment of gift 
tax has expired, then the IRS is foreclosed from adjusting the value of 
the gift under section 2504(c) (for purposes of determining the current 
gift tax liability) and under section 2001(f) (for purposes of 
determining the estate tax liability). However, the IRS is not 
precluded from making adjustments involving legal issues, even if the 
gift was adequately disclosed. This position was based on longstanding 
regulations applying section 2504(c) and relevant case law.
    Comments suggested that this rule is contrary to Congressional 
intent in enacting section 2001(f) and amending section 2504(c) to 
provide a greater degree of finality with respect to the gift and 
estate tax statutory scheme. In response to these comments, the final 
regulations preclude adjustments with respect to all issues related to 
a gift once the gift tax statute of limitations expires with respect to 
that gift.

3. Non-Gift Transactions

    Under the proposed regulations, a completed transfer that did not

[[Page 67769]]

constitute a gift would be considered adequately disclosed if the 
taxpayer submitted the information required for adequate disclosure and 
an explanation describing why the transfer was not subject to the gift 
tax. One commentator suggested that the adequate disclosure requirement 
should be waived if the taxpayer reasonably, in good faith, believes 
the transfer is not a gift (for example, a salary payment made to a 
child employed in a family business). Another commentator noted that 
the standard for adequate disclosure is higher for a ``non-gift'' than 
it is for a gift transaction since, in the non-gift situation, the 
donor must provide all the information required by the regulation and a 
statement why the transaction is not a gift. Another comment requested 
more guidance for reporting non-gift business transactions. In response 
to the comments, the final regulations limit the information required 
in a non-gift situation. In addition, the final regulations provide 
that completed transfers to members of the transferor's family (as 
defined in section 2032A(e)(2)) in the ordinary course of operating a 
business are deemed to be adequately disclosed, even if not reported on 
a gift tax return, if the item is properly reported by all parties for 
income tax purposes. For example, in the case of a salary payment made 
to a child of the donor employed in the donor's business, the 
transaction will be treated as adequately disclosed for gift tax 
purposes if the salary payment is properly reported by the business and 
the child on their income tax returns. This exception only applies to 
transactions conducted in the ordinary course of operating a business. 
It does not apply, for example, in the case of a sale of property 
(including a business) by a parent to a child.

4. Effective Date Provisions

    Several comments were received regarding clarification of the 
statutory effective date rules.
    One comment requested clarification of the effective date of 
section 6501(c)(9), as amended. The Taxpayer Relief Act of 1997 
provides that the amendments to section 6501(c)(9) (commencing the 
running of the period of limitations only if the gift is adequately 
disclosed) apply to gifts made in calendar years ending after August 5, 
1997 (that is, all gifts made in calendar year 1997 and thereafter). 
However, the underlying legislative history indicates that the 
amendment to section 6501(c)(9) applies ``to gifts made in calendar 
years after the date of enactment [August 5, 1997]''. H.R. Conf. Rep. 
No. 220, 105th Cong., 1st Sess. 408 (1997). Notwithstanding this 
statement in the legislative history, the statutory language is clear 
that the section as amended applies to all gifts made during the 1997 
calendar year, and thereafter. In the final regulations, the statutory 
effective date language is restated in a manner that makes it clear 
that section 6501(c)(9) as amended applies to all gifts made after 
December 31, 1996.
    Another comment suggested clarification of the application of the 
adequate disclosure rules and the interaction between sections 2504(c) 
and 6501(c)(9) with respect to gifts made between January 1, 1997, and 
August 6, 1997, since section 2504(c) as amended applies only to gifts 
made after August 5, 1997, but section 6501(c)(9) as amended applies to 
all gifts made in 1997. In response to this comment, an example has 
been added under Sec. 25.2504-2(c) involving a situation where a gift 
is made prior to August 6, 1997, that is not adequately disclosed on 
the return filed for 1997. The example clarifies that the period for 
assessment with respect to the pre-August 6, 1997 gift does not 
commence to run because the gift is not adequately disclosed. 
Accordingly, a gift tax may be assessed with respect to the gift at any 
time, and notwithstanding the effective date for section 2504(c), that 
1997 gift can be adjusted as a part of prior taxable gifts in 
determining subsequent gift tax liability. Further, the 1997 gift can 
be adjusted as part of taxable gifts under section 2001 in determining 
estate tax liability.
    Finally, in response to another comment, an example has been added 
illustrating the application of the effective date rules in a similar 
fact pattern, where the gifts are made in a calendar year prior to 
1997. The example illustrates that the IRS may not revalue the gifts, 
for purposes of determining prior taxable gifts for gift tax purposes, 
if a gift tax was paid and assessed with respect to the calendar year, 
and the period for assessment has expired. Since the gifts were made 
prior to 1997, the rules of section 2504(c) and section 6501 prior to 
amendment apply. However, the IRS may adjust the gifts for purposes of 
determining adjusted taxable gifts for estate tax purposes.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Small Business Administration for comment on their impact on small 
business.
    Drafting Information: The principal author of these regulations is 
William L. Blodgett, Office of Assistant Chief Counsel (Passthroughs 
and Special Industries), IRS. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 20, 25, 301 and 602 are amended as 
follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Paragraph 1. The authority citation for part 20 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 20.2001-1 is revised to read as follows:


Sec. 20.2001-1  Valuation of adjusted taxable gifts and section 2701(d) 
taxable events.

    (a) Adjusted taxable gifts made prior to August 6, 1997. For 
purposes of determining the value of adjusted taxable gifts as defined 
in section 2001(b), if the gift was made prior to August 6, 1997, the 
value of the gift may be adjusted at any time, even if the time within 
which a gift tax may be assessed has expired under section 6501. This 
paragraph (a) also applies to adjustments involving issues other than

[[Page 67770]]

valuation for gifts made prior to August 6, 1997.
    (b) Adjusted taxable gifts and section 2701(d) taxable events 
occurring after August 5, 1997. For purposes of determining the amount 
of adjusted taxable gifts as defined in section 2001(b), if, under 
section 6501, the time has expired within which a gift tax may be 
assessed under chapter 12 of the Internal Revenue Code (or under 
corresponding provisions of prior laws) with respect to a gift made 
after August 5, 1997, or with respect to an increase in taxable gifts 
required under section 2701(d) and Sec. 25.2701-4 of this chapter, then 
the amount of the taxable gift will be the amount as finally determined 
for gift tax purposes under chapter 12 of the Internal Revenue Code and 
the amount of the taxable gift may not thereafter be adjusted. The rule 
of this paragraph (b) applies to adjustments involving all issues 
relating to the gift, including valuation issues and legal issues 
involving the interpretation of the gift tax law.
    (c) Finally determined. For purposes of paragraph (b) of this 
section, the amount of a taxable gift as finally determined for gift 
tax purposes is--
    (1) The amount of the taxable gift as shown on a gift tax return, 
or on a statement attached to the return, if the Internal Revenue 
Service does not contest such amount before the time has expired under 
section 6501 within which gift taxes may be assessed;
    (2) The amount as specified by the Internal Revenue Service before 
the time has expired under section 6501 within which gift taxes may be 
assessed on the gift, if such specified amount is not timely contested 
by the taxpayer;
    (3) The amount as finally determined by a court of competent 
jurisdiction; or
    (4) The amount as determined pursuant to a settlement agreement 
entered into between the taxpayer and the Internal Revenue Service.
    (d) Definitions. For purposes of paragraph (b) of this section, the 
amount is finally determined by a court of competent jurisdiction when 
the court enters a final decision, judgment, decree or other order with 
respect to the amount of the taxable gift that is not subject to 
appeal. See, for example, section 7481 regarding the finality of a 
decision by the U.S. Tax Court. Also, for purposes of paragraph (b) of 
this section, a settlement agreement means any agreement entered into 
by the Internal Revenue Service and the taxpayer that is binding on 
both. The term includes a closing agreement under section 7121, a 
compromise under section 7122, and an agreement entered into in 
settlement of litigation involving the amount of the taxable gift.
    (e) Expiration of period of assessment. For purposes of determining 
if the time has expired within which a tax may be assessed under 
chapter 12 of the Internal Revenue Code, see Sec. 301.6501(c)-1(e) and 
(f) of this chapter.
    (f) Effective dates. Paragraph (a) of this section applies to 
transfers of property by gift made prior to August 6, 1997, if the 
estate tax return for the donor/decedent's estate is filed after 
December 3, 1999. Paragraphs (b) through (e) of this section apply to 
transfers of property by gift made after August 5, 1997, if the gift 
tax return for the calendar period in which the gift is made is filed 
after December 3, 1999.

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

    Par. 3. The authority citation for part 25 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Par. 4. In Sec. 25.2504-1, a sentence is added at the end of 
paragraph (d) to read as follows:


Sec. 25.2504-1  Taxable gifts for preceding calendar periods.

* * * * *
    (d) * * * However, see Sec. 25.2504-2(b) regarding certain gifts 
made after August 5, 1997.
    Par. 5. Section 25.2504-2 is revised to read as follows:


Sec. 25.2504-2  Determination of gifts for preceding calendar periods.

    (a) Gifts made before August 6, 1997. If the time has expired 
within which a tax may be assessed under chapter 12 of the Internal 
Revenue Code (or under corresponding provisions of prior laws) on the 
transfer of property by gift made during a preceding calendar period, 
as defined in Sec. 25.2502-1(c)(2), the gift was made prior to August 
6, 1997, and a tax has been assessed or paid for such prior calendar 
period, the value of the gift, for purposes of arriving at the correct 
amount of the taxable gifts for the preceding calendar periods (as 
defined under Sec. 25.2504-1(a)), is the value used in computing the 
tax for the last preceding calendar period for which a tax was assessed 
or paid under chapter 12 of the Internal Revenue Code or the 
corresponding provisions of prior laws. However, this rule does not 
apply where no tax was paid or assessed for the prior calendar period. 
Furthermore, this rule does not apply to adjustments involving issues 
other than valuation. See Sec. 25.2504-1(d).
    (b) Gifts made or section 2701(d) taxable events occurring after 
August 5, 1997. If the time has expired under section 6501 within which 
a gift tax may be assessed under chapter 12 of the Internal Revenue 
Code (or under corresponding provisions of prior laws) on the transfer 
of property by gift made during a preceding calendar period, as defined 
in Sec. 25.2502-1(c)(2), or with respect to an increase in taxable 
gifts required under section 2701(d) and Sec. 25.2701-4, and the gift 
was made, or the section 2701(d) taxable event occurred, after August 
5, 1997, the amount of the taxable gift or the amount of the increase 
in taxable gifts, for purposes of determining the correct amount of 
taxable gifts for the preceding calendar periods (as defined in 
Sec. 25.2504-1(a)), is the amount that is finally determined for gift 
tax purposes (within the meaning of Sec. 20.2001-1(c) of this chapter) 
and such amount may not be thereafter adjusted. The rule of this 
paragraph (b) applies to adjustments involving all issues relating to 
the gift including valuation issues and legal issues involving the 
interpretation of the gift tax law. For purposes of determining if the 
time has expired within which a gift tax may be assessed, see 
Sec. 301.6501(c)-1(e) and (f) of this chapter.
    (c) Examples. The following examples illustrate the rules of 
paragraphs (a) and (b) of this section:

    Example 1. (i) Facts. In 1996, A transferred closely-held stock 
in trust for the benefit of B, A's child. A timely filed a Federal 
gift tax return reporting the 1996 transfer to B. No gift tax was 
assessed or paid as a result of the gift tax annual exclusion and 
the application of A's available unified credit. In 2001, A 
transferred additional closely-held stock to the trust. A's Federal 
gift tax return reporting the 2001 transfer was timely filed and the 
transfer was adequately disclosed under Sec. 301.6501(c)-1(f)(2) of 
this chapter. In computing the amount of taxable gifts, A claimed 
annual exclusions with respect to the transfers in 1996 and 2001. In 
2003, A transfers additional property to B and timely files a 
Federal gift tax return reporting the gift. (ii) Application of the 
rule limiting adjustments to prior gifts. Under section 2504(c), in 
determining A's 2003 gift tax liability, the amount of A's 1996 gift 
can be adjusted for purposes of computing prior taxable gifts, since 
that gift was made prior to August 6, 1997, and therefore, the 
provisions of paragraph (a) of this section apply. Adjustments can 
be made with respect to the valuation of the gift and legal issues 
presented (for example, the availability of the annual exclusion 
with respect to the gift). However, A's 2001 transfer was adequately 
disclosed on a timely filed gift tax return and, thus, under 
paragraph (b) of this section, the amount of the 2001 taxable gift 
by A may not be adjusted (either with respect to the valuation of 
the gift or any legal issue) for

[[Page 67771]]

purposes of computing prior taxable gifts in determining A's 2003 
gift tax liability.
    Example 2. (i) Facts. In 1996, A transferred closely-held stock 
to B, A's child. A timely filed a Federal gift tax return reporting 
the 1996 transfer to B and paid gift tax on the value of the gift 
reported on the return. On August 1, 1997, A transferred additional 
closely-held stock to B in exchange for a promissory note signed by 
B. Also, on September 10, 1997, A transferred closely-held stock to 
C, A's other child. On April 15, 1998, A timely filed a gift tax 
return for 1997 reporting the September 10, 1997, transfer to C and, 
under Sec. 301.6501(c)-1(f)(2) of this chapter, adequately disclosed 
that transfer and paid gift tax with respect to the transfer. 
However, A believed that the transfer to B on August 1, 1997, was 
for full and adequate consideration and A did not report the 
transfer to B on the 1997 Federal gift tax return. In 2002, A 
transfers additional property to B and timely files a Federal gift 
tax return reporting the gift.
    (ii) Application of the rule limiting adjustments to prior 
gifts. Under section 2504(c), in determining A's 2002 gift tax 
liability, the value of A's 1996 gift cannot be adjusted for 
purposes of computing the value of prior taxable gifts, since that 
gift was made prior to August 6, 1997, and a timely filed Federal 
gift tax return was filed on which a gift tax was assessed and paid. 
However, A's prior taxable gifts can be adjusted to reflect the 
August 1, 1997, transfer because, although a gift tax return for 
1997 was timely filed and gift tax was paid, under Sec. 301.6501(c)-
1(f) of this chapter the period for assessing gift tax with respect 
to the August 1, 1997, transfer did not commence to run since that 
transfer was not adequately disclosed on the 1997 gift tax return. 
Accordingly, a gift tax may be assessed with respect to the August 
1, 1997, transfer and the amount of the gift would be reflected in 
prior taxable gifts for purposes of computing A's gift tax liability 
for 2002. A's September 10, 1997, transfer to C was adequately 
disclosed on a timely filed gift tax return and, thus, under 
paragraph (b) of this section, the amount of the September 10, 1997, 
taxable gift by A may not be adjusted for purposes of computing 
prior taxable gifts in determining A's 2002 gift tax liability.
    Example 3. (i) Facts. In 1994, A transferred closely-held stock 
to B and C, A's children. A timely filed a Federal gift tax return 
reporting the 1994 transfers to B and C and paid gift tax on the 
value of the gifts reported on the return. Also in 1994, A 
transferred closely-held stock to B in exchange for a bona fide 
promissory note signed by B. A believed that the transfer to B in 
exchange for the promissory note was for full and adequate 
consideration and A did not report that transfer to B on the 1994 
Federal gift tax return. In 2002, A transfers additional property to 
B and timely files a Federal gift tax return reporting the gift.
    (ii) Application of the rule limiting adjustments to prior 
gifts. Under section 2504(c), in determining A's 2002 gift tax 
liability, the value of A's 1994 gifts cannot be adjusted for 
purposes of computing prior taxable gifts because those gifts were 
made prior to August 6, 1997, and a timely filed Federal gift tax 
return was filed with respect to which a gift tax was assessed and 
paid, and the period of limitations on assessment has expired. The 
provisions of paragraph (a) of this section apply to the 1994 
transfers. However, for purposes of determining A's adjusted taxable 
gifts in computing A's estate tax liability, the gifts may be 
adjusted. See Sec. 20.2001-1(a) of this chapter.

    (d) Effective dates. Paragraph (a) of this section applies to 
transfers of property by gift made prior to August 6, 1997. Paragraphs 
(b) and (c) of this section apply to transfers of property by gift made 
after August 5, 1997, if the gift tax return for the calendar period in 
which the transfer is reported is filed after December 3, 1999.
    Par. 6. In Sec. 25.2511-2, paragraph (j) is revised to read as 
follows:


Sec. 25.2511-2  Cessation of donor's dominion and control.

* * * * *
    (j) If the donor contends that a power is of such nature as to 
render the gift incomplete, and hence not subject to the tax as of the 
calendar period (as defined in Sec. 25.2502-1(c)(1)) of the initial 
transfer, see Sec. 301.6501(c)-1(f)(5) of this chapter.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 7. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 8. Section 301.6501(c)-1 is amended by:
    1. Revising the heading to paragraph (e).
    2. Adding paragraph (f).
    The revision and addition reads as follows:


Sec. 301.6501(c)-1  Exceptions to general period of limitations on 
assessment and collection.

* * * * *
    (e) Gifts subject to chapter 14 of the Internal Revenue Code not 
adequately disclosed on the return. * * *
    (f) Gifts made after December 31, 1996, not adequately disclosed on 
the return--(1) In general. If a transfer of property, other than a 
transfer described in paragraph (e) of this section, is not adequately 
disclosed on a gift tax return (Form 709, ``United States Gift (and 
Generation-Skipping Transfer) Tax Return''), or in a statement attached 
to the return, filed for the calendar period in which the transfer 
occurs, then any gift tax imposed by chapter 12 of subtitle B of the 
Internal Revenue Code on the transfer may be assessed, or a proceeding 
in court for the collection of the appropriate tax may be begun without 
assessment, at any time.
    (2) Adequate disclosure of transfers of property reported as gifts. 
A transfer will be adequately disclosed on the return only if it is 
reported in a manner adequate to apprise the Internal Revenue Service 
of the nature of the gift and the basis for the value so reported. 
Transfers reported on the gift tax return as transfers of property by 
gift will be considered adequately disclosed under this paragraph 
(f)(2) if the return (or a statement attached to the return) provides 
the following information--
    (i) A description of the transferred property and any consideration 
received by the transferor;
    (ii) The identity of, and relationship between, the transferor and 
each transferee;
    (iii) 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;
    (iv) Except as provided in Sec. 301.6501-1(f)(3), a detailed 
description of the method used to determine the fair market value of 
property transferred, including any financial data (for example, 
balance sheets, etc. with explanations of any adjustments) that were 
utilized in determining the value of the interest, any restrictions on 
the transferred property that were considered in determining the fair 
market value of the property, and a description of any discounts, such 
as discounts for blockage, minority or fractional interests, and lack 
of marketability, claimed in valuing the property. In the case of a 
transfer of an interest that is actively traded on an established 
exchange, such as the New York Stock Exchange, the American Stock 
Exchange, the NASDAQ National Market, or a regional exchange in which 
quotations are published on a daily basis, including recognized foreign 
exchanges, recitation of the exchange where the interest is listed, the 
CUSIP number of the security, and the mean between the highest and 
lowest quoted selling prices on the applicable valuation date will 
satisfy all of the requirements of this paragraph (f)(2)(iv). In the 
case of the transfer of an interest in an entity (for example, a 
corporation or partnership) that is not actively traded, a description 
must be provided of any discount claimed in valuing the interests in 
the entity or any assets owned by such entity. In addition, if the 
value of the entity or of the interests in the entity is properly 
determined based on the net value of the assets held by the entity, a 
statement must be provided regarding the fair market value of 100 
percent of the entity (determined without regard to any discounts in 
valuing the entity or any assets owned

[[Page 67772]]

by the entity), the pro rata portion of the entity subject to the 
transfer, and the fair market value of the transferred interest as 
reported on the return. If 100 percent of the value of the entity is 
not disclosed, the taxpayer bears the burden of demonstrating that the 
fair market value of the entity is properly determined by a method 
other than a method based on the net value of the assets held by the 
entity. If the entity that is the subject of the transfer owns an 
interest in another non-actively traded entity (either directly or 
through ownership of an entity), the information required in this 
paragraph (f)(2)(iv) must be provided for each entity if the 
information is relevant and material in determining the value of the 
interest; and
    (v) 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 (see Sec. 601.601(d)(2) 
of this chapter).
    (3) Submission of appraisals in lieu of the information required 
under paragraph (f)(2)(iv) of this section. The requirements of 
paragraph (f)(2)(iv) of this section will be satisfied if the donor 
submits an appraisal of the transferred property that meets the 
following requirements--
    (i) The appraisal is prepared by an appraiser who satisfies all of 
the following requirements:
    (A) The appraiser is an individual who holds himself or herself out 
to the public as an appraiser or performs appraisals on a regular 
basis.
    (B) Because of the appraiser's qualifications, as described in the 
appraisal that details the appraiser's background, experience, 
education, and membership, if any, in professional appraisal 
associations, the appraiser is qualified to make appraisals of the type 
of property being valued.
    (C) The appraiser is not the donor or the donee of the property or 
a member of the family of the donor or donee, as defined in section 
2032A(e)(2), or any person employed by the donor, the donee, or a 
member of the family of either; and
    (ii) The appraisal contains all of the following:
    (A) The date of the transfer, the date on which the transferred 
property was appraised, and the purpose of the appraisal.
    (B) A description of the property.
    (C) A description of the appraisal process employed.
    (D) A description of the assumptions, hypothetical conditions, and 
any limiting conditions and restrictions on the transferred property 
that affect the analyses, opinions, and conclusions.
    (E) The information considered in determining the appraised value, 
including in the case of an ownership interest in a business, all 
financial data that was used in determining the value of the interest 
that is sufficiently detailed so that another person can replicate the 
process and arrive at the appraised value.
    (F) The appraisal procedures followed, and the reasoning that 
supports the analyses, opinions, and conclusions.
    (G) The valuation method utilized, the rationale for the valuation 
method, and the procedure used in determining the fair market value of 
the asset transferred.
    (H) The specific basis for the valuation, such as specific 
comparable sales or transactions, sales of similar interests, asset-
based approaches, merger-acquisition transactions, etc.
    (4) Adequate disclosure of non-gift completed transfers or 
transactions. Completed transfers to members of the transferor's 
family, as defined in section 2032A(e)(2), that are made in the 
ordinary course of operating a business are deemed to be adequately 
disclosed under paragraph (f)(2) of this section, even if the transfer 
is not reported on a gift tax return, provided the transfer is properly 
reported by all parties for income tax purposes. For example, in the 
case of salary paid to a family member employed in a family owned 
business, the transfer will be treated as adequately disclosed for gift 
tax purposes if the item is properly reported by the business and the 
family member on their income tax returns. For purposes of this 
paragraph (f)(4), any other completed transfer that is reported, in its 
entirety, as not constituting a transfer by gift will be considered 
adequately disclosed under paragraph (f)(2) of this section only if the 
following information is provided on, or attached to, the return--
    (i) The information required for adequate disclosure under 
paragraphs (f)(2)(i), (ii), (iii) and (v) of this section; and
    (ii) An explanation as to why the transfer is not a transfer by 
gift under chapter 12 of the Internal Revenue Code.
    (5) Adequate disclosure of incomplete transfers. Adequate 
disclosure of a transfer that is reported as a completed gift on the 
gift tax return will commence the running of the period of limitations 
for assessment of gift tax on the transfer, even if the transfer is 
ultimately determined to be an incomplete gift for purposes of 
Sec. 25.2511-2 of this chapter. For example, if an incomplete gift is 
reported as a completed gift on the gift tax return and is adequately 
disclosed, the period for assessment of the gift tax will begin to run 
when the return is filed, as determined under section 6501(b). Further, 
once the period of assessment for gift tax expires, the transfer will 
not be subject to inclusion in the donor's gross estate for estate tax 
purposes. On the other hand, if the transfer is reported as an 
incomplete gift whether or not adequately disclosed, the period for 
assessing a gift tax with respect to the transfer will not commence to 
run even if the transfer is ultimately determined to be a completed 
gift. In that situation, the gift tax with respect to the transfer may 
be assessed at any time, up until three years after the donor files a 
return reporting the transfer as a completed gift with adequate 
disclosure.
    (6) Treatment of split gifts. If a husband and wife elect under 
section 2513 to treat a gift made to a third party as made one-half by 
each spouse, the requirements of this paragraph (f) will be satisfied 
with respect to the gift deemed made by the consenting spouse if the 
return filed by the donor spouse (the spouse that transferred the 
property) satisfies the requirements of this paragraph (f) with respect 
to that gift.
    (7) Examples. The following examples illustrate the rules of this 
paragraph (f):

    Example 1. (i) Facts. In 2001, A transfers 100 shares of common 
stock of XYZ Corporation to A's child. The common stock of XYZ 
Corporation is actively traded on a major stock exchange. For gift 
tax purposes, the fair market value of one share of XYZ common stock 
on the date of the transfer, determined in accordance with 
Sec. 25.2512-2(b) of this chapter (based on the mean between the 
highest and lowest quoted selling prices), is $150.00. On A's 
Federal gift tax return, Form 709, for the 2001 calendar year, A 
reports the gift to A's child of 100 shares of common stock of XYZ 
Corporation with a value for gift tax purposes of $15,000. A 
specifies the date of the transfer, recites that the stock is 
publicly traded, identifies the stock exchange on which the stock is 
traded, lists the stock's CUSIP number, and lists the mean between 
the highest and lowest quoted selling prices for the date of 
transfer.
    (ii) Application of the adequate disclosure standard. A has 
adequately disclosed the transfer. Therefore, the period of 
assessment for the transfer under section 6501 will run from the 
time the return is filed (as determined under section 6501(b)).
    Example 2. (i) Facts. On December 30, 2001, A transfers closely-
held stock to B, A's child. A determined that the value of the 
transferred stock, on December 30, 2001, was $9,000. A made no other 
transfers to B, or any other donee, during 2001. On A's Federal gift 
tax return, Form 709, for the 2001

[[Page 67773]]

calendar year, A provides the information required under paragraph 
(f)(2) of this section such that the transfer is adequately 
disclosed. A claims an annual exclusion under section 2503(b) for 
the transfer.
    (ii) Application of the adequate disclosure standard. Because 
the transfer is adequately disclosed under paragraph (f)(2) of this 
section, the period of assessment for the transfer will expire as 
prescribed by section 6501(b), notwithstanding that if A's valuation 
of the closely-held stock was correct, A was not required to file a 
gift tax return reporting the transfer under section 6019. After the 
period of assessment has expired on the transfer, the Internal 
Revenue Service is precluded from redetermining the amount of the 
gift for purposes of assessing gift tax or for purposes of 
determining the estate tax liability. Therefore, the amount of the 
gift as reported on A's 2001 Federal gift tax return may not be 
redetermined for purposes of determining A's prior taxable gifts 
(for gift tax purposes) or A's adjusted taxable gifts (for estate 
tax purposes).
    Example 3. (i) Facts. A owns 100 percent of the common stock of 
X, a closely-held corporation. X does not hold an interest in any 
other entity that is not actively traded. In 2001, A transfers 20 
percent of the X stock to B and C, A's children, in a transfer that 
is not subject to the special valuation rules of section 2701. The 
transfer is made outright with no restrictions on ownership rights, 
including voting rights and the right to transfer the stock. Based 
on generally applicable valuation principles, the value of X would 
be determined based on the net value of the assets owned by X. The 
reported value of the transferred stock incorporates the use of 
minority discounts and lack of marketability discounts. No other 
discounts were used in arriving at the fair market value of the 
transferred stock or any assets owned by X. On A's Federal gift tax 
return, Form 709, for the 2001 calendar year, A provides the 
information required under paragraph (f)(2) of this section 
including a statement reporting the fair market value of 100 percent 
of X (before taking into account any discounts), the pro rata 
portion of X subject to the transfer, and the reported value of the 
transfer. A also attaches a statement regarding the determination of 
value that includes a discussion of the discounts claimed and how 
the discounts were determined.
    (ii) Application of the adequate disclosure standard. A has 
provided sufficient information such that the transfer will be 
considered adequately disclosed and the period of assessment for the 
transfer under section 6501 will run from the time the return is 
filed (as determined under section 6501(b)).
    Example 4. (i) Facts. A owns a 70 percent limited partnership 
interest in PS. PS owns 40 percent of the stock in X, a closely-held 
corporation. The assets of X include a 50 percent general 
partnership interest in PB. PB owns an interest in commercial real 
property. None of the entities (PS, X, or PB) is actively traded 
and, based on generally applicable valuation principles, the value 
of each entity would be determined based on the net value of the 
assets owned by each entity. In 2001, A transfers a 25 percent 
limited partnership interest in PS to B, A's child. On the Federal 
gift tax return, Form 709, for the 2001 calendar year, A reports the 
transfer of the 25 percent limited partnership interest in PS and 
that the fair market value of 100 percent of PS is $y and that the 
value of 25 percent of PS is $z, reflecting marketability and 
minority discounts with respect to the 25 percent interest. However, 
A does not disclose that PS owns 40 percent of X, and that X owns 50 
percent of PB and that, in arriving at the $y fair market value of 
100 percent of PS, discounts were claimed in valuing PS's interest 
in X, X's interest in PB, and PB's interest in the commercial real 
property.
    (ii) Application of the adequate disclosure standard. The 
information on the lower tiered entities is relevant and material in 
determining the value of the transferred interest in PS. 
Accordingly, because A has failed to comply with requirements of 
paragraph (f)(2)(iv) of this section regarding PS's interest in X, 
X's interest in PB, and PB's interest in the commercial real 
property, the transfer will not be considered adequately disclosed 
and the period of assessment for the transfer under section 6501 
will remain open indefinitely.
    Example 5. The facts are the same as in Example 4 except that A 
submits, with the Federal tax return, an appraisal of the 25 percent 
limited partnership interest in PS that satisfies the requirements 
of paragraph (f)(3) of this section in lieu of the information 
required in paragraph (f)(2)(iv) of this section. Assuming the other 
requirements of paragraph (f)(2) of this section are satisfied, the 
transfer is considered adequately disclosed and the period for 
assessment for the transfer under section 6501 will run from the 
time the return is filed (as determined under section 6501(b) of 
this chapter).
    Example 6. A owns 100 percent of the stock of X Corporation, a 
company actively engaged in a manufacturing business. B, A's child, 
is an employee of X and receives an annual salary paid in the 
ordinary course of operating X Corporation. B reports the annual 
salary as income on B's income tax returns. In 2001, A transfers 
property to family members and files a Federal gift tax return 
reporting the transfers. However, A does not disclose the 2001 
salary payments made to B. Because the salary payments were reported 
as income on B's income tax return, the salary payments are deemed 
to be adequately disclosed. The transfer of property to family 
members, other than the salary payments to B, reported on the gift 
tax return must satisfy the adequate disclosure requirements under 
paragraph (f)(2) of this section in order for the period of 
assessment under section 6501 to commence to run with respect to 
those transfers.

    (8) Effective date. This paragraph (f) is applicable to gifts made 
after December 31, 1996, for which the gift tax return for such 
calendar year is filed after December 3, 1999.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 9. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 10. In Sec. 602.101, paragraph (b) is amended in the table by 
revising the entry for 301.6501(c)-1 to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
    CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
301.6501(c)-1.............................................     1545-1241
                                                               1545-1637
                  *        *        *        *        *
------------------------------------------------------------------------

Bob Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: November 18, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-30944 Filed 12-2-99; 8:45 am]
BILLING CODE 4830-01-U