[Federal Register Volume 74, Number 173 (Wednesday, September 9, 2009)]
[Rules and Regulations]
[Pages 46347-46350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-21458]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9460]
RIN 1545-BD67
Declaratory Judgments--Gift Tax Determinations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 7477 of
the Internal Revenue Code (Code) regarding petitions filed with the
United States Tax Court for declaratory judgments with respect to the
valuation of gifts. Changes to the applicable law were made by section
506(c)(1) of the Taxpayer Relief Act of 1997. These final regulations
primarily affect individuals who are donors of gifts. The final
regulations provide rules for determining whether a donor may petition
the Tax Court for a determination regarding the value of a gift,
including guidance regarding the definition of ``exhaustion of
administrative remedies.''
DATES: Effective date: These regulations are effective September 9,
2009.
Applicability date: For the date of applicability, see Sec.
301.7477-1(f).
FOR FURTHER INFORMATION CONTACT: Deborah S. Ryan or George Masnik (202)
622-3090 (not a toll free number).
Background
Section 7477, enacted in conjunction with other provisions as part
of the Taxpayer Relief Act of 1997 (TRA) (Pub. L. 105-34, 111 Stat.
855), provides a declaratory judgment procedure pursuant to which
taxpayers may contest in the United States Tax Court an IRS
determination regarding the value of a gift. Prior law did not provide
a judicial remedy in situations where the proposed IRS adjustment would
not result in a gift tax deficiency or a tax overpayment. The new
procedure applies, for example, where an increase in gift tax
determined under section 2502 is offset by the taxpayer's applicable
credit amount under section 2505(a), so that no additional tax is
assessed as a result of a valuation increase. Because there is no tax
deficiency, in the absence of section 7477, the taxpayer would be
unable to challenge the IRS determination, even though, upon the
expiration of the statute of limitations, that determination would
become binding for purposes of calculating the cumulative gift tax on
all future gifts of that taxpayer, as well as the taxpayer's estate tax
liability. See H.R. Conf. Rep. No. 105-220, at 407-408 (1997).
On June 9, 2008, proposed regulations under section 7477 were
published in the Federal Register (REG-143716-04, 73 FR 32503, 2008-25
IRB 1170). The IRS received no written or oral comments responding to
the notice of proposed rulemaking. No public hearing was requested or
held.
The final regulations include a few clarifications. In particular,
under section 7477, in order to be eligible for the declaratory
judgment procedure, the Tax Court must determine that the donor
exhausted all administrative remedies. In general, the proposed
regulations provide that the IRS will consider a donor to have
exhausted all administrative remedies if an Appeals conference is
requested timely and the donor (or an authorized representative)
``participates fully'' in the Appeals process. The final regulations
contain a separate subsection specifying that full participation
requires timely submission of requested information and disclosure of
all relevant information regarding the controversy. In addition, a
provision has been added specifying that, if Appeals does not grant the
donor's request for a conference, the donor will be treated as having
exhausted all administrative remedies if, after filing a Tax Court
petition for a declaratory judgment, the donor (or authorized
representative) participates fully in the Appeals office consideration
when offered by the IRS while the case is in docketed status.
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 on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding this regulation was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Information
The principal authors of these final regulations are Deborah Ryan
and Juli Ro Kim, Office of the Associate Chief Counsel (Passthroughs
and Special Industries), IRS. Other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 301.7477-1 is revised to read as follows:
Sec. 301.7477-1 Declaratory judgments relating to the value of
certain gifts for gift tax purposes.
(a) In general. If the adjustment(s) proposed by the Internal
Revenue Service (IRS) will not result in any deficiency in or refund of
the donor's gift tax liability for the calendar year, and if the
requirements contained in paragraph (d) of this section are satisfied,
then the declaratory judgment procedure under section 7477 is available
to the donor for determining the amount of one or more of the donor's
gifts during that calendar year for Federal gift tax purposes.
(b) Declaratory judgment procedure--(1) In general. If a donor does
not resolve a dispute with the IRS concerning the value of a transfer
for gift tax purposes at the Examination level, the donor will be sent
a notice of preliminary determination of value (Letter 950-G or such
other document as may be utilized by the IRS for this purpose from time
to time, but referred to in this section as Letter 950-G), inviting the
donor to file a formal
[[Page 46348]]
protest and to request consideration by the appropriate IRS Appeals
office. See Sec. Sec. 601.105 and 601.106 of this chapter.
Subsequently, the donor will be sent a notice of determination of value
(Letter 3569, or such other document as may be utilized from time to
time by the IRS for this purpose in cases where no deficiency or refund
would result, but referred to in this section as Letter 3569) if--
(i) The donor requests Appeals consideration in writing within 30
calendar days after the mailing date of the Letter 950-G, or by such
later date as determined pursuant to IRS procedures, and the matter is
not resolved by Appeals;
(ii) The donor does not request Appeals consideration within the
time provided in paragraph (b)(1)(i) of this section; or
(iii) The IRS does not issue a Letter 950-G in circumstances
described in paragraph (d)(4)(iv) of this section.
(2) Notice of determination of value. The Letter 3569 will notify
the donor of the adjustment(s) proposed by the IRS, and will advise the
donor that the donor may contest the determination made by the IRS by
filing a petition with the Tax Court before the 91st day after the date
on which the Letter 3569 was mailed to the donor by the IRS.
(3) Tax Court petition. If the donor does not file a timely
petition with the Tax Court, the IRS determination as set forth in the
Letter 3569 will be considered the final determination of value, as
defined in sections 2504(c) and 2001(f). If the donor files a timely
petition with the Tax Court, the Tax Court will determine whether the
donor has exhausted available administrative remedies. Under section
7477, the Tax Court is not authorized to issue a declaratory judgment
unless the Tax Court finds that the donor has exhausted all
administrative remedies within the IRS. See paragraph (d)(4) of this
section regarding the exhaustion of administrative remedies.
(c) Adjustments subject to declaratory judgment procedure. The
declaratory judgment procedures set forth in this section apply to
adjustments involving all issues relating to the transfer, including
without limitation valuation issues and legal issues involving the
interpretation and application of the gift tax law.
(d) Requirements for declaratory judgment procedure--(1) In
general. The declaratory judgment procedure provided in this section is
available to a donor with respect to a transfer only if all the
requirements of paragraphs (d)(2) through (5) of this section with
regard to that transfer are satisfied.
(2) Reporting. The transfer is shown or disclosed on the return of
tax imposed by chapter 12 for the calendar year during which the
transfer was made or on a statement attached to such return. For
purposes of this paragraph (d)(2), the term return of tax imposed by
chapter 12 means the last gift tax return (Form 709, ``United States
Gift (and Generation-skipping Transfer) Tax Return'' or such other form
as may be utilized for this purpose from time to time by the IRS) for
the calendar year filed on or before the due date of the return,
including extensions granted if any, or, if a timely return is not
filed, the first gift tax return for that calendar year filed after the
due date. For purposes of satisfying this requirement, the transfer
need not be reported in a manner that constitutes adequate disclosure
within the meaning of Sec. 301.6501(c)-1(e) or (f) (and thus for
which, under Sec. Sec. 20.2001-1(b) and 25.2504-2(b) of this chapter,
the period during which the IRS may adjust the value of the gift will
not expire). The issuance of a Letter 3569 with regard to a transfer
disclosed on a return does not constitute a determination by the IRS
that the transfer was adequately disclosed, or otherwise cause the
period of limitations on assessment to commence to run with respect to
that transfer. In addition, in the case of a transfer that is shown on
the return, the IRS may in its discretion defer until a later time
making a determination with regard to such transfer. If the IRS
exercises its discretion to defer such determination in that case, the
transfer will not be addressed in the Letter 3569 (if any) sent to the
donor currently, and the donor is not yet eligible for a declaratory
judgment with regard to that transfer under section 7477.
(3) IRS determination and actual controversy. The IRS makes a
determination regarding the gift tax treatment of the transfer that
results in an actual controversy. The IRS makes a determination that
results in an actual controversy with respect to a transfer by mailing
a Letter 3569 to the donor, thereby notifying the donor of the
adjustment(s) proposed by the IRS with regard to that transfer and of
the donor's rights under section 7477.
(4) Exhaustion of administrative remedies--(i) In general. The Tax
Court determines whether the donor has exhausted all administrative
remedies available within the IRS for resolving the controversy.
(ii) Appeals office consideration. For purposes of this section,
the IRS will consider a donor to have exhausted all administrative
remedies if, prior to filing a petition in Tax Court (except as
provided in paragraphs (d)(4)(iii) and (iv) of this section), the
donor, or a qualified representative of the donor described in Sec.
601.502 of this chapter, timely requests consideration by Appeals and
participates fully (within the meaning of paragraph (d)(4)(vi) of this
section) in the Appeals consideration process. A timely request for
consideration by Appeals is a written request from the donor for
Appeals consideration made within 30 days after the mailing date of the
Letter 950-G, or by such later date for responding to the Letter 950-G
as is agreed to between the donor and the IRS.
(iii) Request for Appeals office consideration not granted. If the
donor, or a qualified representative of the donor described in Sec.
601.502 of this chapter, timely requests consideration by Appeals and
Appeals does not grant that request, the IRS nevertheless will consider
the donor to have exhausted all administrative remedies within the IRS
for purposes of section 7477 upon the issuance of the Letter 3569,
provided that the donor, or a qualified representative of the donor
described in Sec. 601.502 of this chapter, after the filing of a
petition in Tax Court for a declaratory judgment pursuant to section
7477, participates fully (within the meaning of paragraph (d)(4)(vi) of
this section) in the Appeals office consideration if offered by the IRS
while the case is in docketed status.
(iv) No Letter 950-G issued. If the IRS does not issue a Letter
950-G to the donor prior to the issuance of Letter 3569, the IRS
nevertheless will consider the donor to have exhausted all
administrative remedies within the IRS for purposes of section 7477
upon the issuance of the Letter 3569, provided that--
(A) The IRS decision not to issue the Letter 950-G was not due to
actions or inactions of the donor (such as a failure to supply
requested information or a current mailing address to the Area Director
having jurisdiction over the tax matter); and
(B) The donor, or a qualified representative of the donor described
in Sec. 601.502 of this chapter, after the filing of a petition in Tax
Court for a declaratory judgment pursuant to section 7477, participates
fully (within the meaning of paragraph (d)(4)(vi) of this section) in
the Appeals office consideration if offered by the IRS while the case
is in docketed status.
(v) Failure to agree to extension of time for assessment. For
purposes of section 7477, the donor's refusal to agree to an extension
of the time under section 6501 within which gift tax with
[[Page 46349]]
respect to the transfer at issue (if any) may be assessed will not be
considered by the IRS to constitute a failure by the donor to exhaust
all administrative remedies available to the donor within the IRS.
(vi) Participation in Appeals consideration process. For purposes
of this section, the donor or a qualified representative of the donor
described in Sec. 601.502 of this chapter participates fully in the
Appeals consideration process if the donor or the qualified
representative timely submits all information related to the transfer
that is requested by the IRS in connection with the Appeals
consideration and discloses to the Appeals office all relevant
information regarding the controversy to the extent such information
and its relevance is known or should be known by the donor or the
qualified representative during the time the issue is under
consideration by Appeals.
(5) Timely petition in Tax Court. The donor files a pleading with
the Tax Court requesting a declaratory judgment under section 7477.
This pleading must be filed with the Tax Court before the 91st day
after the date of mailing of the Letter 3569 by the IRS to the donor.
The pleading must be in the form of a petition subject to Tax Court
Rule 211(d).
(e) Examples. The following examples illustrate the provisions of
this section, and assume that in each case the Tax Court petition is
filed on or after September 9, 2009.
These examples, however, do not address any other situations that
might affect the Tax Court's jurisdiction over the proceeding:
Example 1. Exhaustion of administrative remedies. The donor (D)
timely files a Form 709, ``United States Gift (and Generation-
Skipping Transfer) Tax Return,'' on which D reports D's completed
gift of closely held stock. After conducting an examination, the IRS
concludes that the value of the stock on the date of the gift is
greater than the value reported on the return. Because the amount of
D's available applicable credit amount under section 2505 is
sufficient to cover any resulting tax liability, no gift tax
deficiency will result from the adjustment. D is unable to resolve
the matter with the IRS examiner. The IRS sends a Letter 950-G to D
informing D of the proposed adjustment. D, within 30 calendar days
after the mailing date of the letter, submits a written request for
Appeals consideration. During the Appeals process, D provides to the
Appeals office all additional information (if any) requested by
Appeals relevant to the determination of the value of the stock in a
timely fashion. The Appeals office and D are unable to reach an
agreement regarding the value of the stock as of the date of the
gift. The Appeals office sends D a notice of determination of value
(Letter 3569). For purposes of section 7477, the IRS will consider D
to have exhausted all available administrative remedies within the
IRS, and thus will not contest the allegation in D's petition that D
has exhausted all such administrative remedies.
Example 2. Exhaustion of administrative remedies. Assume the
same facts as in Example 1, except that D does not timely request
consideration by Appeals after receiving the Letter 950-G. A Letter
3569 is mailed to D more than 30 days after the mailing of the
Letter 950-G and prior to the expiration of the period of
limitations for assessment of gift tax. D timely files a petition in
Tax Court pursuant to section 7477. After the case is docketed, D
requests Appeals consideration. In this situation, because D did not
respond timely to the Letter 950-G with a written request for
Appeals consideration, the IRS will not consider D to have exhausted
all administrative remedies available within the IRS for purposes of
section 7477 prior to filing the petition in Tax Court, and thus may
contest any allegation in D's petition that D has exhausted all such
administrative remedies.
Example 3. Exhaustion of administrative remedies. D timely files
a Form 709 on which D reports D's completed gifts of interests in a
family limited partnership. After conducting an examination, the IRS
proposes to adjust the value of the gifts as reported on the return.
No gift tax deficiency will result from the adjustments, however,
because D has a sufficient amount of available applicable credit
amount under section 2505. D declines to consent to extend the time
for the assessment of gift tax with respect to the gifts at issue.
Because of the pending expiration of the period of limitation on
assessment within which a gift tax, if any, could be assessed, the
IRS determines that there is not adequate time for Appeals
consideration. Accordingly, the IRS mails to D a Letter 3569, even
though a Letter 950-G had not first been issued to D. D timely files
a petition in Tax Court pursuant to section 7477. After the case is
docketed in Tax Court, D is offered the opportunity for Appeals to
consider any dispute regarding the determination and participates
fully in the Appeals consideration process. However, the Appeals
office and D are unable to resolve the issue. The IRS will consider
D to have exhausted all administrative remedies available within the
IRS, and thus will not assert that D has not exhausted all such
administrative remedies.
Example 4. Legal issue. D transfers nonvested stock options to a
trust for the benefit of D's child. D timely files a Form 709
reporting the transfer as a completed gift for Federal gift tax
purposes and complies with the adequate disclosure requirements for
purposes of triggering the commencement of the applicable statute of
limitations. Pursuant to Sec. 301.6501(c)-1(f)(5), adequate
disclosure of a transfer that is reported as a completed gift on the
Form 709 will commence the running of the period of limitations for
assessment of gift tax on D, even if the transfer is ultimately
determined to be an incomplete gift for purposes of Sec. 25.2511-2
of this chapter. After conducting an examination, the IRS concurs
with the reported valuation of the stock options, but concludes that
the reported transfer is not a completed gift for Federal gift tax
purposes. D is unable to resolve the matter with the IRS examiner.
The IRS sends a Letter 950-G to D, who timely mails a written
request for Appeals consideration. Assuming that the IRS mails to D
a Letter 3569 with regard to this transfer, and that D complies with
the administrative procedures set forth in this section, including
the exhaustion of all administrative remedies available within the
IRS, then D may file a petition for declaratory judgment with the
Tax Court pursuant to section 7477.
Example 5. Transfers in controversy. On April 16, 2007, D timely
files a Form 709 on which D reports gifts made in 2006 of fractional
interests in certain real property and of interests in a family
limited partnership (FLP). However, although the gifts are disclosed
on the return, the return does not contain information sufficient to
constitute adequate disclosure under Sec. 301.6501(c)-1(e) or (f)
for purposes of the application of the statute of limitations on
assessment of gift tax with respect to the reported gifts. The IRS
conducts an examination and concludes that the value of both the
interests in the real property and the FLP interests on the date(s)
of the transfers are greater than the values reported on the return.
No gift tax deficiency will result from the adjustments because D
has a sufficient amount of remaining applicable credit amount under
section 2505. However, D does not agree with the adjustments. The
IRS sends a Letter 950-G to D informing D of the proposed
adjustments in the value of the reported gifts. D, within 30
calendar days after the mailing date of the letter, submits a
written request for Appeals consideration. The Appeals office and D
are unable to reach an agreement regarding the value of any of the
gifts. In the exercise of its discretion, the IRS decides to resolve
currently only the value of the real property interests, and to
defer the resolution of the value of the FLP interests. On May 28,
2009, the Appeals office sends D a Letter 3569 addressing only the
value of the gifts of interests in the real property. Because none
of the gifts reported on the return filed on April 16, 2007 were
adequately disclosed for purposes of Sec. 301.6501(c)-1(e) or (f),
the period of limitations during which the IRS may adjust the value
of those gifts has not begun to run. Accordingly, the Letter 3569 is
timely mailed. If D timely files a petition in Tax Court pursuant to
section 7477 with regard to the value of the interests in the real
property, then, assuming the other requirements of section 7477 are
satisfied with regard to those interests, the Tax Court's
declaratory judgment, once it becomes final, will determine the
value of the gifts of the interests in the real property. Because
the IRS has not yet put the gift tax value of the interests in the
FLP into controversy, the procedure under section 7477 is not yet
available with regard to those gifts.
(f) Effective/applicability date. This section applies to civil
proceedings described in section 7477 filed in the
[[Page 46350]]
United States Tax Court on or after September 9, 2009.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: August 26, 2009.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-21458 Filed 9-8-09; 8:45 am]
BILLING CODE 4830-01-P