Gift tax return SOL - exception to the general rule.

A deficiency for gift tax generally must be assessed within three years after the gift tax return was filed (Sec. 6501(a)). However, Sec. 6501(c) provides several exceptions to the general three-year statute of limitations (SOL). One such exception involves gifts of property subject to the special valuation rules of Sec. 2701 or 2702 (i.e., transfers of certain interests in corporations, partnerships and trusts).

Under Sec. 6501(c)(9) and Regs. Sec. 301.6501(c)-1(e), if any gift of property subject to the special valuation rules of Sec. 2701 or 2702 is not "adequately shown" on a gift tax return, any related gift tax may be assessed (or a proceeding in court for the collection of the gift tax may be instigated) at any time. This adequate disclosure rule applies even if the gift was not taxable due to the $10,000 annual exclusion. Therefore, it is necessary to adequately disclose gifts subject to Secs. 2701 and 2702 on a gift tax return to start the SOL for such gifts, even if a gift tax return would not otherwise be required.

A gift will be considered "adequately shown" only if it is disclosed on a gift tax return that provides:

* A description of the transactions, including a description of transferred and retained interests and the method (or methods) used to value each;

* The identity of, and relationship between, the transferor, transferee, all other persons participating in the transactions and all parties related to the transferor who hold an equity interest in any entity involved in the transaction; and

* A detailed description (including all actuarial factors and discount rates used) of the method used to determine the amount of the gift arising from the transfer. In the case of an equity interest not actively traded, the financial and other data used in determining value must also be disclosed. (Financial data should generally include balance sheets, income statements, operating results and dividends paid for each of the five years immediately preceding the valuation date.)

Common transactions subject to the adequate disclosure rule include grantor retained annuity trusts (GRATs), grantor retained unitrusts (GRUTs), qualified personal residence trusts (QPRTs) and transfers of family-controlled corporate or partnership interests. When taxpayers enter into such transactions, gift tax returns adequately disclosing the transactions should be filed in order to start the SOL. Also, if a position is taken that a GRAT can be "zeroed-out" (a position contrary to the IRS's position in Regs. Sec. 25.2702-3(e), Example 5 and Rev. Rul. 77-454), it will be necessary to disclose this information on a gift tax return (or an attached statement) in order to meet the adequate disclosure rules.