Give It While You Can – And Just As Importantly Document It!

Recently I wrote about the importance of affluent taxpayers taking advantage of the $22.4 million exemption while it is available. Deciding to give, and how to give, is the major issue but not the only issue. Filing a gift tax return (Form 709) and providing an appraisal to support the value is critical. The legal importance is that there is no statute of limitations on gifts if a gift tax return is not filed. Further, the gift tax return needs to provide the necessary information, such as asset appraisals, to put the IRS on notice of the substance and value of the gift – “adequate disclosure.” Absent filing a gift tax return, the statute remains open and transactions that taxpayers may think have been closed remain subject to IRS scrutiny, even up to the time of death.

A 2012 U.S. Tax Court decision Dickerson v. Commissioner, T.C. Memo 2012-60, regarding a waitress who won $10 million in a lottery, illustrates the importance of filing the return. The waitress won a lottery and tried to shift the winnings to family members without incurring a taxable gift. The IRS disagreed, claiming there was a gift, and the Tax Court concurred. The relevance here is not the lottery and desired income assignment, but rather the procedural aspects of the case. The waitress won the lottery in 1999 but did not file a gift tax return until 2007. In 2008, the IRS asserted that gift tax was owed. The Tax Court heard the case in 2010, which resulted in the 2012 decision, 13 years after the winnings. Because the gift tax return with adequate disclosure was never filed, the statute did not run and the lifetime transfer remained open to IRS challenge.