Tuesday, January 3, 2012

Court now grants John Doe summons sought in gift tax enforcement initiative

After previously refusing to do so, a district court has now granted IRS permission to issue a John Doe summons to the California Board of Equalization (BOE) as part of a gift tax enforcement initiative to detect transfers of real property between nonspouse relatives that weren't reported on gift tax returns.
Observation: IRS will now get the information from California. Previously, it requested and received comparable information from Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren't.

Gift tax background. The gift tax is imposed on the transfer of money or other property by gift. (Code Sec. 2501(a)) The first $13,000 of gifts of a present interest made annually by a donor to each donee is excluded from the amount of the donor's taxable gifts. (Code Sec. 2503(b))

For gifts made and decedents dying after 2010, the gift tax is integrated with the estate tax under a “unified” rate schedule that imposes a single tax on transfers during life and at death which effectively imposes no tax on gifts unless the total amount of taxable gifts for any such year and all prior years exceeds $5 million (indexed for inflation after 2011). This is achieved through a unified credit. For gifts made after 2012, the amount exempted from the gift tax will be $1 million. (Code Sec. 2505)

Any individual who makes gifts to any one donee during a calendar year which aren't fully excluded under the $13,000 annual exclusion must file a gift tax return. A return must be filed even if no tax is payable. (Reg. § 25.6019-1(f)) But, no return is required to report a qualified transfer for educational or medical costs, most charitable transfers, or a transfer that qualifies for the marital deduction, except that a return must be filed to make a qualified terminable interest property (QTIP) election. (Code Sec. 6019, Reg. § 25.6019-1(a))

The period of assessment doesn't close for a gift made in a calendar year ending after Aug. 5, '97, unless the gift is adequately disclosed on a gift tax return. (Code Sec. 6501(c)(9)) Transfers reported on a gift tax return as transfers of property by gift are considered adequately disclosed if the return (or a statement attached to it) provides certain information including: 
  • A description of the transferred property and any consideration received by the transferor; 
  • The identity of, and relationship between, the transferor and each transferee; and 
  • Unless the donor submits an appraisal meeting the requirements of Reg. § 301.6501(c)-1(f)(3), a detailed description of the method used to determine the fair market value of the property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that was 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. (Reg. § 301.6501(c)-1(f)(2)) 
Background on summonses. IRS may examine books, papers, records or other data for purposes of ascertaining the correctness of any return, making a return if none has been made, determining the tax liability of any person, and collecting that liability. (Code Sec. 7602(a)(1)) IRS may issue a summons to the taxpayer or other persons it feels may be able to assist in determining the taxpayer's tax liability. (Code Sec. 7602(a)(2))

IRS may serve a John Doe summons under Code Sec. 7609(f) after a court proceeding in which it establishes that: 
  • the summons relates to the investigation of a particular person or ascertainable group or class of persons; 
  • there is a reasonable basis for believing that the person, group, or class may fail or have failed to comply with any internal revenue provision; and 
  • the information sought from the examination of records and testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources. 
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