Filing 2016 Gift Tax Returns—Is there a Need to Disclose Noncompliance with Proposed Treasury Regulations Under Code Section 2704 with respect to Discounted Valuation Gifts?

September 8, 2017
President Trump issued in April Executive Order 13789 to identify which regulations: (i) are unduly complex, (ii) impose undue financial burdens on taxpayers, or (iii) exceed the IRS’s statutory authority. The Proposed 2704 Treasury Regulations have been highly criticized as to their impact on taxpayers’ ability to take discounts on the value of taxable gifts of interests in entities, such as a limited liability company (LLC). These 2704 Proposed Regulations have been identified as one of the proposed regulations that fit within the above category. This may lead to these regulations being on the chopping block, or greatly simplified or modified.
This brings up the quandary of whether gifts made in 2016 that used valuation discounts to avoid or lessen any gift taxes must now be highlighted on the Form 709 Federal Gift Tax Return as being contrary to the valuations allowed under the proposed regulations. It is extremely important that any discounted valuation of gifts made in 2016 that are contrary to any treasury regulations (even proposed regulations) contain an adequate disclosure on the Form 709 that the valuation used is contrary to such regulations. This disclosure is critical because without it, the statute of limitations does not commence, meaning that the IRS can challenge the value of the gifts many years later. In that event, an IRS audit could result in significant unexpected taxes, interest, penalties and headaches.
In light of the importance of such a disclosure, serious consideration should be given to adding a statement to the Form 709 that relays that the 2704 proposed regulations were not taken into account in valuing the 2016 gifts because the taxpayer believes that such proposed regulations do not apply to such gifts. This position is based on the fact that the proposed regulations’ effective date does not apply to gifts made prior to such proposed regulations becoming final regulations.
By Edward D. Brown, Esq., LLM. CPA