IRS is time-barred from assessing gift tax

The Tax Court held that a taxpayer’s 2006 gift tax return and supporting documentation constituted adequate disclosure and began the statute of limitation, despite the gift’s being deemed complete in 2007.

Facts: In 2006, Ronald Schlapfer, sole owner of European Marketing Group Inc. (EMG), applied for a universal variable life insurance policy. The policy was intended to benefit Schlapfer’s nephews and listed his mother, aunt, and uncle as the insured lives, with Schlapfer listed as the policyholder. Schlapfer funded the policy with cash and 100 shares of EMG. The stock of EMG, which was a Panamanian corporation, was officially transferred to the policy on Nov. 8,

In 2007, Schlapfer assigned ownership of the policy jointly to his mother, aunt, and uncle. Schlapfer was born in Switzerland but had lived in the United States since 1979 under the authority of a nonimmigrant visa, which required him to declare that he had no intent to permanently reside in the United States. Schlapfer applied for U.S. citizenship in 2007 and became a U.S. citizen in 2008.

In 2012 and 2013, Schlapfer participated in the Offshore Voluntary Disclosure Program (OVDP), an IRS initiative providing U.S. taxpayers the opportunity to resolve income tax liabilities relating to undisclosed income from offshore assets. Included in his OVDP submission was a 2006 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, as a “protective filing,” which reported the EMG stock transfer.

Schlapfer contended that he was not subject to the gift tax in 2006 because he did not intend to reside permanently in the United States until he obtained citizenship in 2008.

In 2014, after reviewing his submission, the IRS requested additional information regarding the gift reported on his 2006 Form 709. Schlapfer promptly sent in the requested information and further expounded on his position as to why the gift of EMG stock was a 2006 transfer. Schlapfer asserted that the gift was made in 2006 when the stock was transferred, and his actions in 2007 naming his mother, aunt, and uncle as policyholders were merely a correction of an error made by the insurance company, which had listed him as the policyholder in 2006.

After receiving his response, the IRS had little contact with Schlapfer, except that on Jan. 6, 2016, it notified Schlapfer that his 2006 Form 709 was selected for an examination. The examination involved Schlapfer’s claim of nondomiciliary status in 2006, as well as the gift of EMG stock. Schlapfer signed Form 872, Consent to Extend the Time to Assess Tax, agreeing to extend the time to assess tax to Nov. 30, 2017.

In August 2016, the IRS concluded that no completed taxable gift was made in 2006 and that the transfers in fact occurred in 2007 when Schlapfer relinquished all dominion and control of the life insurance policy. Because the gift was deemed to be made in 2007 and Schlapfer had failed to file a gift tax return for 2007, the IRS argued that he did not adequately disclose the gifts to commence the period of limitation. Schlapfer refused to concede that the gifts were made in 2007 and withdrew from the OVDP.

In 2019, the IRS issued Schlapfer a notice of deficiency for 2007 assessing a gift tax liability of $4,429,949 and penalties for failure to file and late payment of $4,319,200. Schlapfer filed a petition with the Tax Court, and both sides moved for summary judgment.

Issues: The IRS generally has three years from the filing of a gift tax return to assess additional tax. If no Form 709 is filed or if the gift is not adequately disclosed with a gift tax return, then the IRS can assess tax at any time. The IRS asserted that since the gift was complete in 2007 and no 2007 gift tax return was filed, the statute of limitation had not commenced, and so tax could be imposed at any time.

Regs. Sec. 301.6501(c)-1(f)(5) provides that even if the reported gift is ultimately determined to be an incomplete transfer under Regs. Sec. 25.2511-2, so long as there is adequate disclosure on Form 709, the statute of limitation will commence. The court found that the relevant issue was whether Schlapfer’s 2006 gift tax return and accompanying exhibits constituted adequate disclosure in a manner sufficient to apprise the IRS of the transactions’ nature and start the three-year statute of limitation (Regs. Sec. 301.6501(c)-1(f)(1)).

Regs. Sec. 301.6501(c)-1(f)(2) provides that a transfer is adequately disclosed if the gift tax return includes information regarding the description of the property transferred and any consideration received for the transfer; the identity and relationship between the transferor and the transferee; and a detailed description of the method used to determine the fair market value of property transferred, including the financial data required for that method. Additional requirements pertain to property transferred in trust and any position taken contrary to regulations or revenue rulings.

Schlapfer included with his 2006 gift tax return Schedule F of his 2006 Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, which showed the balance sheet of EMG. He asserted that this document, along with his protective filing attachment and his Offshore Entity Statement, constituted adequate disclosure and thus started the statute of limitation.

The IRS argued that the gift was not adequately disclosed because the Offshore Entity Statement was not part of the 2006 gift tax return and should not be considered as a gift disclosure. Even if it were so considered, the IRS argued, Schlapfer failed to satisfy all applicable requirements of Regs. Sec. 301. 6501(c)-1(f)(2).

Holding: The Tax Court ruled in favor of Schlapfer, concluding that the documents submitted with his 2006 gift tax return substantially satisfied the adequate-disclosure requirements under Regs. Sec. 301.6501(c)-1(f)(2), and the three-year statute of limitation commenced when the return was filed.

While Schlapfer may not have strictly complied with all the requirements of Regs. Sec. 301.6501(c)-1(f)(2), the court held, he substantially complied by providing sufficient information to apprise the IRS of the nature of the transaction.

Since Schlapfer was found to have adequately disclosed the gifts on his 2006 gift tax return, the period of limitation to assess the gift tax started when the return was filed in 2013. The IRS was barred from assessing gift tax because it issued the notice of deficiency in 2019, more than three years after the filing plus the agreed-upon one-year extension pursuant to Form 872.

■ Schlapfer, T.C. Memo. 2023-65

David R. Silversmith, CPA, CFP, CFE, is a senior tax manager in Hauppauge, N.Y.; Mani Gupta, CPA, is a senior tax manager in Cranford, N.J.; and Bhakti Shah, CPA, J.D., is a partner in Cranford, N.J., all with PKF O’Connor Davies Advisory LLC. To comment on this column, contact Paul Bonner, the JofA’s tax editor.