If you gift an interest in a closely held entity, you must adequately disclose it on Form 709, United States Gift Tax Return or in a statement attached to the gift tax return. If you don’t, the statute of limitations won’t begin – allowing the IRS adjust the unified credit or assess potential gift tax, interest and penalties. The statute of limitations for the gift tax return is generally three years from the date you file the return.
Treasury Regulation Section 301.6501(c)-1(f)(3) addresses the submission of appraisals. Appraisals of the transferred property must meet the following requirements:
- The appraiser must:
- Hold himself or herself out to the public as an appraiser, or regularly perform appraisals
- Be qualified to make appraisals on the type of property being valued – and the appraisal must detail these qualifications, including background, experience, education and membership, if any, in professional appraisal associations
- NOT be the donor or the donee of the property; or a relative, employee or relative of an employee of the donor or done
- The appraisal must contain:
- The transfer date, appraisal date and the purpose of the appraisal
- A description of the property
- A description of the appraisal process
- A description of the assumptions, hypothetical conditions and any limiting conditions and restrictions on the transferred property that affect the analyses, opinions and conclusions
- The information considered in determining the appraised value, including in the case of an ownership interest in a business, all financial data that was used in determining the value of the interest that is sufficiently detailed so that another person can replicate the process and arrive at the appraised value.
- The appraisal procedures followed, and the reasoning that supports the analyses, opinions and conclusions
- The valuation method utilized, the rationale for the valuation method and the procedure used in determining the fair market value of the asset transferred
- The specific basis for the valuation
The alternative to using a qualified appraiser and submitting a qualified valuation report requires more detail than simply attaching the qualified appraisal. Substantiation includes a detailed description of the method used for determining fair market value, including any financial data that was used in determining value.
It also requires discussion of any restrictions on the property that were considered in determining value and the description of discounts taken to the fair market value. This would be similar to representing yourself as your own attorney in a court of law.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 12/19/2012.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.