Sumner Redstone Case Demonstrates Importance of Timely Gift Tax Return Filing

Gift Tax Return FilingHow many years after a taxable gift may the IRS audit the gift? Taxpayers are often surprised to learn that when a gift tax return is not filed, or when a filed gift tax return does not “adequately disclose” a gift, there is no statute of limitations on an IRS audit. The unlimited nature of the IRS’s audit power over undisclosed gifts received media attention recently in connection with a dispute between the IRS and media tycoon Sumner Redstone. The IRS has taken the position that Redstone failed to report a 1972 taxable gift to his children. Redstone argues that the gift was not a gift at all, but an “ordinary business transaction.” Commentators have characterized the audit of the forty-one year old gift as “unprecedented.”

The Redstone case emphasizes the importance of timely filing gift tax returns and making sure such returns meet the adequate disclosure rules found in Treasury Regulations § 301.6501(c)-1. Generally speaking, the adequate disclosure rules require a transaction to be reported in a manner “adequate to apprise the IRS of the nature of the gift and the basis for the value” of such gift. The regulations allow a taxpayer to submit an appraisal of gifted property in order to meet certain elements of the adequate disclosure requirements. When the adequate disclosure standards are met, the IRS has three years to audit the return. The Redstone case also shows that it may be advisable in some cases to disclose non-gift transactions on a gift tax return in order to prevent the IRS from arguing that such transactions were in fact gifts.

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