Declaratory Judgments-Gift Tax Determinations, 32503-32508 [E8-12894]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 111 (Monday, June 9, 2008)]
[Proposed Rules]
[Pages 32503-32508]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-12894]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-143716-04]
RIN 1545-BD67


Declaratory Judgments--Gift Tax Determinations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section 7477 
of the Internal Revenue Code (Code) regarding petitions filed with the 
United States Tax Court for declaratory judgments as to the valuation 
of gifts. Changes to the applicable law were made by section 506(c)(1) 
of the Taxpayer Relief Act of 1997 (TRA). The proposed regulations 
primarily affect individuals who are donors of gifts. The proposed 
regulations provide rules for determining whether a donor may petition 
the Tax Court with respect to the value of a gift, including guidance 
regarding the definition of ``exhaustion of administrative remedies.'' 
This document also provides a notice of a public hearing on these 
proposed regulations.

DATES: Written and electronic comments must be received by September 8, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for October 16, 2008, must be received by September 11, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-143716-04), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
143716-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
electronic comments via the Federal eRulemaking Portal at https://
www.regulations.gov (IRS REG-143716-04). The public hearing will be 
held in the auditorium of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Juli Ro Kim or George Masnik, (202) 622-3090; concerning submissions of 
comments, the hearing, and/or to be placed on the building access list 
to attend the hearing, Kelly Banks at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    Gift tax is computed by determining a tax on the total of the gifts 
deemed made by the donor in the year for which the return is filed (the 
current calendar year) plus the total of that donor's gifts in prior 
years (prior taxable gifts). The tax so computed is then reduced by the 
tax that would have been payable on the prior taxable gifts, had the 
tax rate for the current taxable year applied to the prior taxable 
gifts. The result (after taking into account the applicable credit 
amount under section 2505) is the gift tax on the gifts in the current 
calendar year. Similarly, the estate tax is computed by determining a 
tax on the sum of the value of the decedent's taxable estate and the 
value of certain taxable gifts (adjusted taxable gifts) made by the 
decedent prior to death. The tax computed is then reduced by the gift 
tax that would have been payable on the adjusted taxable gifts, had the 
estate tax rate applied to the adjusted taxable gifts. The result 
(after allowing for various credits) is the estate tax on the taxable 
estate.
    The Taxpayer Relief Act of 1997 (TRA) (Pub. L. 105-34, 111 Stat. 
855), the Internal Revenue Service Restructuring and Reform Act of 1998 
(Pub. L. 105-206, 112 Stat. 685), and the Tax and Trade Relief 
Extension Act of 1998 (Pub. L. 105-277, 112 Stat. 2681-909), 
(collectively, the 1998 Acts), enacted or amended sections 2001(f), 
2504(c), 6501(c)(9), and 7477, effective in the case of gifts made 
after August 5, 1997, to provide a degree of finality regarding the 
valuation of lifetime gifts for gift and estate tax purposes. Congress 
was concerned that the prior regime resulted in the resolution of 
controversies based on stale evidence, and necessitated the retention 
of records for unduly long periods of time. H.R. Rep. No. 105-148 at 
359 (1997).
    Under sections 6501(a) and (c)(9) as amended by TRA and the 1998 
Acts, and the applicable regulations, if a transfer of property is 
adequately disclosed on a gift tax return, then the period of 
limitations for assessment of gift tax with regard to that transfer 
will commence to run on the date the return is filed. Once the time for 
assessment of gift tax has expired for a transfer made after August 5, 
1997, the value of the gift as ``finally determined'' for gift tax 
purposes, as defined in section 2001(f), is the value to be used for 
purposes of determining prior taxable gifts in computing the gift tax 
liability in subsequent years under section 2504(c),

[[Page 32504]]

and for purposes of determining adjusted taxable gifts in computing the 
estate tax liability under section 2001(f). Under Sec. Sec.  20.2001-
1(b) and 25.2504-2(b), this finality rule applies with respect to all 
issues that might be raised with respect to the transfer, including 
valuation issues and legal issues. The amount of a gift is finally 
determined if: (1) The amount is shown on a gift tax return and the IRS 
does not contest the amount before the period for assessing gift tax 
expires; (2) before the period for assessing gift tax expires, the 
amount is adjusted by the IRS and the taxpayer does not contest the 
adjusted amount; or, (3) the amount is determined by a court or 
pursuant to a settlement agreement between the taxpayer and the IRS.
    Section 7477 was enacted as part of TRA in conjunction with these 
other provisions to provide a declaratory judgment procedure pursuant 
to which taxpayers may contest in the United States Tax Court an IRS 
determination regarding the value of a gift. See H.R. Conf. Rep. No. 
105-220, at 407-408 (1997). In the absence of section 7477, without an 
actual gift tax deficiency, a taxpayer would be unable to petition the 
Tax Court to contest the determination or, without an overpayment of 
tax, file a claim for refund or bring suit for refund in Federal court. 
This could occur, for example, if an increase in gift tax determined 
under section 2502 is offset by the taxpayer's applicable credit amount 
under section 2505(a), so that no additional tax would be assessed as a 
result of the valuation increase. Thus, without section 7477, such a 
taxpayer would be left without any way to challenge the IRS 
determination, even though, upon the expiration of the statute of 
limitations, that determination would become binding for purposes of 
calculating the cumulative gift tax on all future gifts of that 
taxpayer, as well as the taxpayer's estate tax liability.

Explanation of Provisions

    Under section 7477(a), the donor may contest an IRS determination 
of the amount of a gift. Specifically, the donor may petition the Tax 
Court for a declaratory judgment, provided that certain requirements 
are met. Section 7477(a) applies in the case of an actual controversy 
involving a determination by the IRS regarding the value of a gift that 
is shown on the gift tax return or disclosed on the gift tax return or 
in a statement attached to that return.
    These proposed regulations provide a procedure for pursuing a 
declaratory judgment in the Tax Court pursuant to section 7477 in 
situations where, prior to the enactment of that section, the taxpayer 
would have had no remedy to challenge the IRS determination. 
Specifically, the procedure provided by these proposed regulations 
applies only in those situations where an adjustment by the IRS does 
not result in a gift tax deficiency or refund. In situations where the 
IRS adjustment results in a proposed tax deficiency or a potential 
refund, taxpayers should not follow the procedures in these proposed 
regulations but should continue to follow the procedures already in 
place to dispute a deficiency or claim a refund. These procedures more 
efficiently address and resolve disputes involving a deficiency or 
refund.
    The first requirement for eligibility for relief under section 7477 
is that the transfer must be shown or disclosed ``on the return of tax 
imposed by chapter 12,'' that is, a Federal gift tax return, or on a 
statement attached to the return. Under the proposed regulations, the 
return of tax imposed by chapter 12 is defined as the last gift tax 
return for the calendar year filed on or before the due date of the 
return, including extensions granted (if any), or if a timely return is 
not filed, the first gift tax return for the calendar year filed after 
the due date.
    If the transfer is not shown or disclosed on the gift tax return, 
or on a statement attached to the return, a declaratory judgment under 
section 7477 is not available. If, however, a transfer is disclosed on 
the return or on a statement attached to the return, this eligibility 
requirement for the section 7477 procedure is satisfied, even if the 
transfer is disclosed in a manner that does not satisfy the 
requirements of section 6501(c)(9) and Sec.  301.6501(c)-1(e) or (f) 
pertaining to adequate disclosure sufficient to commence the running of 
the period of limitations on assessment. There may be no compelling 
reason for the IRS to examine a transaction that is disclosed on the 
return but not in a manner sufficient to trigger the running of the 
statute of limitations, because the time period for adjusting the value 
of the gift is not limited by the statute of limitations for 
assessments. The Treasury Department and the IRS, however, recognize 
that in many cases the IRS may prefer to contemporaneously resolve the 
transfer tax treatment of that transaction, even though the standards 
for adequate disclosure with regard to that transaction have not been 
satisfied by the donor. Thus, the IRS in its discretion may make a 
determination regarding the transfer and place the transfer in 
controversy by mailing a notice of determination of value used in 
unagreed cases (Letter 3569) with regard to that transfer. The ability 
to place a transfer that is not adequately disclosed in controversy is 
consistent with the Congressional purpose in enacting the TRA 
provisions, noted previously, to promote the early resolution of gift 
tax controversies based on contemporaneous evidence. The IRS and 
Treasury Department emphasize that the issuance of a Letter 3569 with 
regard to such a transfer does not constitute a determination by the 
IRS that the transfer was adequately disclosed or otherwise cause the 
period of limitations on assessment to commence to run with respect to 
that transfer.
    Alternatively, the IRS may in its discretion decide not to put a 
transfer in controversy at that time (whether or not any other transfer 
reported on a gift tax return is then put into controversy). If the IRS 
decides not to put the transfer into controversy at that time, the IRS 
will not issue a Letter 3569 (described in this preamble) (or the 
Letter 3569 issued will not address that transfer), the declaratory 
judgment procedure will not be available for that transfer, and the 
limitations period applicable to that transfer will remain open.
    Section 7477 also requires an actual controversy with respect to a 
determination by the IRS of the value of the disclosed transfer. Thus, 
the donor is not permitted to bypass the examination process and 
unilaterally seek a declaratory judgment. Generally, the IRS must 
propose adjustments with which the donor disagrees. Accordingly, the 
proposed regulations provide that, in order for the section 7477 
declaratory judgment procedure to be available to a donor, the IRS must 
first make a determination regarding the gift tax treatment of the 
transfer that results in an actual controversy in a situation where the 
adjustments do not result in a gift tax deficiency or refund. This IRS 
determination is deemed to be made by the mailing of a Letter 3569 to 
notify the taxpayer of the adjustments proposed by the IRS. The mailing 
of this letter to the donor is the prerequisite for filing a petition 
with the Tax Court requesting a declaratory judgment under section 
7477.
    Section 7477 also requires that the donor's pleading seeking a 
declaratory judgment under section 7477 must be filed with the Tax 
Court before the 91st day after the mailing of the Letter 3569 by the 
IRS. The pleading must be in the form of a petition subject to Tax 
Court Rule 211(d).
    Finally, section 7477(b)(2) provides that the Tax Court may not 
issue a declaratory judgment under section 7477 unless it first 
determines that the

[[Page 32505]]

donor has exhausted all administrative remedies available to the donor 
within the IRS with respect to the controversy. Tax Court Rule 211(d) 
requires that the petition in an action under section 7477 must contain 
a statement that the petitioner has exhausted all administrative 
remedies within the IRS. See also Tax Court Rule 210(c)(4). 
Accordingly, the proposed regulations set forth the administrative 
remedies available to the donor with respect to a determination by the 
IRS of the amount of a gift, and the circumstances in which the IRS 
will not contest the donor's allegation that administrative remedies 
have been exhausted. The administrative remedies are intended to 
parallel those applicable in the case of an asserted gift tax 
deficiency.
    Specifically, the proposed regulations provide that the IRS will 
not contest the donor's allegation that the donor's administrative 
remedies have been exhausted if: (1) The donor requests Appeals 
consideration in writing within 30 calendar days after the mailing date 
of a notice of preliminary determination of value (Preliminary 
Determination Letter) from the IRS, or by such later date for 
responding to the Preliminary Determination Letter as determined 
pursuant to IRS procedures; (2) the donor participates fully in the 
Appeals consideration process, including without limitation timely 
submitting all additional information related to the amount of the gift 
that is requested by the IRS in connection with (or as a follow-up to) 
the Appeals consideration process; and (3) the IRS mails to the donor 
the Letter 3569, which will notify the donor of the proposed 
adjustments and of the donor's right to contest the determination by 
filing a petition for declaratory judgment with the Tax Court before 
the 91st day after the date of mailing the Letter 3569. The Letter 3569 
usually will be issued by the Appeals office. However, because section 
7477 requires that the Tax Court, rather than the IRS, determines 
whether the donor has exhausted all administrative remedies, the donor 
generally will be sent a Letter 3569 in those situations where the 
donor does not respond to the Preliminary Determination Letter, or 
expressly declines to participate in the Appeals process. If a donor 
does not respond to a Preliminary Determination Letter, or if a donor 
does not participate in the Appeals process, the IRS will consider the 
donor to have failed to exhaust administrative remedies. In such cases, 
the IRS may challenge any allegation in the donor's petition for a 
section 7477 declaratory judgment that the donor has exhausted all 
administrative remedies.
    The proposed regulations also provide that the IRS will not contest 
the donor's allegation that all administrative remedies have been 
exhausted in certain circumstances where the above-described process is 
not followed by the IRS. (For example, the IRS might mail a Letter 3569 
to the donor in the absence of these other preliminary steps where, 
because of the imminent expiration of the applicable statute of 
limitations, the IRS believes there is not sufficient time to issue a 
Preliminary Determination Letter to allow Appeals consideration.) If 
the IRS's decision not to issue a Preliminary Determination Letter is 
not due to the donor's actions or failure to act, the IRS will not 
contend that the donor failed to exhaust all administrative remedies, 
provided that the donor fully participates in the Appeals consideration 
process offered by the IRS during the pendancy of the Tax Court 
proceeding. In this regard, the IRS and Treasury Department do not view 
the reference to section 7477 contained in Sec.  601.106(a)(2)(iv) of 
the Statement of Procedural Rules as currently in effect and Rev. Proc. 
87-24 (1987-1 CB 720) as prohibiting Appeals' jurisdiction to consider 
docketed cases under current section 7477. The version of section 7477 
referenced in those items was repealed prior to the enactment of the 
current section 7477 as part of the TRA.
    The proposed regulations confirm that the donor is not required to 
consent to an extension of the time within which gift tax with respect 
to the transfer at issue may be assessed in order to exhaust the 
donor's administrative remedies, and that the failure to consent to 
such an extension will not be taken into account for this purpose. See 
section 7430(b)(1) and Minahan v. Commissioner, 88 T.C. 492 (1987), 
considering this issue in the context of section 7430(b)(1) prior to 
amendment by Public Law 104-168 (110 Stat. 1452).
    Under the proposed regulations, a donor may petition for a 
declaratory judgment with respect to disputes regarding valuation and/
or other related issues. This is consistent with Sec. Sec.  20.2001-
1(b) and 25.2504-2(b) providing that, once the gift tax statute of 
limitations has expired with respect to a transfer, the IRS is 
precluded from making any adjustments with respect to that transfer for 
purposes of determining prior taxable gifts or adjusted taxable gifts, 
regardless of whether the adjustment involves a valuation issue or a 
legal issue pertaining to the proper interpretation of the gift tax 
law. See also Sec.  301.6501(c)-1(f)(5) providing a similar rule 
regarding transfers that are incomplete gifts but are reported as 
completed gifts. Accordingly, even if a gift tax adjustment does not 
generate any additional gift tax liability, the IRS nevertheless is 
required to propose the adjustment (and to take all other necessary 
steps) in order to challenge the return as filed within the statutory 
limitations period, regardless of the nature of the issue presented. 
Sections 2001(f), 2504(c), 6501(c)(9) and 7477, as enacted or amended 
by TRA and the 1998 Acts, provide an integrated statutory regime 
pursuant to which taxpayers are accorded finality with respect to 
adequately disclosed transfers (except for transfers that are reported 
as incomplete gifts), while the IRS is afforded the reasonable 
opportunity to identify in a timely manner returns that present issues 
that merit further examination. The section 7477 declaratory judgment 
procedure is a necessary part of this regime because it provides a 
mechanism to finally resolve any disputed adjustments in circumstances 
where there is no tax assessment and thus the donor would otherwise be 
unable to satisfy the jurisdictional requirements for any judicial 
resolution. The IRS and Treasury Department believe it is appropriate 
for the declaratory judgment mechanism under section 7477, when 
available in circumstances where there is no deficiency or refund, to 
be available for all adjustments regardless of whether the basis for 
those adjustments is factual, legal, or both.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations and, because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this regulation has 
been submitted to the Small Business Administration for comment on the 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request

[[Page 32506]]

comments on the clarity of the proposed regulations and how they may be 
made easier to understand. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for October 16, 2008 at 10 a.m. 
in the auditorium of the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. In addition, all visitors must present 
photo identification to enter the building. Because of access 
restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the 
hearing. Persons who wish to present oral comments at the hearing must 
submit comments by September 8, 2008, and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by September 8, 2008.
    A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Juli Ro Kim, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries), IRS. Other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 301.7477-1 is revised to read as follows:


Sec.  301.7477-1  Declaratory judgments relating to the value of 
certain gifts for gift tax purposes.

    (a) In general. If the requirements contained in paragraph (d) of 
this section are satisfied, a donor may petition the United States Tax 
Court under section 7477 for a declaratory judgment regarding the 
amount of one or more of the donor's gifts during the calendar year for 
Federal gift tax purposes, if the adjustment(s) proposed by the 
Internal Revenue Service (IRS) will not result in any deficiency in or 
refund of the donor's gift tax liability for that calendar year.
    (b) Declaratory judgment procedure--(1) In general. If a donor does 
not resolve a dispute with the IRS concerning the value of a transfer 
for gift tax purposes at the Examination level, the donor will be sent 
a notice of preliminary determination of value, or such other document 
as may be utilized by the IRS for this purpose from time to time, but 
referred to in this section as a Preliminary Determination Letter, 
inviting the donor to file a formal protest and to request 
consideration by the appropriate IRS Appeals office. See Sec. Sec.  
601.105 and 601.106 of this chapter. Subsequently, the donor will be 
sent a notice of determination of value (Letter 3569, or such other 
document as may be utilized from time to time by the IRS for this 
purpose in cases where no deficiency or refund would result, but 
referred to in this section as Letter 3569) if--
    (i) The donor requests Appeals consideration in writing within 30 
calendar days after the mailing date of the Preliminary Determination 
Letter, or by such later date as determined pursuant to IRS procedures, 
and the matter is not resolved by Appeals;
    (ii) The donor does not request Appeals consideration within the 
time provided in paragraph (b)(1)(i) of this section; or
    (iii) The IRS does not issue a Preliminary Determination Letter in 
circumstances described in paragraph (d)(3)(ii) of this section.
    (2) Notice of determination of value. The Letter 3569 will notify 
the donor of the adjustment(s) proposed by the IRS, and will advise the 
donor that the donor may contest the determination made by the IRS by 
filing a petition with the Tax Court before the 91st day after the date 
on which the Letter 3569 was mailed to the donor by the IRS.
    (3) Tax Court petition. If the donor does not file a timely 
petition with the Tax Court, the IRS determination as set forth in the 
Letter 3569 will be considered the final determination of value, as 
defined in sections 2504(c) and 2001(f). If the donor files a timely 
petition with the Tax Court, the Tax Court will determine whether the 
donor has exhausted available administrative remedies. Under section 
7477, the Tax Court is not authorized to issue a declaratory judgment 
unless the Tax Court finds that the donor has exhausted all 
administrative remedies within the IRS. See paragraph (d)(3) of this 
section regarding the exhaustion of administrative remedies.
    (c) Adjustments subject to declaratory judgment procedure. The 
declaratory judgment procedures set forth in this section apply to 
adjustments involving all issues relating to the transfer, including 
without limitation valuation issues and legal issues involving the 
interpretation and application of the gift tax law.
    (d) Requirements for declaratory judgment procedure. The 
declaratory judgment procedure provided in this section is available to 
a donor with respect to a transfer only if the requirements of 
paragraphs (d)(1) through (4) of this section with regard to that 
transfer are satisfied.
    (1) Reporting. The transfer is shown or disclosed on the return of 
tax imposed by chapter 12 for the calendar year during which the 
transfer was made or on a statement attached to such return. For 
purposes of this paragraph, the term return of tax imposed by chapter 
12 means the last gift tax return (Form 709, ``United States Gift (and 
Generation-skipping Transfer) Tax Return,'' or such other form as may 
be utilized for this purpose from time to time by the IRS) for the 
calendar year filed on or before the due date of the return, including 
extensions granted if any, or, if a timely return is not filed, the 
first gift tax return for that calendar year filed after the due date. 
For purposes of satisfying this requirement, the transfer need not be 
reported in a manner that constitutes adequate disclosure within the 
meaning of Sec.  301.6501(c)-1(e) or (f) (and thus for which, under 
Sec. Sec.  20.2001-1(b) and 25.2504-2(b) of this chapter, the period 
will not expire during which the IRS may adjust the value of the gift). 
The issuance of a Letter 3569 with regard to a transfer disclosed on a 
return does not constitute a determination by the IRS that the transfer 
was adequately disclosed, or otherwise cause the period of limitations 
on assessment to commence to run with respect to that transfer. In 
addition, in the case of a transfer that is shown on the return, the 
IRS may in its discretion choose to defer until a later time making a 
determination with regard to such transfer. If the IRS exercises its

[[Page 32507]]

discretion to defer such determination in that case, the transfer will 
not be addressed in the Letter 3569 (if any) sent to the donor 
currently, and the donor is not yet eligible for a declaratory judgment 
with regard to that transfer under section 7477.
    (2) IRS determination and actual controversy. The IRS makes a 
determination regarding the gift tax treatment of the transfer that 
results in an actual controversy. The IRS makes a determination that 
results in an actual controversy with respect to a transfer by mailing 
a Letter 3569 to the donor, thereby notifying the donor of the 
adjustment(s) proposed by the IRS with regard to that transfer and of 
the donor's rights under section 7477.
    (3) Exhaustion of administrative remedies--(i) In general--Appeals 
office consideration. The Tax Court determines that the donor has 
exhausted all administrative remedies available within the IRS for 
resolving the controversy. For purposes of this section, the IRS will 
consider a donor to have exhausted all administrative remedies if, 
prior to filing a petition in Tax Court (except as provided in 
paragraph (d)(3)(ii) of this section), the donor, or a qualified 
representative of the donor described in Sec.  601.502 of this chapter, 
timely requests consideration by Appeals and participates fully in the 
Appeals consideration process, including, without limitation, timely 
submitting all information related to the transfer that is requested by 
the IRS in connection with the Appeals consideration. A timely request 
for consideration by Appeals is a written request from the donor for 
Appeals consideration made within 30 days after the mailing date of the 
Preliminary Determination Letter, or by such later date for responding 
to the Preliminary Determination Letter as is agreed to between the 
donor and the IRS.
    (ii) No Preliminary Determination Letter issued. If the IRS does 
not issue a Preliminary Determination Letter to the donor prior to the 
issuance of Letter 3569, the IRS nevertheless will consider the donor 
to have exhausted all administrative remedies within the IRS for 
purposes of section 7477 upon the issuance of the Letter 3569, provided 
that--
    (A) The IRS decision not to issue the Preliminary Determination 
Letter was not due to actions or inactions of the donor (such as a 
failure to supply requested information or a current mailing address to 
the Area Director having jurisdiction over the tax matter); and
    (B) The donor, or a qualified representative of the donor described 
in Sec.  601.502 of this chapter, after the filing of a petition in Tax 
Court for a declaratory judgment pursuant to section 7477, fully 
participates (within the meaning of paragraph (d)(3)(i) of this 
section) in the Appeals office consideration when offered by the IRS 
while the case is in docketed status.
    (iii) Failure to agree to extension of time for assessment. The 
donor has the right to agree (or to decline to agree) to an extension 
of the time under section 6501 within which gift tax with respect to 
the transfer at issue may be assessed. For purposes of section 7477, 
the donor's refusal to agree to such an extension will not be 
considered by the IRS to constitute a failure by the donor to exhaust 
all administrative remedies available to the donor within the IRS.
    (4) Timely petition in Tax Court. The donor files a pleading with 
the Tax Court requesting a declaratory judgment under section 7477. 
This pleading must be filed with the Tax Court before the 91st day 
after the date of mailing of the Letter 3569 by the IRS to the donor. 
The pleading must be in the form of a petition subject to Tax Court 
Rule 211(d).
    (e) Examples. The following examples illustrate the provisions of 
this section. These examples, however, do not address any other 
situations that might affect the Tax Court's jurisdiction over the 
proceeding. The examples read as follows:

    Example 1. Exhaustion of administrative remedies. The donor (D) 
timely files a Form 709, ``United States Gift (and Generation-
Skipping Transfer) Tax Return,'' on which D reports D's completed 
gift of closely held stock. After conducting an examination, the IRS 
concludes that the value of the stock on the date of the gift is 
greater than the value reported on the return. Because the amount of 
D's available applicable credit amount under section 2505 is 
sufficient to cover any resulting tax liability, no gift tax 
deficiency will result from the adjustment. D is unable to resolve 
the matter with the IRS examiner. The IRS sends a notice of 
preliminary determination of value (Preliminary Determination 
Letter) to D informing D of the proposed adjustment. D, within 30 
calendar days after the mailing date of the letter, submits a 
written request for Appeals consideration. During the Appeals 
process, D provides to the Appeals office all additional information 
(if any) requested by Appeals relevant to the determination of the 
value of the stock in a timely fashion. The Appeals office and D are 
unable to reach an agreement regarding the value of the stock as of 
the date of the gift. The Appeals office sends D a notice of 
determination of value (Letter 3569). For purposes of section 7477, 
the IRS will consider D to have exhausted all available 
administrative remedies within the IRS, and thus will not contest 
the allegation in D's petition that D has exhausted all such 
administrative remedies.
    Example 2. Exhaustion of administrative remedies. Assume the 
same facts as in Example 1, except that D does not timely request 
consideration by Appeals after receiving the Preliminary 
Determination Letter. A Letter 3569 is mailed to D more than 30 days 
after the mailing of the Preliminary Determination Letter and prior 
to the expiration of the period of limitations for assessment of 
gift tax. D timely files a petition in Tax Court pursuant to section 
7477. After the case is docketed, D requests Appeals consideration. 
In this situation, because D did not respond timely to the 
Preliminary Determination Letter with a written request for Appeals 
consideration, the IRS will not consider D to have exhausted all 
administrative remedies available within the IRS for purposes of 
section 7477 prior to filing the petition in Tax Court, and thus may 
contest any allegation in D's petition that D has exhausted all such 
administrative remedies.
    Example 3. Exhaustion of administrative remedies. D timely files 
a Form 709 on which D reports D's completed gifts of interests in a 
family limited partnership. After conducting an examination, the IRS 
proposes to adjust the value of the gift as reported on the return. 
No gift tax deficiency will result from the adjustments, however, 
because D has a sufficient amount of available applicable credit 
amount under section 2505. D declines to consent to extend the time 
for the assessment of gift tax with respect to the gifts at issue. 
Because of the pending expiration of the period of limitation on 
assessment with respect to the gifts, the IRS determines that there 
is not adequate time for Appeals consideration. Accordingly, the IRS 
mails to D a Letter 3569, even though a Preliminary Determination 
Letter had not first been issued to D. D timely files a petition in 
Tax Court pursuant to section 7477. After the case is docketed in 
Tax Court, D is offered the opportunity for Appeals to consider any 
dispute regarding the determination and participates fully in the 
Appeals consideration process. However, the Appeals office and D are 
unable to resolve the issue. The IRS will consider D to have 
exhausted all administrative remedies available within the IRS, and 
thus will not assert that D has not exhausted all such 
administrative remedies.
    Example 4. Legal issue. In 2006, D transfers nonvested stock 
options to a trust for the benefit of D's child. D timely files a 
Form 709 reporting the transfer as a completed gift for Federal gift 
tax purposes and complies with the adequate disclosure requirements 
for purposes of triggering the commencement of the applicable 
statute of limitations. Pursuant to Sec.  301.6501(c)-1(f)(5), 
adequate disclosure of a transfer that is reported as a completed 
gift on the Form 709 will commence the running of the period of 
limitations for assessment of gift tax on D, even if the transfer is 
ultimately determined to be an incomplete gift for purposes of Sec.  
25.2511-2 of this chapter. After conducting an examination, the IRS 
concurs with the reported valuation of the stock options, but 
concludes that the reported transfer is not a completed gift for 
Federal gift tax purposes. D is unable to resolve the matter with 
the IRS

[[Page 32508]]

examiner. Assuming that the IRS mails to D a Letter 3569 with regard 
to this transfer, and that D complies with the administrative 
procedures set forth in this section, including the exhaustion of 
all administrative remedies available within the IRS, then D may 
file a petition for declaratory judgment with the Tax Court pursuant 
to section 7477.
    Example 5. Transfers in controversy. On April 16, 2007, D timely 
files a Form 709 on which D reports gifts made in 2006 of fractional 
interests in certain real property and of interests in a family 
limited partnership (FLP). However, although the gifts are disclosed 
on the return, the return does not contain information sufficient to 
constitute adequate disclosure under Sec.  301.6501(c)-1(e) or (f) 
for purposes of the application of the statute of limitations on 
assessment of gift tax with respect to the reported gifts. The IRS 
conducts an examination and concludes that the value of both the 
interests in the real property and the FLP interests on the date(s) 
of the transfers are greater than the values reported on the return. 
No gift tax deficiency will result from the adjustments because D 
has a sufficient amount of remaining applicable credit amount under 
section 2505. However, D does not agree with the adjustments. The 
IRS sends a Preliminary Determination Letter to D informing D of the 
proposed adjustments in the value of the reported gifts. D, within 
30 calendar days after the mailing date of the letter, submits a 
written request for Appeals consideration. The Appeals office and D 
are unable to reach an agreement regarding the value of any of the 
gifts. In the exercise of its discretion, the IRS decides to resolve 
currently only the value of the real property interests, and to 
defer the resolution of the value of the FLP interests. On May 28, 
2009, the Appeals office sends D a Letter 3569 addressing only the 
value of the gifts of interests in the real property. Because none 
of the gifts reported on the return filed on April 16, 2007, were 
adequately disclosed for purposes of Sec.  301.6501(c)-1(e) or (f), 
the period of limitations during which the IRS may adjust the value 
of those gifts has not begun to run. Accordingly, the Letter 3569 is 
timely mailed. If D timely files a petition in Tax Court pursuant to 
section 7477 with regard to the value of the interests in the real 
property, then, assuming the other requirements of section 7477 are 
satisfied with regard to those interests, the Tax Court's 
declaratory judgment, once it becomes final, will determine the 
value of the gifts of the interests in the real property. Because 
the IRS has not yet put the gift tax value of the interests in the 
FLP into controversy, the procedure under section 7477 is not 
available with regard to those gifts.

    Par. 3. Section 301.7477-2 is added to read as follows:


Sec.  301.7477-2  Effective date.

    Section 301.7477-1 applies to civil proceedings described in 
section 7477 filed in the United States Tax Court on or after the date 
these regulations are published as final regulations in the Federal 
Register.

 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-12894 Filed 6-6-08; 8:45 am]
BILLING CODE 4830-01-P