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If a gift is reported on a gift tax return, the IRS may challenge the value of the transferred property. If the IRS increases the value, but the taxpayer has adequate unified credit to cover any increase in tax, there is no increase in actual tax that results at the time. Previously, taxpayers had no way to obtain relief from such a change in value in Tax Court due to the absence of the imposition of current tax, even though the use of the taxpayer's unified credit may result in additional gift taxes or estate taxes due to later transfers.

In 1997, Code Section 7477 was enacted to provide a route to the Tax Court in circumstances such as these. The IRS has now issued Regulations providing when taxpayers can go this route to obtain a declaratory judgment from the Tax Court on the value of a reported gift.

There are a number of prerequisites/requirements before such relief is available:

a. The transfer must be shown or disclosed on a gift tax return, including a statement attached to a return;

b. The IRS must 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. Thus, a taxpayer cannot initiate Tax Court review absent a dispute with the IRS. The IRS determination is deemed made by the mailing of a Letter 3569 to notify the taxpayer of the adjustments proposed by IRS;

c. The donor has to file a pleading seeking a declaratory judgment with the Tax Court before the 91st day after the mailing of the Letter 3569 by IRS (similar to 90 day letter procedures);

d. The taxpayer must have exhausted all administrative remedies. The Regulations list the various remedies and at what stage it agrees that they have been exhausted.

The new Regulations, which adopted fairly closely previously issued proposed regulations, are effective for Tax Court petitions filed after September 8, 2009.

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