Purpose: To establish the fair market value of business interests transferred during life and at death for federal tax purposes.

When the owners of privately held companies or investment entities transfer equity interests in those entities to family members or others, they must disclose to the Internal Revenue Service the fair market value of the transferred interests. Transfers that fall within the annual exclusion (currently $11,000 per recipient) or single lifetime exclusion (currently $1 million per donor) are non-taxable, while amounts in excess of the exclusions are subject to tax. In all cases, the taxpayer is responsible for properly documenting the value of the transferred interests. In many cases, this will require a valuation by an independent party.

Final regulations on adequate disclosure of gifts became effective as of December 3, 1999. Under IRC §6501(c)(9), the period of limitations on the assessment of gift tax with respect to a gift will commence to run only if the gift is adequately disclosed on the gift tax return. Under the final regulations, “…the taxpayer must either meet certain disclosure requirements in the return submitted or, alternatively, submit a properly completed appraisal.”