United States Tax Court

United States Tax Court

T.C. Memo. 2023-65

RONALD SCHLAPFER,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 419-20.

Filed May 22, 2023.

—————

Scott D. Michel, Ross R. Sharkey, Christopher S. Rizek, and Jeffrey S.

Stephens, for petitioner.

Blake J. Corry, William Benjamin McClendon, and Randall S. Trebat,

for respondent.

MEMORANDUM OPINION

BUCH, Judge: This case is before the Court on Cross-Motions for

Summary Judgment. Ronald Schlapfer was the policyholder of a life

insurance policy issued in 2006. The policy was funded by stock and cash

from European Marketing Group, Inc. (EMG), an entity solely owned by

Mr. Schlapfer. Mr. Schlapfer assigned ownership of the policy to his

mother, aunt, and uncle.

In 2013, Mr. Schlapfer submitted a disclosure packet to the

Internal Revenue Service (IRS) Offshore Voluntary Disclosure Program

(OVDP). In this packet, he included a gift tax return for 2006 that

informed the IRS that he had made gifts of EMG stock to his mother,

aunt, and uncle. The IRS concluded that he made the gifts in 2007, not

2006, and that because he failed to file a gift tax return for that year, he

did not adequately disclose the gift to commence the period of limitations

on assessment.

Served 05/22/23

2

[*2] The Commissioner generally has three years from the filing of a

gift tax return to assess additional tax. If no return is filed, or if the gift

is not adequately disclosed on or with the gift tax return, then the

Commissioner may assess at any time. But the adequate disclosure of a

completed gift on a gift tax return will commence the running of the

period of limitations for assessment of gift tax on the transfer even if the

transfer is ultimately determined to be an incomplete gift.

Mr. Schlapfer adequately disclosed the gift on his 2006 gift tax

return. The documents he attached to, and referenced in, his return

provided the Commissioner with enough information to satisfy adequate

disclosure. Therefore, the period of limitations to assess the gift tax

commenced when the return was filed; and because the Commissioner

issued the notice of deficiency more than three years after the filing, the

Commissioner is barred from assessing gift tax.

Background

Ronald Schlapfer has ties to both the United States and

Switzerland. He was born in Switzerland in 1950 and remained there

until 1978. While in Switzerland, he began a career in banking and

finance, working at Bank Vontobel and then Citibank. In 1979 he moved

to the United States with his first wife, whom he met while working in

Tokyo. He moved to the United States to continue his career at Citibank.

Through Citibank, Mr. Schlapfer obtained a nonimmigrant visa, which

required a declaration that he did not intend to permanently reside in

the United States. He later obtained a U.S. green card. Other than his

wife, Mr. Schlapfer’s immediate family, which included his mother,

brother, aunt, and uncle, remained in Switzerland.

Mr. Schlapfer and his first wife had two daughters, who were born

in 1979 and 1981. They all lived together in the United States until 1989

when Mr. Schlapfer and his first wife divorced. Thereafter, his first wife

and their two daughters moved to Switzerland. His daughters returned

to the United States in the mid-1990s for school.

Mr. Schlapfer married his current wife, Linda Schlapfer (Mrs.

Schlapfer), in 1990. Like Mr. Schlapfer, she had been married

previously. She and her first husband moved to the United States in

1978 and had a daughter in 1979. They divorced in the late 1980s. Mrs.

Schlapfer married Mr. Schlapfer in 1990, and they had a son together in

1992.

3

[*3] After leaving Citibank in 1998, Mr. Schlapfer started his own

businesses. First, he started a currency trading company in the United

States called Tradex. Then in 2002, he formed EMG. EMG was a

Panamanian corporation that managed investments, holding

marketable securities and cash. Mr. Schlapfer owned all of its issued

and outstanding shares (namely, 100 shares of common stock).

On May 18, 2007, Mr. Schlapfer applied for U.S. citizenship, and

in 2008 he became a U.S. citizen.

I.

The Life Insurance Policy

On July 7, 2006, Mr. Schlapfer applied for a LifeBridge Universal

Variable Life Policy (UVL Policy) offered by swisspartners Insurance

Company SPC Ltd. (Swisspartners). Mr. Schlapfer’s stated purpose for

doing so was to create and fund a policy that his mother, aunt, and uncle

could use to benefit his nephews, whose dad (Mr. Schlapfer’s brother)

had died in 1994. The application listed Mr. Schlapfer as the

policyholder, his mother, aunt, and uncle as the insured lives, Mr.

Schlapfer and Mrs. Schlapfer as the primary beneficiaries, and Mr.

Schlapfer’s three children and stepchild as the secondary beneficiaries.

It also indicated that AIG Private Bank, Zurich (AIG) had been selected

as custodian, meaning policy assets would be held there. On September

22, 2006, UVL Policy No. XXX-X03-06 was issued bearing the same

policyholder, insured lives, primary and secondary beneficiaries, and

custodian as requested in the application.

Mr. Schlapfer funded the UVL Policy premium with $50,000 1 and

100 shares of EMG. 2 The assets were held in an account at AIG titled

“swisspartners Insurance Company SPC Ltd. Rubric: XXX-X03-06” (AIG

Account). The initial premium payment was made on August 21, 2006,

when EMG transferred $50,000 to the AIG Account. The next premium

payment was made on September 22, 2006, when EMG issued a share

certificate showing the AIG Account as the owner of all 100 shares of

1 All monetary amounts are shown in U.S. dollars and rounded to the nearest

dollar. Unless otherwise indicated, all statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all regulation references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 Shares of an entity called FX Funds, Ltd., were also contributed to the UVL

Policy. However, because FX Funds is a dormant entity with no assets, those shares

are not relevant.

4

[*4] EMG stock. Those shares were transferred to the AIG Account on

November 8, 2006.

Mr. Schlapfer eventually substituted his mother, aunt, and uncle

for himself as the policyholders. On January 23, 2007, Mr. Schlapfer

initially requested that Swisspartners assign the policy to his mother as

the policyholder with immediate effect. The next day, his mother signed

a revised term sheet that made her the policyholder. Then on April 23,

2007, Mr. Schlapfer and his mother jointly requested that Swisspartners

assign the policy so that Mr. Schlapfer’s mother, aunt, and uncle would

be joint policyholders. They also requested that the beneficiary

designations be made irrevocable. These changes were executed on May

31, 2007. All other terms of the policy remained the same.

II.

The Offshore Voluntary Disclosure Program

In 2012, Mr. Schlapfer entered into the OVDP. The OVDP

“offered U.S. taxpayers with undisclosed income from offshore assets a

compliance avenue to resolve income tax liabilities” and “tax

information reporting obligations.” See Internal Revenue Manual

4.63.3.1 (Apr. 27, 2021). When disclosing assets, the OVDP required that

taxpayers disregard all entities through which undisclosed assets were

held. It also required taxpayers to pay all tax, interest, and penalties

related to undisclosed assets during the most recent eight years,

regardless of the statute of limitations. See I.R.S., Offshore Voluntary

Disclosure Program Frequently Asked Questions and Answers 2012, Q7,

Q9,

Q42,

https://www.irs.gov/individuals/international-taxpayers/

offshore-voluntary-disclosure-program-frequently-asked-questionsand-answers-2012 (last updated June 27, 2021).

On November 20, 2013, Mr. Schlapfer, through counsel,

submitted a disclosure packet to participate in the OVDP. The

submission included the following items:

•

Original Forms 1040, U.S. Individual Income Tax Return, for tax

years 2004 through 2009;

•

Forms 1040X, Amended U.S. Individual Income Tax Return, for

tax years 2004 through 2009;

•

Forms CT–1040, Connecticut Resident Income Tax Return, and

Forms CT–1040X, Amended Connecticut Income Tax Return for

Individuals, for tax years 2004 through 2009;

5

[*5]

•

Forms 5471, Information Return of U.S. Persons With Respect to

Certain Foreign Corporations;

•

Form 709, United States Gift (and Generation-Skipping Transfer)

Tax Return, for 2006; 3

•

Reports of Foreign Bank and Financial Accounts (FBARs) for tax

years 2004 through 2009;

•

Bank Statements;

•

Foreign Account or Asset Statements;

•

A completed Penalty Computation Worksheet;

•

A copy of OVDI Prepayment Check No. 2318 to the Department

of the Treasury for $6 million for tax years 2004 through 2011;

•

Consents, (i) Form 872, Consent to Extend the Time to Assess

Tax, and (ii) Consent to Extend the Time to Assess Civil Penalties

Provided by 31 U.S.C. § 5321 for FBAR Violations;

•

An Offshore Entity Statement;

•

An Offshore Voluntary

Attachments; and

•

Copies of Forms 2848, Power of Attorney and Declaration of

Representative, for Ronald Schlapfer and Linda Schlapfer.

Disclosure

Letter with Required

With this submission, Mr. Schlapfer attempted to comply with

applicable U.S. tax laws. For 2004, 2005, and 2006, he provided

amended income tax returns that included Forms 5471 for EMG. Those

forms provided information regarding the number and type of issued

and outstanding shares, the number of shares held by Mr. Schlapfer,

and EMG’s income statement, balance sheet, and earnings and profits

for the respective tax years. Mr. Schlapfer also provided an Offshore

Entity Statement detailing his control over EMG, which stated:

EMG was established by the Taxpayer in 2003, and was

beneficially owned by the Taxpayer until July 6, 2006, at

3 The gift tax return was attached to Mr. Schlapfer’s 2006 amended return.

6

[*6]

which time the Taxpayer gifted his entire interest in EMG

to his mother. The Taxpayer is taking into account all of

the income earned by the accounts underlying EMG in the

enclosed Amended U.S. Individual Tax Returns during the

years he controlled and beneficially owned EMG.

Mr. Schlapfer also included a Form 709 for 2006 with his

submission. Attached to the Form 709 was a protective filing that stated:

A PROTECTIVE FILING IS BEING SUBMITTED. ON

JULY 6, 2006, TAXPAYER MADE A GIFT OF

CONTROLLED FOREIGN COMPANY STOCK VALUED

AT $6,056,686.

PER U.S. TREASURY REGULATION 25.2501-1(B), THE

TAXPAYER IS NOT SUBJECT TO U.S. GIFT TAX AS HE

DID NOT INTEND TO RESIDE PERMANENTLY IN THE

UNITED

STATES

UNTIL

CITIZENSHIP

WAS

OBTAINED IN 2008.

This gift stemmed from Mr. Schlapfer’s assignment of the UVL Policy.

He reported the gift as stock rather than the UVL Policy because the

2012 OVDP instructions required taxpayers to disregard certain entities

that hold underlying assets, and he believed the policy was such an

entity. 4 He also contends that he prepared the 2006 gift tax return in

accordance with the investor control doctrine. The Commissioner does

not dispute that Mr. Schlapfer filed a gift tax return for 2006 when he

submitted the disclosure packet to the OVDP.

On June 4, 2014, after reviewing the 2006 gift tax return in Mr.

Schlapfer’s OVDP submission, an IRS revenue agent issued him an

information document request (IDR). The IDR asked Mr. Schlapfer to

provide documentation (1) of the gift of EMG to his mother, including

the transfer of ownership of the entity as well as the transfer of the

ownership of foreign accounts related to the entity, and (2) to

substantiate his claim that in 2006 he did not have an intent to remain

in the country and is therefore exempt from paying gift tax.

4 The Commissioner does not consider a life insurance policy an “entity” as

defined under the 2012 OVDP instructions.

7

[*7] Mr. Schlapfer promptly responded. He provided the following

documents to show the transfer of his entire ownership interest in EMG

to the AIG Account:

(1) a copy of the September 22, 2006, share certificate showing

the AIG Account as the owner of all issued and outstanding

shares in EMG;

(2) a copy of an AIG statement dated August 8, 2006, showing the

initial premium payment of $50,000 to the AIG Account;

(3) a copy of an AIG statement showing EMG’s portfolio valuation

as of September 22, 2006; and

(4) a copy of the Bearer Share of FX Fund, Ltd., which was held

in the AIG Account.

He provided the following additional documents to show that he made a

gift to his mother:

(5) a copy of the updated UVL Policy term sheet signed by his

mother on January 24, 2007;

(6) a copy of Mr. Schlapfer’s signed instructions to Swisspartners

to change the policyholder of the UVL Policy to his mother;

and

(7) copies of the UVL Policy chart.

In addition to providing these documents, with his response Mr.

Schlapfer explained his position as to the date of the gift transfer. He

asserted that the gift was made on July 6, 2006, when he instructed

Swisspartners to transfer ownership of the UVL Policy to his mother,

aunt, and uncle as soon as the policy was issued. However, he also

agreed to a revised gift date of September 22, 2006, the date the policy

was issued. He explained that Swisspartners’ naming him as a

policyholder was a scrivener’s error, and that the requests made in

January and April 2007 were merely intended to correct that error. After

his initial response to the IDR, Mr. Schlapfer quickly followed up with

documents to substantiate his claim that he did not intend to remain in

8

[*8] the United States, in the form of affidavits from family members

and business partners, in July 2014. 5

Following his response to the IDR, the IRS had little contact with

Mr. Schlapfer about his 2006 gift tax return until 2016, when it opened

an examination of the return. On January 6, 2016, an IRS estate tax

attorney notified Mr. Schlapfer of the examination and requested to

meet with him to discuss his claim of nondomiciliary status in the

United States for 2006. On May 17, 2016, an IRS estate tax attorney

interviewed Mr. Schlapfer. Although most of the questions related to

Mr. Schlapfer’s domicile, there were also questions regarding the nature

of the gift, when it was made, and the reported value of the gift. On June

14, 2016, Mr. Schlapfer signed a Form 872 for his 2006 gift tax return.

He agreed to extend the time to assess tax to November 30, 2017.

In August 2016, the IRS issued Mr. Schlapfer a Form 3233,

Report of Gift Tax Examination, for his 2006 gift tax return. In that

report, the IRS concluded that there was no taxable gift in 2006 because

Mr. Schlapfer made an incomplete transfer. It explained that because

Mr. Schlapfer failed to relinquish dominion and control of the UVL

Policy as the policyholder until May 31, 2007, the gift was not completed

in 2006. Because Mr. Schlapfer refused to concede that the gift was

made in 2007, he was given the choice to opt out of or be removed from

the OVDP. He withdrew.

After Mr. Schlapfer formally withdrew from the OVDP, the

Commissioner prepared a substitute gift tax return for 2007 pursuant

to section 6020(b). On October 17, 2019, the Commissioner issued Mr.

Schlapfer a notice of deficiency for 2007 determining a gift tax liability

of $4,429,949, and additions to tax under section 6651(a)(2) and (f) of

$4,319,200. While residing in Florida, Mr. Schlapfer filed a Petition

challenging the Commissioner’s determinations.

The Commissioner filed a Motion for Summary Judgment asking

the Court to find as a matter of law that (1) Mr. Schlapfer made a taxable

gift of an insurance policy in 2007 and (2) that he is liable for additions

to tax under section 6651(f), or in the alternative section 6651(a)(1) and

(2). Mr. Schlapfer filed a Cross-Motion for Summary Judgment asking

the Court to find as a matter of law that the Commissioner’s period of

limitation to assess the gift tax expired before the notice of deficiency

status.

5 For purposes of this Opinion, we need not resolve Mr. Schlapfer’s domiciliary

9

[*9] was issued because Mr. Schlapfer adequately disclosed the gift on

his 2006 gift tax return. Mr. Schlapfer supplemented his Motion, and

the Commissioner responded to the Supplement.

Discussion

Before the Court are the parties’ Cross-Motions for Summary

Judgment. We are asked to decide whether the period of limitations to

assess the 2007 gift tax expired before the Commissioner issued the

notice of deficiency. To answer this question, we must decide whether

Mr. Schlapfer adequately disclosed his gift on his gift tax return.

I.

Summary Judgment Standard

We may grant summary judgment when there is no genuine

dispute as to any material fact and a decision may be rendered as a

matter of law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The moving party

bears the burden of showing that there is no genuine dispute as to any

material fact. Sundstrand Corp., 98 T.C. at 520. When a motion for

summary judgment is properly made and supported, an opposing party

may not rest on mere allegations or denials. Rule 121(d). Rather, the

party’s response, by affidavits or declarations, or as otherwise provided

in Rule 121, must set forth specific facts showing there is a genuine

factual dispute for trial. Id. In deciding whether to grant summary

judgment, we view the facts and make inferences in the light most

favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520.

II.

Gift Tax

Section 2501(a)(1) imposes a tax on the transfer of property by

gift. A gift is generally defined as any transaction where property is

gratuitously passed to or conferred upon another for less than full and

adequate consideration. I.R.C. § 2512(b); Treas. Reg. § 25.2511-1(c)(1).

The amount of tax imposed is based on the value of the property

transferred on the date the gift is complete. 6 I.R.C. § 2512(a); Treas. Reg.

§ 25.2511-2(a). The gift tax applies to a transfer regardless of whether

the gift is direct or indirect, whether the property is real or personal,

whether the property is tangible or intangible, or whether the transfer

is in a trust or otherwise. I.R.C. § 2511(a). Individuals subject to the gift

6 Treasury Regulation § 25.2511-2(b) provides that the transfer of property is

not a complete gift unless the donor parts with dominion and control over the property

with no power to change its disposition.

10

[*10] tax who make a transfer by gift must file a gift tax return, Form

709, for the year the transfer is made. I.R.C. § 6019; Treas. Reg.

§ 25.2501-1(a)(1).

Mr. Schlapfer filed Form 709 for 2006 on which he reported a

transfer of stock by gift, but the Commissioner disagrees as to the

characterization of the transferred property (EMG stock vs. UVL Policy)

and the timing of the transfer (2006 vs. 2007). For purposes of this

Opinion, we make no determination as to whether the gift is the EMG

stock or the UVL Policy. We will analyze the applicable law under both.

Additionally, for reasons discussed below, the timing issue is

immaterial.

III.

Statute of Limitations for Gift Tax Assessment

Subject to various exceptions, the Commissioner generally has

three years after a gift tax return is filed to assess any gift tax. I.R.C.

§ 6501(a), (c); Estate of Brown v. Commissioner, T.C. Memo. 2013-50, at

*8–9. Section 6501(c)(9) provides an exception for certain gifts not shown

on returns. It provides that the Commissioner may assess gift tax at any

time for any gift of property, the value of which is required to be shown

on a gift tax return and is not shown on such a return. I.R.C. § 6501(c)(9).

This exception applies unless the gift has otherwise been “disclosed in

such return, or in a statement attached to the return, in a manner

adequate to apprise the Secretary of the nature of such item.” Id.; Treas.

Reg. § 301.6501(c)-1(f)(1). If a gift has been adequately disclosed on the

gift tax return, or a statement attached to the return, that was filed for

the year the transfer occurred, then the ordinary three-year period for

assessment commences upon filing. I.R.C. § 6501(c)(9); Treas. Reg.

§ 301.6501(c)-1(f)(1) and (2).

This is true even if the gift disclosed is ultimately determined to

be an incomplete transfer under Treasury Regulation § 25.2511-2 so

long as there was adequate disclosure. Treasury Regulation

§ 301.6501(c)-1(f)(5) provides that

[a]dequate disclosure of a transfer that is reported as a

completed gift on the gift tax return will commence the

running of the period of limitations for assessment of gift

tax on the transfer, even if the transfer is ultimately

determined to be an incomplete gift for purposes of

§ 25.2511-2 . . . . For example, if an incomplete gift is

reported as a completed gift on the gift tax return and is

11

[*11] adequately disclosed, the period for assessment of the gift

tax will begin to run when the return is filed . . . .

(Emphasis added.) Hence, under this Treasury regulation, for purposes

of commencing the period of limitations, the focus is on when the

transfer was reported, not when the transfer was completed.

Here we will focus on whether Mr. Schlapfer adequately disclosed

the gift transfer reported on his 2006 gift tax return. The Commissioner

determined that the gift transfer was completed in 2007, and his notice

is predicated on that determination. However, when the transfer was

completed is immaterial. Even if we were to decide that the gift was

completed in 2007, Mr. Schlapfer’s adequate disclosure of the gift on his

2006 return would suffice to commence the three-year period of

limitations upon the filing of that return. See Treas. Reg. § 301.6501(c)1(f)(5).

IV.

Adequate Disclosure

“A disclosure is ‘adequate’ if it is ‘sufficiently detailed to alert the

Commissioner and his agents as to the nature of the transaction so that

the decision as to whether to select the return for audit may be a

reasonably informed one.’” Thiessen v. Commissioner, 146 T.C. 100, 114

(2016) (quoting Estate of Fry v. Commissioner, 88 T.C. 1020, 1023

(1987)). The Commissioner directs us to the reporting requirements for

strict compliance. See, e.g., Treas. Reg. § 25.6019-4. But Treasury

Regulation § 301.6501(c)-1(f)(2) provides that transfers reported on a

gift tax return will be considered adequately disclosed if the return (or

a statement attached to the return) provides the following information:

(i) A description of the transferred property

and any consideration received by the transferor;

(ii) The identity of, and relationship between,

the transferor and each transferee;

(iii) If the property is transferred in trust, the

trust’s tax identification number and a brief

description of the terms of the trust, or in lieu of a

brief description of the trust terms, a copy of the

trust instrument;

(iv) Except as provided in § 301.6501(c)1(f)(3), a detailed description of the method used to

determine the fair market value of property

transferred, including any financial data (for

12

example, balance sheets, etc. with explanations of

any adjustments) that were utilized in determining

the value of the interest, any restrictions on the

transferred property that were considered in

determining the fair market value of the property,

and a description of any discounts, such as discounts

for blockage, minority or fractional interests, and

lack of marketability, claimed in valuing the

property. . . . ; and

(v) A statement describing any position taken

that is contrary to any proposed, temporary or final

Treasury regulations or revenue rulings published

at the time of the transfer . . . .

[*12]

These requirements can be satisfied by filing Form 709 with the

required information, or if needed, an amended Form 709 with the

required information. Rev. Proc. 2000-34, §§ 3 and 4, 2000-2 C.B. 186,

186. However, if an amended return is the one that satisfies adequate

disclosure, then the period of limitations commences with the filing of

the amended return, not the original return. Id.

Whether a statement attached to a gift tax return adequately

discloses a gift is a question of fact. Estate of Hicks Sanders v.

Commissioner, T.C. Memo. 2014-100, at *7. Mr. Schlapfer argues that

the period to assess gift tax has expired because he adequately disclosed

the gift on his 2006 gift tax return. He points to four documents to

support this claim: (1) the gift tax return; (2) a protective filing

attachment; (3) Schedule F of Form 5471 for his 2006 tax return; and

(4) the Offshore Entity Statement. The Commissioner argues that the

period to assess gift tax did not expire because Mr. Schlapfer did not

adequately disclose the gift. Specifically, he asserts that (1) the Offshore

Entity Statement is not part of the 2006 gift tax return and it should not

be considered to determine whether Mr. Schlapfer made an adequate

disclosure of the gift; and (2) even if the Offshore Entity Statement is

considered, Mr. Schlapfer still failed to adequately disclose the gift

because he failed to satisfy all applicable requirements of Treasury

Regulation § 301.6501(c)-1(f)(2).

A.

Disclosure Contents We Can Consider

The Commissioner argues that the Offshore Entity Statement is

not among the documents we should consider in determining whether

the gift was adequately disclosed. We disagree.

13

[*13] We have addressed the question of what documents to consider

for adequate disclosure in cases interpreting section 6501(e)(1)

(regarding substantial income omissions), and we find that the rationale

used in those cases applies with equal force here. Under section

6501(c)(9), the Commissioner may assess a gift tax at any time if a gift

is not shown on a return unless the gift is “disclosed in such return, or

in a statement attached to the return, in a manner adequate to apprise

the Secretary of the nature of such item.” (Emphasis added.) Section

6501(e)(1)(B)(iii) has similar wording, providing that the period of

limitations for the Commissioner to determine the amount omitted from

gross income will extend to six years unless “such amount is disclosed in

the return, or in a statement attached to the return, in a manner adequate

to apprise the Secretary of the nature and amount of such item.”

(Emphasis added.) “Where the same word or phrase appears multiple

times within a statutory text, it is generally presumed to have the same

meaning each place it appears.” Whistleblower 22716-13W v.

Commissioner, 146 T.C. 84, 92–93 (2016) (citing Atl. Cleaners & Dyers,

Inc. v. United States, 286 U.S. 427, 433 (1932) (“Undoubtedly, there is a

natural presumption that identical words used in different parts of the

same act are intended to have the same meaning.”)). A review of

applicable IRS guidance and a plain reading of the statute do not

warrant a conclusion that Congress intended the similar phrases in

section 6501(c)(9) and (e)(1) to be interpreted differently. Therefore, we

look to adequate disclosure caselaw decided under section 6501(e)(1) for

guidance in determining what documents can be used to prove adequate

disclosure under section 6501(c)(9).

This Court has frequently looked beyond a taxpayer’s return for

purposes of determining adequate disclosure, especially where the

return references a separate document. See Reuter v. Commissioner,

T.C. Memo. 1985-607, 51 T.C.M. (CCH) 99, 102 (discussing Benderoff v.

United States, 398 F.2d 132 (8th Cir. 1968), Walker v. Commissioner, 46

T.C. 630 (1966), Roschuni v. Commissioner, 44 T.C. 80 (1965), and Rose

v. Commissioner, 24 T.C. 755 (1955)). For example, when the taxpayer’s

individual return references an information return (such as a

partnership or S corporation return), we may look to those information

returns to determine whether items were adequately disclosed. See

Reuter, 51 T.C.M. (CCH) at 102. When deciding whether an item has

been adequately disclosed, we may consider not only a return, but also

documents attached to the return plus informational documents

referenced in the return.

14

[*14] The Offshore Entity Statement provided with the gift tax return

must be considered in determining adequate disclosure. It was

submitted to the OVDP in a disclosure packet that included the gift tax

return. Furthermore, the protective filing attached to the gift tax return

referenced controlled foreign company (CFC) stock, which alerted the

IRS to look to the Offshore Entity Statement for information on the gift

referred to in the gift tax return. We will consider the return and all

documents accompanying the return. Therefore, the documents we will

consider in determining whether Mr. Schlapfer adequately disclosed the

gift are the gift tax return, the protective filing, all relevant Forms 5471,

and the Offshore Entity Statement.

B.

Strict vs. Substantial Compliance

The Commissioner argues that Mr. Schlapfer did not adequately

disclose the gift because he failed to strictly satisfy all applicable

requirements of Treasury Regulation § 301.6501(c)-1(f)(2). Mr.

Schlapfer disagrees, arguing that he strictly, or at least substantially,

complied with all applicable requirements of the Treasury regulation.

The Commissioner may insist that taxpayers strictly comply with

regulatory requirements, but in certain circumstances we have held that

regulatory requirements can be satisfied by substantial compliance. See,

e.g., Am. Air Filter Co. v. Commissioner, 81 T.C. 709, 719 (1983). The

question the Court must ask in determining whether to apply

substantial or strict compliance to regulatory requirements is whether

the requirements relate “to the substance or essence of the statute.”

Bond v. Commissioner, 100 T.C. 32, 41 (1993) (quoting Taylor v.

Commissioner, 67 T.C. 1071, 1077 (1977)). If the requirement is

essential, then strict adherence to all regulatory requirements is a

precondition to satisfying the statute. Id. However, if the requirement

is “procedural or directory in that [it is] not of the essence of the thing to

be done . . . [it] may be fulfilled by substantial . . . compliance.” Id.

(quoting Taylor, 67 T.C. at 1077–78). This test requires us to examine

section 6501(c)(9) to determine whether the adequate disclosure

requirements of Treasury Regulation § 301.6501(c)-1(f)(2) go to the

essence of the statute or are merely procedural or directory.

Section 6501(c)(9) provides that the Commissioner may assess a

gift tax at any time if a taxpayer fails to report a gift on a gift tax return,

unless the gift is otherwise adequately disclosed on the return or a

statement attached to it. Its essence is to provide the Commissioner with

a viable way to identify gift tax returns that should be examined with

15

[*15] minimum expenditure of resources. T.D. 8845, 1999-2 C.B. 683,

684. The purpose of the adequate disclosure requirements in the

regulation is to provide taxpayers with guidance on what constitutes

adequate disclosure for purposes of section 6501(c)(9).

The Department of the Treasury has acknowledged that

substantial compliance can satisfy the adequate disclosure

requirements. In Treasury Decision 8845, which promulgated Treasury

Regulation § 301.6501(c)-1(f), Treasury specifically addressed

substantial compliance. It rejected a recommendation that the

regulation should expressly allow substantial compliance because of

“the difficulty in defining and illustrating what would constitute

substantial compliance.” T.D. 8845, 1999-2 C.B at 685. It went on to

note, however, that its rejection of the suggestion did not mean “that the

absence of any particular item or items would necessarily preclude

satisfaction of the regulatory requirements, depending on the nature of

the item omitted and the overall adequacy of the information provided.”

Id. That statement describes, and accepts, the very essence of

substantial compliance. Therefore, we conclude that the adequate

disclosure requirements can be satisfied by substantial compliance. 7

C.

Whether Mr. Schlapfer Strictly or Substantially Complied

With the Adequate Disclosure Requirements

Under Treasury Regulation § 301.6501(c)-1(f)(2), a transfer will

be considered adequately disclosed if the taxpayer provides the following

information on a gift tax return or statement attached to it: (i) a

description of the gift and consideration received for the gift; (ii) the

identities of and relationship between the transferor and transferee;

(iii) if the gift is transferred in trust, the trust tax identification number

and a description of the terms of the trust; (iv) a detailed description of

the method used to determine the fair market value of the gift; and (v) a

statement describing any position taken that is contrary to Treasury

regulations or revenue rulings published at the time of the transfer.

Here, we need to decide only whether Mr. Schlapfer strictly or

substantially satisfied requirements (i), (ii), and (iv). A taxpayer will be

7 Generally, “[s]tatutes of limitation sought to be applied to bar rights of the

Government, must receive a strict construction in favor of the Government.” Badaracco

v. Commissioner, 464 U.S. 386, 391 (1984) (quoting E.I. Dupont de Nemours & Co. v.

Davis, 264 U.S. 456, 462 (1924)). However, we have applied the substantial compliance

doctrine to situations where we are tasked in determining whether a return was

sufficient to commence the running of the statute of limitations. See, e.g., Gen. Mfg.

Corp. v. Commissioner, 44 T.C. 513, 523–24 (1965).

16

[*16] deemed to have substantially complied with a requirement if it is

procedural and the taxpayer fulfilled all other essential purposes of the

requirement. See Am. Air Filter Co., 81 T.C. at 719. Therefore, if Mr.

Schlapfer fails to strictly comply with a requirement, we will find that

he substantially complied with it if he has fulfilled all essential purposes

of the requirement. We will look to the gift tax return, the protective

filing, all relevant Forms 5471, and the Offshore Entity Statement to

determine compliance.

1.

Description of the Property and Consideration

Received

Assuming the gift is the EMG stock, Mr. Schlapfer has strictly

satisfied this requirement. Treasury Regulation § 301.6501(c)-1(f)(2)(i)

requires that Mr. Schlapfer’s gift tax return, or a statement attached to

it, provide a description of the transferred property and any

consideration he received. 8 The 2006 Instructions for Form 709

instructed taxpayers to “[d]escribe each gift in enough detail so that the

property can be easily identified.” 2006 Instructions for Form 709,

United States Gift (and Generation-Skipping Transfer) Tax Return,

at 8. For stock, the instructions specify that the taxpayer should disclose

the number of shares and identify whether they are common or

preferred. Id. Mr. Schlapfer provided the required information via three

attachments: the protective filing, the Offshore Entity Statement, and

the 2006 Form 5471. On the protective filing attached to the return, Mr.

Schlapfer stated that he made a gift of CFC stock valued at $6,056,686.

On the Offshore Entity Statement, he stated that “EMG was established

by the Taxpayer in 2003, and was beneficially owned by the Taxpayer

until July 6, 2006, at which time the Taxpayer gifted his entire interest

in EMG to his mother.” Lastly, on the 2006 Form 5471, he disclosed the

number of and type of EMG shares. Together, these statements provided

the IRS with a description of the property.

However, if the gift is the UVL Policy, Mr. Schlapfer did not

strictly satisfy this requirement. He did not provide any information on

his gift tax return, or on documents attached to it, that directly

referenced or described a transfer of a life insurance policy. But this

failure does not preclude him from satisfying adequate disclosure. As

previously mentioned, disclosure is adequate if it is sufficiently detailed

to alert the Commissioner to the nature of the transaction so that the

decision to select a return for audit is reasonably informed. Thiessen,

8 Mr. Schlapfer transferred his shares of EMG stock for no consideration.

17

[*17] 146 T.C. at 114. And when finalizing the adequate disclosure

regulations, Treasury provided “that the absence of any particular item

or items would [not] necessarily preclude satisfaction of the regulatory

requirements, depending on the nature of the item omitted and the

overall adequacy of the information provided.” T.D. 8845, 1999-2 C.B

at 685. Thus, these “regulatory requirements” are not actually required.

A requirement does not have to be satisfied depending on the importance

of the requirement and what information is provided by the taxpayer.

Furthermore, the Treasury Regulations provide that “[a] transfer will

be adequately disclosed . . . only if it is reported in a manner adequate

to apprise the [IRS] of the nature of the gift . . . . Transfers reported on

the gift tax return as transfers of property by gift will be considered

adequately disclosed . . . if the return . . . provides the following

information.” Treas. Reg. § 301.6501(c)-1(f)(2) (emphasis added). The

difference between the wording used in these two sentences informs us

that the requirements are not mandatory, but act as guidance to

taxpayers to inform them on a way to satisfy adequate disclosure. Thus,

we must determine whether Mr. Schlapfer’s description of the property

transferred was sufficient to alert the Commissioner to the nature of the

gift.

Mr. Schlapfer provided enough information to satisfy this

requirement through substantial compliance. While he may have failed

to describe the gift in the correct way (assuming the gift is the UVL

Policy), he did provide information to describe the underlying property

that was transferred. Mr. Schlapfer asserts that he chose to disclose the

assets held in the insurance policy instead of the actual policy because

the OVDP required him to disregard entities holding foreign assets. The

UVL Policy’s value comes primarily from EMG stock, so Mr. Schlapfer’s

describing the transferred property as EMG stock goes to the nature of

the gift. Because this description was sufficient to alert the

Commissioner to the nature of the gift, Mr. Schlapfer substantially

complied with this requirement.

2.

Identity of the Parties 9

Mr. Schlapfer did not strictly satisfy this requirement. Treasury

Regulation § 301.6501(c)-1(f)(2)(ii) requires that Mr. Schlapfer provide

the identity of, and his relationship to, each transferee. Mr. Schlapfer

has stated various times that he transferred property by gift to his

9 For this requirement, it is immaterial whether the gift is the stock or the life

insurance policy; therefore we do not analyze it separately for each gift.

18

[*18] mother, aunt, and uncle. However, the Offshore Entity Statement

states that he “gifted his entire interest in EMG to his mother;” there

was no mention of his aunt or uncle. Because his return and documents

attached thereto failed to identify his aunt and uncle as transferees, he

did not strictly comply with this requirement.

But Mr. Schlapfer substantially complied with this requirement.

This requirement was procedural, and a failure to list the identity and

relationship of each transferee was not essential to the overall purpose

of the requirement, which was to provide the IRS with enough

information to understand the nature of the transfer. Mr. Schlapfer’s

statement on the Offshore Entity Statement listing his mother as the

transferee provided the IRS with enough to understand the relationship

between Mr. Schlapfer and the transferee, a member of his family. His

failure to provide the names of his aunt and uncle does not make a

meaningful difference in understanding the nature of the transfer.

Therefore, we find that he substantially complied with the requirement

when he identified his mother as the transferee.

3.

Description of Method Used to Determine FMV of

Gift

Mr. Schlapfer did not strictly satisfy this requirement. Treasury

Regulation § 301.6501(c)-1(f)(2)(iv) requires that Mr. Schlapfer provide

a detailed description of the method used to determine the fair market

value of property transferred, including any financial data (balance

sheets, etc. with explanations of any adjustments). Mr. Schlapfer did not

provide any statement describing how he determined the fair market

value of the gift, regardless of whether it is the EMG stock or the UVL

Policy. Therefore, he failed to strictly satisfy this requirement.

However, Mr. Schlapfer substantially complied with this

requirement. Assuming the gift is the EMG stock, Mr. Schlapfer

provided enough financial information to apprise the Commissioner of

the method used to determine its fair market value. The 2006

instructions for Form 709 explained that the purpose of this

requirement is to provide the IRS with information on how the taxpayer

determined the gift’s fair market value. See 2006 Instructions for Form

709, at 8. The instructions also identified documents that could be

submitted to satisfy this requirement. Id. (“For stock of close

corporations or inactive stock, attach balance sheets, particularly the

one nearest the date of the gift, and statements of net earnings or

operating results and dividends paid for each of the 5 preceding years.”).

19

[*19] Mr. Schlapfer provided all the documents identified in the

instructions. His Forms 5471 for 2004, 2005, and 2006 enclosed balance

sheets, statements of net earnings, dividends paid, and operating

results. Furthermore, his Offshore Entity Statement stated that

“[t]axpayer is taking into account all of the income earned by the

accounts underlying EMG in the enclosed Amended U.S. Individual Tax

Returns during the years he controlled and beneficially owned EMG.”

Although Mr. Schlapfer did not provide all the financial documentation

listed in the regulation, he provided the information identified in the

2006 Form 709 instructions, which was enough to show the IRS how he

determined the fair market value of the EMG stock. Therefore, he

substantially complied with this requirement.

Furthermore, Mr. Schlapfer substantially complied even if the

gift is the UVL Policy. The UVL Policy’s principal asset is the EMG

stock, and the documents we considered above were enough to apprise

the Commissioner of the method used to determine the fair market value

of the EMG stock. Because the UVL Policy’s value stems primarily from

the EMG stock, those same documents can be used to illustrate the

method used to determine the fair market value of the UVL Policy.

Accordingly, we find that Mr. Schlapfer substantially complied with this

requirement.

V.

Conclusion

Mr. Schlapfer strictly or substantially complied with Treasury

Regulation § 301.6501(c)-1(f)(2)(i), (ii), and (iv) by way of his gift tax

return, protective filing, Offshore Entity Statement, and Forms 5471. As

a result, he adequately disclosed the gift on his 2006 gift tax return,

causing the three-year assessment period to commence on November 20,

2013, when he submitted his disclosure package to the OVDP, and end

on November 30, 2017 (three years after that date including extensions).

Therefore, we conclude that the period of limitations to assess the gift

tax expired before the Commissioner issued the notice of deficiency.

Accordingly, we will deny the Commissioner’s Motion for Summary

Judgment and grant Mr. Schlapfer’s Cross-Motion for Summary

Judgment.

To reflect the foregoing,

An appropriate order and decision will be entered.