Wednesday, June 29, 2011

Gifts of California Real Estate - Who's Gonna Know ?

IN RE: DOES, Cite as 107 AFTR 2d 2011-XXXX, 05/20/2011

Houses In Southern California imageI remember the first tax course I ever took.  It was at Qunisigamond Community College.  The instructor was an attorney and he told a story about a client coming on a large pile of cash in his deceased father's house.  The clients attitude was "Who's gonna know ?".  I forget the rest of the story except that is didn't have a happy ending.  As technology improves, there will be more and more ways that they are "gonna know".  The IRS lost this skirmish, but it should be a heads up to people who have made transfers of real estate for less than full consideration.

The essence of the case is pretty well summed up in the John Does who are being defended:

United States taxpayers, who during any part of the period January 1, 2005, through December 31, 2010, transferred real property in the State of California for little or no consideration subject to California Propositions 58 or 193, which information is in the possession of the State of California Board of Equalization, sent to BOE by the 58 California counties pursuant to Propositions 58 and 193.


The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.

Increases in California property taxes are limited to 2% per year unless there is a transfer of the property. If the transfer is to a child or a grandchild it does not count and will not trigger a reassessment.  In order to qualify for this treatment you need to file a form either BOE-58-G or BOE-58-AH, which you can get from your assessors office.  Sometimes it can be downloaded.  The existence of these forms is pretty convenient for the IRS because they think that maybe if you filed one of them then maybe you should have filed Form 709, which also can be downloaded, but I suggest that you might want to use a professional. 

California has argued that their privacy laws prevent them from just turning the forms over to the IRS.  It all gets kind of lawerly from here.  The short answer is that the Court has initially refused to enforce the John Doe summons against the state because the IRS has not shown that it can't gather the information in some other way.  The denial is without prejudice so they may be back. 

The lawyerly stuff actually sounds pretty interesting :

It bears mention here as well, however, that, should the United States choose to renew its Petition, this Court has serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe Summons upon a state. Indeed, the Court's own review of the case law has revealed no other circumstances on par with the United States' current request. As such, prior to resubmitting the Petition, the United States is cautioned that it must address, inter alia, the following issues:


(1)) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f);

(2)) Whether a state's sovereign immunity precludes issuance of a John Doe Summons;


(3)) Whether, assuming a state is subject to the Court's power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and

(4)) Whether the United States should be required to attempt to pursue any and all state court remedies prior to seeking relief in federal court.


The Government is strongly advised to be thorough in any future briefing since it will be asking this Court to make a decision ex parte without the benefit of any similar briefing from the state.


The practical take away to me though is that it might be a good idea to see if you kinda of sorta forgot to file the gift tax return because you were so busy with those complicated forms the assessor wanted.  Before long, one way or the other, I think they are "gonna know".

1 comment:

  1. Thanks for highlighting what otherwise would have been an obscure case. I am surprised there is not information sharing here as that seems to be the growing trend among governments - and good for the tax gap.

    I recall many years ago as a revenue agent occasionally having to go to the Recorder's office to look up property ownership and transfers. Seems that could have been done here.

    Another issue in California is tracking down property transfers where there is a required reassessment to market value of the property.

    This is all a due diligence area for practitioners to be sure they are asking about property transfers, changes in ownership, etc. and reminding clients of the reporting obligations (if any) and determining what income, property, estate/gift, other tax obligations might arise for the client.

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