Is a Formal Appraisal Required to Value a Gift or Trust for Form 3520?

Is a Formal Appraisal Required for Form 3520?

Is a Formal Appraisal Required for Form 3520?

Is a Formal Appraisal Required to Value a Gift or Trust for Form 3520: A common question our International Tax Law Specialist team receives about Form 3520, is whether or not a formal valuation or appraisal is required in order to determine the Fair Market Value of the gift or trust assets. While obtaining FMV is not an issue when the asset is cash or another asset that is publicly traded or available — such as stock or real estate — it can be an issue for non-publicly traded assets. Even if a FMV is not readily available, that does not mean the US Person must obtain (and pay for) a formal appraisal valuation.

Formal Appraisal Valuations and Form 3520

As provided in the Form 3520 instructions:

• • • Gross Value or Amount For purposes of determining the gross reportable amount, the gross value or gross amount of property is the value of property as determined under section 2512 and its regulations, without regard to any prohibitions or restrictions on a person’s interest in the property.

    • See section VII of Notice 97-34. Although formal appraisals are not generally required, you should keep contemporaneous records of how you arrived at your good faith estimate.

What does this mean?

It means the IRS does not require Form 3520 filers to obtain a formal appraisal. But, like most other valuations, the IRS does recommend the Taxpayer to hold onto the records that reflect how they arrived at the FMV.

What is Notice 97-34 for Form 3520?

Notice 97-34 “provides guidance regarding the new foreign trust and foreign gift reporting provisions contained in the Small Business Job Protection Act of 1996.” Section VII of the notice provides information regarding whether formal appraisal valuations are necessary.

Section VII provides the Following

• • • Substantial penalties under section 6677 and 6039F(c) apply if information required by section 6048 or section 6039F is not reported or is reported inaccurately.

    • Generally, the penalty depends on the ‘‘gross value’’ or ‘‘gross amount’’ of the property involved. In determining the gross value or gross amount of property, the valuation principles of section 2512 and the regulations thereunder must be used, without regard to any prohibitions or restrictions on a person’s interest in the property.

    • Penalties under sections 6677(a) and 6039F will not be imposed if the failure to file was due to reasonable cause and not willful neglect. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the trustee (or other person) for disclosing the required information.

    • Section 6677(d). Also, refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause. The penalties under section 6677 apply only to the extent that the transaction is not reported or is reported inaccurately.

    • Thus, if a U.S. person transfers property worth $1,000,000 to a foreign trust, but reports only $400,000 of that amount, penalties may be imposed only on the unreported $600,000. Moreover, if the penalties under both sections 6677 and 1494(c) could apply to the failure to report the transfer of property to a foreign trust, the penalty under section 6677 will be assessed and will reduce any penalty otherwise imposed under section 1494(c). If the penalties under both sections 6039F and section 6677 could apply to the failure to report a distribution from a foreign trust treated as a gift, the penalty under section 6677 will be assessed, and will reduce any penalty otherwise imposed under section 6039F.

International Tax Law Specialist Team: Golding & Golding

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A and Form 3520 Penalty & Relief Procedures.

Contact our firm today for assistance.