A U.S. Tax Court decision filed March 6th, Dickerson v. Commissioner, regarding a waitress who won $10 million in a lottery, is extremely relevant for gift tax law. The waitress tried to shift the winnings to family members without incurring a taxable gift. The IRS disagreed, claiming there was a gift, and the Tax Court concurred.
The relevance is not so much the facts of the case, since few of us win lotteries, but rather the procedural aspects of the case. The waitress won the lottery in 1999 but did not file a gift tax return until 2007. In 2008, the IRS asserted that gift tax was owed. The Tax Court heard the case in 2010, which resulted in its decision last week.
The legal importance is that there is no statute of limitations on gifts if a gift tax return is not filed. Further, the gift tax return needs to provide the necessary information, such as asset appraisals, to put the IRS on notice of the substance of the gift. Absent filing a gift tax return, or filing the proper return, the statute remains open and transactions that taxpayers may think have been closed remain vulnerable to IRS challenge.
In 2011 and 2012, when numerous taxpayers are taking advantage of the $5 million exemption amount (now $5,120,000) while it exists, Dickerson highlights the importance of properly making the gift and documenting it.