Internal Revenue Code Section 7477, enacted as part of the Taxpayer Relief Act of 1997, provides that taxpayers may contest an Internal Revenue Service determination of gift tax value and seek a declaratory judgment in Tax Court.
The regulations specifically provide that a taxpayer may contest a valuation under IRC Section 7477—even if the IRS adjustment does not result in a gift tax deficiency or tax overpayment. The regulations also provide the procedures for obtaining the judgment.
Generally, if a dispute is not resolved at the examination level, the IRS will send the taxpayer a preliminary determination of value letter, a Letter 950-G. Then, if the donor fails to request an appeal or the requested appeal does not resolve the issue, the IRS will send the taxpayer a notice of determination of value letter, a Letter 3569.
Under the regulations, the donor may seek a declaratory judgment by filing a petition with the Tax Court within 91 days of the date the Letter 3569 was mailed—but only if the taxpayer already has exhausted all administrative remedies. That means the taxpayer must have requested an appeal and either:
(1) participated fully in the appeals process by submitting all information and disclosing all relevant information regarding the controversy or
(2) the IRS Appeals Office did not grant the request for the appeal.
The regulations also provide that a taxpayer won’t be precluded from pursuing a declaratory judgment under Section 7477 if the IRS never issued a Letter 950-G—so long as the failure to issue the letter was not due to the taxpayer’s actions or inactions and the taxpayer participates in the appeals process if it is later offered.