Judge Ronald L (“Ingenuity”) Buch exercises his ingenuity, finding Reg. Section 301. 6501(c)-1(f)(2) disclosures are adequate to satisfy OVDP, and such disclosures need only substantially comply. Ronald Schlapfer, T. C. Memo. 2023-65, filed 5/22/23, is a Swiss-born naturalized US citizen who made money in banking and finance. Before naturalization but while a green carder, he gifted a universal variable life insurance policy on his nearest and dearest to said nearest and dearest (although he didn’t name them all in his OVDP disclosure that doesn’t matter). He paid the premium for the policy with a small amount of cash and all the stock in his Panamanian Corp (wherein he stashed his securities portfolio).

Ron fessed up with OVDP, but IRS claimed he disclosed the gift in the wrong year because it was incomplete, so 3SOL never ran. Doesn’t matter, says Judge Buch; Reg. Section 301. 6501(c)-1(f)(5) says a gift reported as complete triggers 3SOL even if later incompleted by Reg. Section 25.2511-2.

IRS says even if disclosed in correct year, Ron didn’t strictly comply. Now this is a question of fact, and both sides want summary J.

Ron attached an Offshore Entity Statement, which IRS says Judge Buch should ignore. No, he won’t. Using Section 6501(e) unreported income disclosure, he applies same rules to gift tax. Attachments to returns, if they tell the tale so that IRS knows what return to pull for exam, are enough. IRS looks at 1065s, 1099s, 1120s, and all kinds of other documents to determine taxable transactions.

Now when IRS adopted Reg. Section 301.6501(c)-1(f), they refused to write in substantial compliance, because they couldn’t define it. But they went on to say that omission of any one item wouldn’t necessarily invalidate the disclosure. Give Judge Buch a hole like that, and the late great Jim Brown had nothing on him.

Ron strictly disclosed all the info about the stock. But what he gave was the life insurance policy. So what, says Judge Buch. “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.” T. C. Memo. 2023-65, at p. 17. IRS needs enough info to know whether to pull a return for audit, and here they did.

True, Ron left out aunt and uncle from list of donees, noting only Mom. But since the gift was only to family members, all of whom were offshore, doesn’t matter: substantial compliance. Taishoff says note requirement for onshores to disclose gifts from offshores (Form 3520). Different result if any donee was onshore? If onshore donee was not disclosed, how could IRS backcheck for a 3520 from the onshore to see if the 709 numbers were good?

“Mr. Schlapfer provided all the documents identified in the instructions. His Forms 5471… enclosed balancesheets, 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 [Corp] in the enclosed Amended U.S. Individual Tax Returns during the years he controlled and beneficially owned [Corp].’Although Mr. Schlapfer did not provide all the financial documentation listed in the regulation, he provided the information identified in the [year at issue] Form 709 instructions, which was enough to show the IRS how he determined the fair market value of the [Corp] stock. Therefore, he substantially complied with this requirement.” T. C. Memo. 2023-65, at p. 18.

And since the variable life insurance policy was largely funded by the Corp stock, and its value will vary as the Corp’s portfolio fluctuates, that’s good enough.

Ron wins on SOL.

Takeaway- For OVDP and FBAR practitioners, take a look at Judge Buch’s reasoning. Then compare and contrast with Judge Christian N. (“Speedy”) Weiler’s deconstruction of Barbara Fairbank’s situation; see my blogpost “FBAR SOL? FUBAR,” 2/23/23.