Business planning involving a transfer of a business interest requires a qualified appraisal that meets adequate disclosure. The adequate disclosure is essential to start the statute of limitations on gift tax and to avoid potential valuation-related penalties. However, the exact meaning of “qualified appraisal” and what constitutes “adequate disclosure” can be a gray area.

The regulations tell us that for an appraisal to be considered “qualified” by the Internal Revenue Service, it must be conducted by a qualified appraiser who possesses the necessary expertise. The appraisal report itself must adhere to generally accepted appraisal standards. Of course, the devil is in the details when it comes to determining if you have a qualified appraiser and a report that adheres to the required standards.

When looking for the above answers, it helps to understand the details of the regulations and to look at prior court decisions and how tax court judges have interpreted the language. Two recent Tax Court decisions — Schlapfer v. Commissioner (T.C. Memo. 2023-65) and WT Art Partnership LP v. Commissioner (T.C. Memo. 2025-30) — provide an excellent opportunity to revisit what constitutes a qualified appraisal and what it takes to meet adequate disclosure.

This article will provide a summary of the regulations surrounding adequate disclosure, how recent cases clarify those regulations, and the practical steps an estate planner can take to minimize audit risk.

Regulatory Background: Adequate Disclosure and Qualified Appraisals

Under the Internal Revenue Code, the IRS generally has three years from the filing of a gift tax return (Form 709) to assess additional gift tax. If no return is filed or if the value of a gift is not “adequately disclosed” on the return, the statute of limitations remains open indefinitely. To provide a safe harbor, Treasury regulations, such as §301.6501(c)-1(f), spell out what constitutes adequate disclosure of a gift.

In short, a gift is considered adequately disclosed when the return (or an attached statement) provides enough information to inform the IRS of the nature of the gift and the basis for its value. Specifically, the regulations require that the following information be included for each gift:

• Description of the transferred property (and any consideration received by the donor)
• Identity of each donee and the relationship between donor and donee
• Valuation method and appraisal: Either a copy of the qualified appraisal obtained for the property or a detailed description of the method used to determine fair market value (including any financial data and analysis used)
• Explanation of any position contrary to IRS regulations: For example, disclosure of any legal position taken that is at odds with proposed or temporary regulations (to avoid penalties for valuation understatements)

In practice, this means the goal is to provide the IRS enough detail to review the fair market value of the transfer without needing to do its own analysis. If these conditions are met, the three-year statute of limitations for assessing the gift will commence upon filing even if the IRS later disagrees with the value. On the other hand, failing to meet the adequate disclosure standard means the IRS can challenge the gift’s valuation at any time in the future.

The best way, it seems, to meet the adequate disclosure requirements is by way of a qualified appraisal. The most applicable definitions for a qualified appraisal reside within the IRS regulations and the tax code governing charitable contributions commonly used as a benchmark in estate and gift planning. Under IRC §170(f)(11):

• A “qualified appraisal” is defined as an appraisal conducted by a qualified appraiser in accordance with generally accepted appraisal standards and meeting any requirements set by IRS regulations. In other words, the appraisal should follow professional standards (for example, the Uniform Standards of Professional Appraisal Practice – USPAP)
• A “qualified appraiser” generally must be an individual with the education and experience to value the type of property in question. The person should have a recognized professional appraisal designation or otherwise meet minimum education/experience guidelines set by the IRS

With this regulatory framework in mind, let’s see how the Tax Court applied these rules in the Schlapfer and WT Art cases.

Case Analysis: Schlapfer v. Commissioner (T.C. Memo. 2023-65)

Ronald Schlapfer involved a gift tax reporting issue with international flair. The taxpayer, Ronald Schlapfer, was a Swiss national who had funded a universal variable life insurance policy with cash and stock, intending to transfer that policy to relatives in 2006. Due to a clerical mistake, the policy transfer wasn’t legally completed until 2007. As part of a later IRS Offshore Voluntary Disclosure Program (OVDP) in 2013, Schlapfer filed a protective gift tax return for 2006, reporting the transfer of stock. He attached various documents to this submission, including an Offshore Entity Statement and corporate financial information relating to the stock’s value.

The IRS later argued that the gift was actually made in 2007 (when the insurance policy ownership transferred) and that, because Schlapfer did not file a 2007 gift tax return, the gift was never adequately disclosed. In 2019, well over three years after the 2006 filing, the IRS issued a notice of deficiency for gift tax on the transfer (treating it as an unreported 2007 gift) along with penalties. The IRS’ position was that Schlapfer’s 2006 return failed to meet the adequate disclosure requirements, so the statute of limitations never started to run.

Notably, Schlapfer’s 2006 Form 709 had some clear shortcomings under the disclosure regulations: he reported the wrong asset (he listed a gift of stock, whereas the IRS viewed the actual gift as the life insurance policy), he did not list all the donees of the transfer (the policy actually benefited multiple relatives), and he did not describe the method used to determine fair market value of the gift on the return. In other words, he did not strictly comply with every item of Reg. §301.6501(c)-1(f). However, he did provide a lot of information in the attached documents, which was the basis of his counterargument.

The Tax Court sided with Schlapfer, holding that the gift was adequately disclosed on the 2006 return despite the technical short comings. The Court concluded that Schlapfer “substantially complied” with the adequate disclosure requirements (enough to alert the IRS to the nature of the gift), and thus the three-year statute of limitations began when the return was filed in 2013 as part of OVDP. Because the IRS was past the three years to issue a deficiency, the assessment was time-barred.

Essentially, even though Schlapfer did not strictly meet every element listed in the regulations, the information he did provide was sufficient to put the IRS on notice of the gift’s existence, nature, and value.

In reaching this taxpayer-favorable result, the Tax Court made several important points about adequate disclosure standards:

• The Court emphasized that the purpose of the disclosure rules is to apprise the IRS of what it needs to know. It cited the principle that disclosure is adequate so long as it is “sufficiently detailed to alert the IRS as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one.”
• The specific items listed in Reg. §301.6501(c)-1(f)(2) were described by the Court as guidance for taxpayers, not a rigid checklist. In other words, a taxpayer’s disclosure can still be considered adequate even if one or more of the listed pieces of information is missing as long as the overall disclosure achieves its goal of informing the IRS about the gift.
• The Court made it clear that not only the face of the return, but any documents attached to the return or explicitly referenced, can be considered in determining whether the disclosure was adequate
• The Court noted that Schlapfer’s disclosure, while not perfect, included the essential facts: it disclosed the stock gift, the value, the parties involved (family members), and even though it didn’t attach a formal appraisal or explicitly walk through the valuation, the balance sheet and OVDP narrative gave clues to how the value was derived

Schlapfer v. Commissioner is a significant taxpayer win that distinguishes strict vs. substantial compliance in adequate disclosure. It was the first time the Tax Court thoroughly addressed these gift tax disclosure regulations.

Case Analysis: WT Art Partnership LP v. Commissioner

WT Art Partnership involved a different tax context – the substantiation of a charitable contribution deduction – but it too centered on what qualifies as an acceptable appraisal.

The taxpayer, WT Art Partnership LP, was an entity through which art collector Oscar Tang donated valuable Chinese paintings to the Metropolitan Museum of Art (the “Met”). WT Art contributed a total of five antique Chinese paintings to the Met, with aggregate charitable deductions claimed in excess of $73 million. For each donation year, WT Art attached an appraisal report to its tax return to justify the fair market value of the paintings with the valuation performed by China Guardian Auctions Co. Ltd., a prominent auction house in China, rather than by an individual appraiser. The reports were signed by the president of China Guardian and provided estimated auction values for the artworks.

Upon audit, the IRS agreed with the values of the paintings after some negotiation but disallowed the entire charitable deductions on the grounds that no “qualified appraisal” had been attached to the returns as required by law. The IRS asserted that China Guardian was not a qualified appraiser under the defined terms of IRC §170(f)(11) – being a company rather than an individual appraiser and lacking evidence of the necessary qualifications.

Oscar Tang (through WT Art) petitioned the Tax Court, effectively admitting that the formal appraisal requirement wasn’t met but invoking the provision in the law that excuses such failures if the taxpayer had reasonable cause and acted in good faith. Tang argued that he reasonably believed the China Guardian appraisals were qualified given the advice he had and the circumstances.

The Tax Court issued a split ruling: it agreed with the IRS that the appraisals were not “qualified appraisals” by a “qualified appraiser.” An appraisal firm or auction company itself cannot be the appraiser – it must be someone acting in their individual capacity. Nonetheless, the Tax Court allowed the deductions in full because it found the taxpayer met the reasonable cause and no willful neglect exception. In other words, WT Art stands for the proposition that, in the right circumstances, a failure to comply with the strict appraisal requirements of §170(f)(11) can be forgiven, preventing disallowance of the deduction, if the taxpayer can demonstrate that they exercised ordinary business care and reasonable cause.

The Court evaluated Oscar Tang’s actions and mindset to decide if he had reasonable cause for using China Guardian. They found compelling evidence that he did:

• Tang was not a tax expert and was relying on professionals. He had engaged advisors and followed their recommendations in securing appraisals. Significantly, back in 2005, he had donated some paintings and in that process China Guardian had been involved as a secondary appraiser with no objection from the IRS at that time. Tang came away from that experience with the understanding that the IRS viewed China Guardian as a reputable source for valuations.
• The Court found that Tang truly believed the appraisal firm was qualified. He exercised what a layperson would consider ordinary business care by hiring a well-known company and by using an approach that had seemingly been blessed in a prior audit.

Given these considerations, the Court ruled that the reasonable cause exception was satisfied for WT Art. Therefore, the lack of a qualified appraisal did not trigger the harsh result of a denied deduction.

The Tax Court’s message in WT Art Partnership was twofold: first, taxpayers (and the IRS) should remember that the appraisal requirements in §170 are strict, and failing them will ordinarily kill a deduction. The Court plainly agreed that, strictly speaking, WT Art did not meet the substantiation rules. But second, the case demonstrates a measure of fairness for honest mistakes. The Court was careful to note that this exception should not be viewed as a convenient escape hatch for those who choose to ignore the rules.

The WT Art Partnership case is a cautionary tale for practitioners: not all appraisals are created equal in the eyes of the IRS. Even a high-profile auction house’s valuation might fail the “qualified appraisal” standard if the appraiser isn’t a person with the proper credentials.

Practical Guidance for Estate Planners

These cases highlight the fine line between technical compliance and substantial compliance, and they offer several lessons for practitioners advising on gifts, estate valuations, and charitable contributions:

• Always obtain a truly qualified appraisal for valuable assets. For any significant gift or bequest of a business interest, real estate, artwork, or other difficult-to-value property, engage a “qualified appraiser” with proven credentials in the relevant field. Ensure the appraiser has a recognized professional designation or otherwise meets the IRS’ qualification criteria (education and experience) and regularly performs appraisals appropriate for the subject asset. It is safest to use professional appraisers who are accredited (e.g., ASA, MAI, or similar designations) and who follow generally accepted appraisal standards (e.g., USPAP), producing a thorough report.
• Include the appraisal and all required details with the tax return. For gift tax returns, always attach the full appraisal along with any other relevant documentation.
• Document your good-faith efforts. If an issue does arise despite your efforts, having a paper trail of diligence is invaluable. For instance, if you did rely on an appraiser who turned out not to be qualified, evidence that you vetted the appraiser’s reputation or were advised by a reputable expert to use them could help establish reasonable cause.

Adequate disclosure and qualified appraisals are cornerstones of risk management in gift and estate tax reporting. A prudent estate planner will take lessons from Schlapfer and WT Art to heart: meticulously complying with disclosure regulations, insisting on qualified appraisers and thorough reports, and reviewing every return for completeness.

A shorter version of this article was published by Bloomberg Tax.