SF86 and Gift Taxes


#1

Hi all,

I’ve got a question about the SF86 and gift taxes. I lost a family member a couple years ago that resulted in a good chunk of insurance money being given to me and another very close family member. We decided that it would be a smart idea to pool our money together and purchase a property we were interested in. I did this by transferring money to an account the family member opened for this purpose. Purchasing the property we wanted fell through (got bought out for a higher price) so the money has just sat in the account untouched. The account was not a joint account. Due to this, I needed to file a Form 709 declaring the money as a gift for that tax year. Since I wasn’t considering this to be a gift at the time, the existence of this form (and the requirement to file it) never crossed my mind. I’m currently in the process of working with a CPA to file an amended return with that information. Since the total amount is below the lifetime limit, I won’t actually owe any tax.

I could only find one other topic on the issue of amended tax returns and that one concerned income tax where the individual failed to file and actually owed money. My tax record has been perfect, I’ve always filed and always paid what was due when it was due. The above situation is the only aberration.

SF86 question 26.3 states:
In the past seven (7) years have you failed to file or pay Federal, state, or other taxes when required by law or ordinance?

My question is two fold:

  1. I’m guessing I need to answer ‘yes’ to the above now and explain the circumstances but I’m not quite sure.
  2. I know interim determinations are made by reviewing the SF86 for derogatory information. If I get this resolved, describe the resolution and provide the information I mention above, what are the chances this would affect an interim clearance?

I did find a previous thread on this topic (Amended Tax Return SF86 26C) but the issue described there is a lot more serious (the individual failed to file income tax and failed to pay on time, ended up owing money).

I do intend to speak to a clearance attorney at some point (gotta scrape the money together first!). Any help / explanations given here though are greatly appreciated!


#2

Are you amending your 2017 taxes or is this from a previous year?

I would tend to answer “No” because you are in the process of voluntarily correcting the issue. You can still speak to this is the explanation.

I’m also not sure that you need to file this as a gift. It’s really a joint venture between you and a business partner which hasn’t come to fruition as yet. You need to be VERY careful with ventures like this. The tax ramifications can be significant if real estate ventures are not built correctly. But . . . That’s a discussion for another forum . . .


#3

Your response is appreciated. I am amending a tax return from a previous year, not 2017. You’re 100% correct about being careful - the person I am doing this with is someone I know well and trust. I just wanted to make sure this doesn’t screw me out of a cleared job should I choose to move into that sector.


#4

I’m also not so sure that this is a “gift” either. Since you are working with a CPA I will certainly defer to that individual. But it seems to me that this is more of an investment you’ve made that hasn’t been completed yet. Perhaps there is some “timeframe” out there that limits how that can be done but it seems perfectly reasonable to me that it could take several years before an investment is fully completed. (I know this is an extreme case where lots of money is involved, where your case is surely smaller in scale… but…) It would take several years to get all the building permits, various government agency buyins etc for you to build a new resort in the florida keys for instance.


#5

Thanks for your thoughts. To be clear, the intention was to pool money with a close family member to purchase an existing, already built property. As I mentioned this fell through as the property was bought out by someone else. The money is currently sitting in an account with his name but not mine (risky I know). He’s waiting on the go ahead from my CPA to transfer the cash back. My main concern surrounds what would happen to the security clearance investigation if indeed the IRS does view this as a gift (just due to the way the account is setup + the large cash transfer) and does make me amend a return prior to 2017 to report it. Does that count as failing to file? I’m assuming it’ll be easily mitigated since there would be no change in tax liability and that it’s a one off mark on my record.


#6

I definitely agree this is easily mitigated. Unfortunately, I’m not sure how you should respond on the form. You really should consult your FSO for their opinion. It might be that you should answer no, but also provide a comment detailing what you’ve told us here to make clear exactly what the situation is.

Here’s the main rub with this. It’s not that you have any major debt obligations to the IRS that can be used against you, it’s not that you’re trying to evade taxes or anything. The main issue here is someone else has money that is owed to you, and they (I know you trust this person etc etc) could use this against you in a malicious way. Essentially in an attempt to draw information from you. That’s what they will be concerned about. Be open about it and it won’t be an issue.


#7

Why not consider it a zero interest loan? Treating it as a gift doesn’t make any sense since you are now talking about repayment and it was NEVER considered a gift to begin with.

But, again, this just highlights the fact that you can’t run around doing these things without properly setting up the process. If this is a joint project, the money should have gone into a special account with both names established for just this purpose. The fact that you now have a CPA telling you to treat it as a gift, not only has a risk of costing you money now, but of tying your hands in the future.