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A Better Partnership

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Apr 2012
01
April 01, 2012

Estate Planning Tip: Gifts Of Business Interests


New Decision Increases Certainty Regarding Gifts of Business Interests

A recent tax court decision puts taxpayers on firmer ground when giving away interests in hard-to-value assets such as a business or family limited partnership.  In Wandry v. Commissioner, the Tax Court approved a taxpayer’s use of a defined value clause in making gifts of interests in a limited liability company.  A defined value clause states, in so many words, that the taxpayer gives away that number of shares equal in value to a desired dollar value (such as the $13,000 annual gift tax exclusion), as determined by an independent appraisal, and that if the IRS challenges such valuation upon audit, the number of shares gifted shall be adjusted to the number equal in value to the desired dollar value as finally determined for gift tax purposes.  The IRS opposes such formula gifts, mainly for public policy reasons.  Specifically, the IRS argues such defined value formula gifts should be impermissible for the reason that they undermine enforcement of the tax laws because a formula gift leaves very little incentive to audit gift tax returns, as any adjustment in valuation will not result in additional tax.

The tax court brushed aside the IRS’ public policy concerns, reasoning that the IRS’ role is to enforce the tax laws, not just maximize revenues, and that other enforcement mechanisms exist to ensure that gifts are properly valued.  The court also noted that an IRS adjustment in valuation will still have the very real effect of reallocating assets between donor and donee.  Previous rulings had blessed formula gifts in a charitable context, but this ruling now confirms that formula gifts may be used for gifts between individuals.  

Gifts of business interests and other hard-to-value assets are still difficult and often expensive because of the appraisal requirements.  Nonetheless, this new ruling will allow taxpayers to have more certainty in the tax effect of their gifts during the planning stage.

 

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