Landmark decision by the U.S. Tax court provides guidance for a defined value clause (formula clause gifts) used in the taxpayer’s gifting strategy

by Dennis Stuchell 18. June 2012 08:45
  In March of 2012, the U.S. Tax Court filed its memorandum of findings regarding a defined value clause used in the taxpayer’s gifting strategy in Wandry v. Commissioner (March 26, 2012).  Not only was the decision a big win for the taxpayer, but the Tax Court provided guidance for drafting a successful defined value clause.  The ruling is considered a landmark decision, because it allows tax-free ownership transfers from one generation to another with certainty and in an orderly manner." The current tax regime imposes a gift tax of up to 35% when taxpayers give assets away, with exceptions.  Individuals now get one $5.12 million lifetime exemption, and they can also give up to $13,000 of assets a year to an unlimited number of recipients. (In 2013 the lifetime break is scheduled to drop to $1 million and the top rate to rise to 55%.) This means an owner who wants to give a business to children or others, such as employees, can use these exemptions to transfer ownership tax-free. He can even use the $13,000 annual exclusion to transfer value bit by bit. In the Wandry case, Dean and Joanne Wandry, a Colorado couple, each gave units in a family-owned limited-liability company worth $1,099,000 to their heirs in 2004.  To avoid paying tax, they specified the gifts should equal the dollar amount of their exemptions - a key point.  (At the time of the original gifting, the lifetime exemption was $1 million and the annual exclusion $11,000.) In Wandry, as in other cases, the givers have to get a professional appraisal if - as is common - the company is hard to value. The Internal Revenue Service can contest the appraisal after the gift, as it often does.  In Wandry, the value rose about 20% after the IRS appraisal. That brings up an important issue: If values rise after an IRS challenge, must the giver write a big check for tax on the amounts above the exemption?  According to the Wandry decision, no. The judge held the couple intended to make a gift equal to their exemptions, so the excess was never actually given by them. No tax was due. Prior to the Wandry decision, often the best outcome is for a family to designate a charity to receive the excess. No tax is due, but the family gives up some control.  The Wandry case is a boon not only for business owners but also wealthy families with "family limited partnerships" or entities holding publicly traded stocks. Even though the stocks' value is easy to determine, submerging them in a nontraded company provides valuable discounts when units are transferred to heirs. The IRS may appeal the decision, so taxpayers who rely on it run a risk.
Categories: Tax

$3.7 Billion in Valuation Discounts

by Dennis Stuchell 25. July 2011 09:09
“There were 102,608 gifts given in 2008 against which valuation discounts were taken,” reports IRS economist Melissa J. Belvedere in the recent IRS publication 2008 Gifts, “and the dollar value of these discounts totaled $3.7 billion.” Of the 234,714 returns filed for Gift Year 2008, the majority of the returns were nontaxable. A grand total of $40.2 billion was transferred to 927,554 recipients. Family trusts were the most commonly used vehicle to make indirect gifts. While the total nontaxable gifts dropped to the lowest point in the last three years, taxable gifts increased for the third year in a row. An interesting note is that men gave less cash as gifts compared to women, while men gave more stock as gifts then women. The majority of discounts exceeded 40% of the reported fair market value of the gifts. According to Belvedere “approximately 43.6% of discounted assets were stock, while real estate made up 21.1% of discounted assets.” Remember, the statistics are for 2008 gifts, and the IRS’s posture towards these discounts for gifts in 2009 and later might be different given the current U.S. deficit woes. Most gifts were given directly (69.1%, $27.8 billion) to children or grandchildren (48.9% and 24.7%, respectively), while gifts to other relatives or organizations totaled just 11.3%. Cash made up the largest share of total gifts at 46.3% ($14.2 billion) for nontaxable returns and 53.3% ($5.1 billion) on taxable returns.
Categories: Advisory