Formula Clauses: Adjusting Property Transfers to Eliminate Tax 

    ESTATES, TRUSTS & GIFTS 
    by John H. Skarbnik, J.D., LL.M., CPA and Ron West, J.D., LL.M., CPA, CFP 
    Published February 01, 2013

    EXECUTIVE
    SUMMARY

    • A properly drafted and followed formula clause in a will or gift transfer document can limit liability for estate or gift taxes. If the IRS or a court later redetermines the value of the transfer, the formula clause acts to adjust the amount of assets transferred to correspond to a specified dollar value.
    • Courts have historically agreed with the IRS that “savings clauses” that allow donors to “take back” property after an adjustment are void on public policy grounds. However, several courts have approved formula clauses where “excess” amounts after an adjustment pass to one or more charitable beneficiaries.
    • The Tax Court recently approved a transfer governed by a formula clause that did not involve a charitable beneficiary. The IRS withdrew its appeal of the Tax Court’s decision, but has announced that it will not follow the Tax Court’s holding in the case.

    When drafting dispository documents—whether they involve lifetime gifts or testamentary bequests—attorneys often use formula clauses to designate the value of property passing by gift or bequest. Often, the formula refers to the donor’s or decedent’s available federal unified credit. For example, an individual testator might make a bequest to a designated beneficiary of the maximum amount of property that can pass free of estate tax. Similarly, a donor might gift a number of shares in a closely held business whose total value will not result in tax after the application of the donor’s remaining unified credit. Formula clauses adjust the amount of property transferred to maintain a specified value.

    In 2011, the maximum amount of property that could pass free of gift and estate tax to a beneficiary other than the transferor’s spouse was $5 million.1 In 2012, as a result of an inflation adjustment, the estate and gift tax unified credit sheltered up to $5.12 million of property from federal tax.2 For lifetime transfers, the transferor may also shelter from gift tax the amount of the annual gift tax exclusion, in addition to the remaining unused gift tax unified credit amount.3 Generally, no marital deduction is allowed for gifts and bequests to a non–U.S. citizen spouse.4 However, if property passes into a qualified domestic trust for the benefit of the surviving non–U.S. citizen spouse, it may qualify for the marital deduction.5 Also, the annual tax gift exclusion is increased to $100,000, adjusted for inflation ($143,000 for 2013), for gratuitous transfers to a non–U.S. citizen spouse.6

    For estates of decedents dying and gifts made after Dec. 31, 2012, the American Taxpayer Relief Act of 20127 permanently extended the $5 million exclusion as adjusted for inflation, but increased the top tax rate from 35% to 40%. The act also extended other features of the estate and gift tax regime under the Economic Growth and Tax Relief Reconciliation Act of 2001,8 as amended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.9

    To ensure that revaluations of gifts or estate assets by the IRS or a court will not result in additional taxes, taxpayers may want to use a formula adjustment clause that explicitly adjusts the quantity of the property transferred in the event the IRS challenges the taxpayer’s valuation and there is a final determination for tax purposes of the value of the property. By using a formula adjustment clause, testators can specify that their estate should pass in a manner that will not result in any federal estate tax.

    Recently, the Tax Court in Wandry10 upheld a formula adjustment clause that provided for fixed dollar amounts of interests in a limited liability company (LLC) to pass to noncharitable beneficiaries, with a clause stating that any redetermination of the interests’ value would adjust the number of membership units passing to each beneficiary to conform to the specified dollar amounts. In an audit, the IRS increased the value of the membership interests and on that basis recalculated the value of the gifts. The court held that as a result of the adjustment clause, a reduced percentage of LLC interests passed to the noncharitable beneficiaries, and a greater percentage of membership interest remained with the donors. The IRS withdrew its appeal of the case and later announced that it would not follow the Tax Court’s holding.11

    Wandry breaks new ground as the first case to uphold a formula clause where a charity was not involved as a potential recipient. This suggests new and expanded planning opportunities for employing formula adjustment clauses in situations that had not been previously sanctioned judicially. This article explores the Wandry case and its implications, along with some of the cases arising before it.

    The use of a formula allocation clause may at first appear simple. If a testator provides that an amount equal to the maximum amount that can pass free of federal tax will pass to designated individuals or in trust, the dollar amount of the bequest can be relatively easy to determine, especially if the transfer is made in cash or marketable securities. Planning is more complex for assets that are difficult to value, such as interests in closely held businesses, real estate, or any other nonmarketable or hard-to-value assets. Even where the taxpayer obtains qualified appraisals of the interests, the IRS may contest the value.

    To avoid the adverse tax consequences of a revaluation by the IRS or a court, a will, trust, memorandum and assignment of gift, or other transfer document evidencing the inter vivos or testamentary transfer may contain a formula clause. For example, assume that a donor plans on gifting stock in his wholly owned C corporation to his daughter. The donor could execute an assignment that provides:

    I hereby transfer to my daughter such number of shares of ABC Corp. stock that have a value equal to my available remaining applicable exclusion amount for the purpose of determining my unified credit for gift tax, as such value is finally determined for federal gift tax purposes. If, as a result of an audit, the final determination results in an increase in the value of such shares, the number of gifted shares shall be adjusted accordingly so that the value of the total shares gifted does not exceed my available applicable exclusion amount for the purpose of determining my unified credit for gift tax purposes.

    Although the IRS strenuously argues that such clauses are void as against public policy and should be disregarded, the Tax Court has recognized their validity in some circumstances. Therefore, practitioners need to carefully draft such clauses to achieve the desired result.

    The Facts in Wandry

    In Wandry, a married couple, Joanne and Albert Wandry, each executed a separate assignment and memorandum of gifts of interests in their family business, Norseman Capital LLC, to their four children and five grandchildren. Each transfer document defined the gifts as a sufficient number of Norseman membership units so that the units’ fair market value (FMV) for federal gift tax purposes would be equal to $261,000 for each of the Wandrys’ children and $11,000 for each of their grandchildren, for a total of $1,099,000 given by each donor. Each document then stated:

    Although the number of Units gifted is fixed on the date of the gift, that number is based on the fair market value of the gifted Units, which cannot be known on the date of the gift but must be determined after such date based on all relevant information as of that date. Furthermore, the value determined is subject to challenge by the [IRS]. I intend to have a good-faith determination of such value made by an independent third-party professional experienced in such matters and appropriately qualified to make such a determination. Nevertheless, if, after the number of gifted Units is determined based on such valuation, the IRS challenges such valuation and a final determination of a different value is made by the IRS or a court of law, the number of gifted Units shall be adjusted accordingly so that the value of the number of Units gifted to each person equals the amount set forth above, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or a court of law. [Emphasis added.]12

    The Tax Court noted that the reported value of the taxpayers’ gifts would fully use the taxpayers’ available federal gift tax exclusions. The taxpayers understood, believed, and claimed that the gifts were of a dollar value, not of a specific fixed number of membership units. At the time the assignments were executed, the taxpayers’ attorney advised them that if a subsequent determination revalued the membership units, no membership units would be returned to them; rather, accounting entries would adjust the capital accounts to reflect the actual number of membership units transferred.

    Each of the taxpayers’ 2004 gift tax returns reported total gifts of $1,099,000. The return schedules described the transfers as 2.39% and 0.101% Norseman membership interests to each child or grandchild, respectively. The taxpayers determined the value of a 1% Norseman membership interest by obtaining an appraisal and applied it to the specified dollar amounts to obtain the membership interest gift percentages.

    In 2006, the IRS examined the taxpayers’ gift tax returns and determined that the correct value of the gifts exceeded that reported on the returns. After negotiations, the parties agreed to an increase of about 20% of the reported value.

    The government made two key arguments to support its proposed assessment of additional gift tax. First, the gifts were of a fixed number of membership units, and the number of membership units was not subject to adjustment. Second, the formula clause created a condition subsequent to the completed gifts and, as such, was void for federal tax purposes as contrary to public policy.

    The government had successfully made similar arguments in prior cases including Procter,13 which the Tax Court in Wandry observed was “ ‘the cornerstone of a body of law’ regarding impermissible transfer clauses.”14 However, the government has had some other significant recent losses in Succession of McCord,15 Estate of Christiansen,16 Estate of Petter,17 and Hendrix.18 These cases upheld formula clauses, finding that the value of the transfer was fixed as of the date of the transfer and that, as a result of an audit, the quantity of property that passed was allowably adjusted. The interest passing to certain designated beneficiaries decreased, and the interest passing to other beneficiaries increased. In these cases, and prior to Wandry, a charity would usually be designated to receive any “excess” value based on a final determination for federal estate or gift tax purposes. This approach eliminated the possibility that additional taxes would be imposed because the increase in value would be offset by a charitable deduction. However, with such an approach, the intended recipient might not benefit from the full value of the transfer.

    Cases Prior to Wandry

    Conditions Subsequent and Savings Clauses

    In Procter, the settlor’s trust document contained an adjustment clause providing that if, as a result of a tax audit, the settlor was subject to gift tax, then to the extent of the value of gifted property subject to gift tax, the property would remain the settlor’s.

    The Fourth Circuit held that this provision created “a condition subsequent” and was “void and contrary to public policy.” The court stated that the clause would

    discourage the collection of the tax by the public officials charged with its collection, since the only effect of an attempt to enforce the tax would be to defeat the gift. In the second place, the effect of the condition would be to obstruct the administration of justice by requiring the courts to pass upon a moot case. If the conditions were valid and the gift were held subject to tax, the only effect of the holding would be to defeat the gift so that it would not be subject to tax. . . . In the third place the condition is to the effect that the final judgment of a court is to be held for naught because of the provision of an indenture necessarily before the court when the judgment is rendered.19

    Following the decision in Procter, the Tax Court upheld IRS disallowances of other attempts to reverse completed transfers in excess of the available gift tax exclusions. These decisions involved the use of “savings clauses.” Under a savings clause, if the value of a gift as finally determined is greater than the value originally claimed, the donee is required to issue a promissory note to the donor to reduce the value of the gift to the amount originally claimed.20

    In 1986, the IRS issued a revenue ruling21 addressing impermissible formula clauses in the nature of savings clauses. In the fact pattern of the revenue ruling, A transferred a one-half undivided interest in real property to B. Under the deed of transfer, if the one-half interest were determined by the IRS to have a value for federal gift tax purposes in excess of $10,000, B’s fractional interest would be reduced by effectively reconveying a fractional share back to A so that the value of the gift equaled $10,000. Under an alternative scenario, there would not be any required reconveyance. B would instead transfer consideration to A in the amount of the “excess” gift. Citing Procter, the revenue ruling held that neither clause would be respected for gift tax purposes. The revenue ruling held that the purpose of the adjustment clauses was “not to preserve or implement the original, bona fide intent of the parties, as in the case of a clause requiring a purchase price adjustment based upon an appraisal by an independent third party . . . [but] to recharacterize the nature of the transaction in the event of a future adjustment to A’s gift tax return by the Service.”22

    Confirmation Agreements

    In McCord,23 the taxpayers gifted limited partnership interests to their sons, a generation-skipping trust for the benefit of their grandchildren, and to two charitable donees, using a sequentially structured defined value clause. Two months after the gift, the donees entered into a confirmation agreement that translated the dollar value of the gift received by each donee (based on an appraisal of the partnership interests as of the date of the gift) into percentages of interests in the limited partnership. On audit, the IRS determined that the taxpayers undervalued their taxable gifts and assessed additional gift tax. The taxpayers challenged the IRS’s determination in Tax Court. The Tax Court applied its own methodology, which used the limited partnership percentages in the confirmation agreement, to redetermine the gift values and sustained a deficiency in gift tax.

    The Fifth Circuit, in a rather blistering opinion, reversed the decision of the Tax Court, stating that the gifts were completed on the date of assignment. The Fifth Circuit stated that by relying on the later confirmation agreement, the Tax Court had “violated the firmly-established maxim that a gift is valued as of the date that it is complete.”

    Disclaimers

    In Estate of Christiansen,24 the Tax Court sustained a formula adjustment clause when it held that a daughter’s partial disclaimer of her rights to the assets in her mother’s estate was effective in limiting the value of the property passing to her to that amount. The daughter disclaimed the portion of the estate whose value, as “finally determined for federal estate tax purposes,” exceeded $6,350,000. The mother’s will provided that property disclaimed by the daughter would pass to a designated charitable lead trust and a charitable foundation created by the decedent during her life.

    The federal estate tax return reported the estate’s gross value as slightly more than $6,510,000. As a result of the daughter’s disclaimer, approximately $160,000 passed to the charities. The estate deducted as charitable contributions the entire amount passing outright to the foundation and the foundation’s annuity interest in the amount passing to the trust.

    The IRS asserted that the estate had substantially undervalued the decedent’s closely held business. Prior to the Tax Court’s decision, the estate and the IRS agreed that the total value of the estate was approximately $9,580,000 and, as a result of the daughter’s disclaimer, approximately $3,230,000 would pass to the charities. However, the IRS argued that the estate should not be allowed a corresponding increase in the amount claimed as a charitable contribution for the property passing to the charitable foundation, for two reasons.25 First, the increase in value was contingent upon a condition subsequent, i.e., an IRS audit. Second, the clause readjusting the value of the interest transferred should be voided as contrary to public policy.

    The court rejected the argument that the disclaimer was contingent upon a condition subsequent. Instead, it found that the gift was completed at the time of the transfer:

    That the estate and the IRS bickered about the value of the property being transferred doesn’t mean the transfer itself was contingent. . . . Resolution of a dispute about the fair market value of assets on the date Christiansen died depends only on a settlement or final adjudication of a dispute about the past, not the happening of some event in the future. Our Court is routinely called upon to decide the fair market value of property donated to charity—for gift, income, or estate tax purposes. And the result can be an increase, a decrease, or no change in the IRS’s initial determination.26

    The Tax Court distinguished this case from Procter, in which the property would actually revert back to the grantor if it were found to be subject to gift tax. In this case, “If the fair market value of the estate assets is increased for tax purposes, then property must actually be reallocated among the three beneficiaries. That would not make us opine on a moot issue, and wouldn’t in any way upset the finality of our decision in this case.”27 The Tax Court not only dismissed the IRS’s public policy argument but concluded that public policy weighed in favor of giving gifts to charities.

    Reallocation Clauses

    In Estate of Petter,28 the Tax Court, affirmed by the Ninth Circuit, sustained a formula adjustment clause that reallocated LLC units between charitable and noncharitable donees when the value of the LLC units was later increased on audit. In 1982, a taxpayer inherited from an uncle a large amount of United Parcel Service of America Inc. (UPS) stock, which was worth millions of dollars. The taxpayer transferred a large amount of the UPS stock to an LLC and then gifted membership units in the LLC to two defective grantor trusts. The amount gifted to each trust was “one-half the minimum dollar amount that can pass free of federal gift tax by reason of Transferor’s applicable exclusion amount allowed by Code Section 2010(c).” The transfer document also provided that if the value of the units the trusts initially received were “finally determined for federal gift tax purposes” to exceed the amount of the available unified credit, the trustees would transfer the excess units to the designated charity.29

    After the taxpayer filed a Tax Court petition in response to the IRS’s proposed deficiency, the taxpayer and the IRS settled upon the value of the units transferred. The issue before the Tax Court was whether it should honor the formula clause, which the court found was similar to the one in Christiansen. In upholding the validity of the clause and rejecting the IRS’s public policy argument, the Tax Court stated:

    As in Christiansen, we find that this gift is not as susceptible to abuse as the Commissioner would have us believe. Although, unlike Christiansen, there is no executor to act as a fiduciary, the terms of this gift made the PFLLC [Petter Family LLC] managers themselves fiduciaries for the foundations, meaning that they could effectively police the trusts for shady dealing such as purposely low-ball appraisals leading to misallocated gifts. . . . We do not fear that we are passing on a moot case; because of the potential sources of enforcement, we have little doubt that a judgment adjusting the value of each unit will actually trigger a reallocation of the number of units between the trusts and the foundation under the formula clause. So we are not issuing a merely declaratory judgment.30

    The Ninth Circuit, affirming the Tax Court, elaborated on the Tax Court’s reasoning:

    [The] particular number of LLC units was the same when the units were first appraised as when the IRS conducted its audit because the fair market value of an LLC unit at a particular time never changes. Thus, the IRS’s determination that the LLC units had a greater fair market value than what the Moss Adams [donor’s] appraisal said they had in no way grants the foundations rights to receive additional units; rather, it merely ensures that the foundations receive those units they were already entitled to receive. The number of LLC units the foundations were entitled to was capable of mathematical determination from the outset, once the fair market value was known.31


    Public Policy

    In Hendrix,32 the Tax Court rejected IRS arguments that the formula clauses were invalid as contrary to public policy. The taxpayers in Hendrix executed an agreement assigning approximately $10,520,000 to a generation-skipping trust, with the excess value passing to a charitable foundation. The IRS issued a notice of deficiency contesting the valuation of the gifts and the validity of the formula clauses. The Tax Court ruled that the gift tax returns’ valuations were correct and that the formula clauses were valid. Therefore, the donors were entitled to the charitable deductions they had claimed on their tax returns.

    The Tax Court, in rejecting the IRS’s argument that the formula clauses violated public policy, stated:

    Here, unlike there [Procter], the formula clauses impose no condition subsequent that would defeat the transfer. Moreover, as stated above, the formula clauses further the fundamental public policy of encouraging gifts to charity. Recently, in Estate of Christiansen v. Commissioner [citation omitted], we held that an essentially similar dollar-value formula disclaimer was not contrary to public policy. We know of no legitimate reason to distinguish the formula clauses from that disclaimer, and we decline to do so. We hold that the formula clauses are not void as contrary to public policy.33


    The Tax Court’s Decision in Wandry

    In Wandry, the Tax Court followed and expanded on the rationale of Petter and Christiansen when it upheld the validity of a formula clause even though none of the donees were charitable organizations. The Tax Court stated that triggering the adjustment clause would alter the interests of the donors and donee but would not change the value of the property transferred.

    The IRS in Wandry argued that the taxpayers had made taxable gifts. First, it said, the taxpayers made a completed gift of a fixed percentage of the LLC. Based upon the IRS’s valuation of the membership interests, the gifts exceeded the taxpayers’ federal gift tax exclusions. Second, even if the transfer was not of a fixed percentage, the Tax Court should not enforce the formula clause, which was similar to the one in Procter that the Fourth Circuit had held operated to reverse a completed transfer in excess of the gift taxable amount. Third, the adjustment clause was triggered as a result of an IRS audit and, as such, should be treated as void because it violated public policy.

    The Tax Court rejected the IRS’s argument that the description in the gift tax returns of a fixed percentage of the membership interests in the LLC should control. The Tax Court distinguished this case from its decision in Knight,34 which the IRS had cited in support of its position. The Tax Court in Knight disregarded the formula gift clause in defined dollar amounts of value of interests in a family limited partnership because of the taxpayers’ failure to respect it when they claimed a lesser value at trial than they had reported on the gift tax return. The Tax Court noted that unlike the taxpayers in Knight, the taxpayers in Wandry were consistent in arguing that their gifts were of the dollar value in the assignments.

    The IRS argued that this case was distinguishable from Petter because the clauses in Wandry acted to “take property back.” The Tax Court noted a difference between invalid savings clauses and valid formula clauses as used in Wandry. With a savings clause, the donor attempts to take back property if the property is later revalued. The Tax Court found that a judgment for the taxpayers would not undo the gift.

    It is inconsequential that the adjustment clause reallocates membership units among petitioners and the donees rather than a charitable organization because the reallocations do not alter the transfers. On January 1, 2004, each donee was entitled to a predefined Norseman percentage interest expressed through a formula. The gift documents do not allow for petitioners to “take property back.”35

    The Tax Court also rejected the IRS’s public policy arguments that:

    1. Any attempt to collect the tax would defeat the tax and, thus, discourage collection efforts;
    2. The court would be called upon to pass judgment on a moot case having no consequences; and
    3. The formula clause would render the court’s judgment a declaratory judgment.

    As to the first argument, the Tax Court observed that the IRS role is to enforce tax laws and not just to maximize tax receipts. As to the latter two, the Tax Court noted that a judgment would not undo the transfer but would instead reallocate the transfer among the parties. As such, the court’s decision would not be moot and would, in fact, have consequences.

    Importantly, the fact that there were no charitable recipients in Wandry did not disturb the court. While earlier cases stated that a congressional policy of encouraging gifts to charities was a factor in upholding formula clauses, it does not determine the analysis, and the absence of a charitable donee does not result in “severe and immediate” public policy concerns, the Tax Court stated in Wandry. The court explained that the competing interests of the donees would serve to ensure and police an accurate valuation over and beyond the possibility of an IRS audit.

    Advising Clients on Using Formula Clauses

    Based upon this line of cases, taxpayers should be able to use formula clauses to limit the value of nonmarketable or hard-to-value gifts and bequests and set determinable amounts. The formula clause sanctioned in Wandry is simple to implement when compared to the more complicated transfer clauses that courts approved in prior cases involving charitable donees. Taxpayers and their advisers must take caution in using formula clauses, however, because the IRS views them with disfavor.

    Since Wandry was published as a memorandum opinion, the case serves as persuasive authority but is not precedential and binding like a reported Tax Court case. Although the IRS withdrew its appeal in Wandry, it has announced that it will not follow the Tax Court’s holding in the case.36 Therefore, taxpayers can expect the IRS to continue contesting formula clauses such as the one employed in Wandry. Taxpayers who are charitably inclined and are more cautious may be advised to use the Petter-type formula clause in which a charitable donee receives any excess redetermined value.

    When drafting formula clauses, attorneys must make sure that the gift is deemed completed at the time of the transfer. With assets that are difficult to value, the transfer can still be deemed as completed when made, even if the quantity or amount of the property transferred must be adjusted as a result of an audit. Taxpayers whose value of gifts passing under a formula clause is challenged in a tax audit should avoid the potential trap highlighted in the Knight case. Taxpayers should not argue that the amount of the gift is actually less than the value declared on the gift or estate tax returns. Such an argument would serve to support an IRS position that the testator or the donor did in fact transfer a fixed percentage of the property value as redetermined.

    To bolster the validity of formula clauses, taxpayers and their advisers can take certain steps to avoid some of the sticking points that were brought out in Wandry. To the extent possible, taxpayers should report the transfer on the gift or estate tax returns and supplemental statements consistently with the formula clause. Taxpayers should explain on the tax returns that, based upon the formula clause, it may be necessary to adjust the quantity of property being transferred due to a redetermination of value by the IRS or a court. For transfers of partnership and LLC interests, the capital accounts or other underlying accounting records should be made consistent with the intended transfer. The transfer documents must not employ any language that could be construed as a savings clause such as the one in Procter that takes property back. All steps in the transfer of the property ought to be clear and consistent, evincing unambiguous intent to transfer a set value of property rather than a percentage interest or number of membership units.

    Formula clauses are an important estate planning tool. Practitioners can draft them so that the total value of the property transferred is a fixed amount as finally determined for transfer tax purposes. This type of clause will result in an adjustment of property transferred to limit the value of the property that passes to an intended recipient. Thus, taxpayers can eliminate or limit the amount of transfer taxes imposed upon a completed gift or bequest.

    Footnotes

    1 Sec. 2010(c)(3).

    2 Sec. 2010(c)(3)(B); Rev. Proc. 2011-52, §3.29, 2011-45 I.R.B. 701.

    3 Sec. 2503(b). In 2013, the annual exclusion is $14,000 (Rev. Proc. 2012-41, 2012-45 I.R.B. 539).

    4 Secs. 2523(i)(1) and 2056(d)(1).

    5 Secs. 2056(d)(2) and 2056A.

    6 Sec. 2523(i)(2); Rev. Proc. 2012-41.

    7 The American Taxpayer Relief Act of 2012, H.R. 8, passed in response to the “fiscal cliff,” extended a broad range of expired and expiring tax provisions.

    8 Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16.

    9 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312.

    10 Wandry, T.C. Memo. 2012-88.

    11 Wandry, No. 12-9007 (10th Cir.), dismissal order filed 10/16/12; nonacq. AOD 2012-04, 2012-46 I.R.B.

    12 Wandry, T.C. Memo. 2012-88 at *5.

    13 Procter, 142 F.2d 824 (4th Cir. 1944), rev’g PH TCM ¶43221 (1943).

    14 Wandry, T.C. Memo. 2012-88 at *16, quoting Estate of Petter, T.C. Memo. 2009-280.

    15 Succession of McCord, 461 F.3d 614 (5th Cir. 2006), rev’g 120 T.C. 358 (2003).

    16 Estate of Christiansen, 130 T.C. 1 (2008), aff’d, 586 F.3d 1061 (8th Cir. 2009).

    17 Estate of Petter, T.C. Memo. 2009-280, aff’d, 653 F.3d 1012 (9th Cir. 2011).

    18 Hendrix, T.C. Memo. 2011-133.

    19 Procter, 142 F.2d at 827.

    20 See Harwood, 82 T.C. 239 (1984); Ward, 87 T.C. 78 (1986); and IRS Field Service Advice 200122011 (6/4/01). For a decision where a similar clause was upheld, see In re King, 545 F.2d 700 (10th Cir. 1976). In it, the Tenth Circuit affirmed a district court’s decision that there was no taxable gift to four trusts created for the taxpayer’s children where the trusts purchased assets with promissory notes and a clause provided an adjustment in the purchase price for the assets sold to the trusts if the value of the assets was redetermined by the IRS.

    21 Rev. Rul. 86-41, 1986-1 C.B. 300.

    22 Id. See also IRS Technical Advice Memorandum 200245053 (11/8/02), which follows this revenue ruling.

    23 Succession of McCord, 461 F.3d 614 (5th Cir. 2006), rev’g 120 T.C. 358 (2003).

    24 Estate of Christiansen, 130 T.C. 1 (2008), aff’d, 586 F.3d 1061 (8th Cir. 2009).

    25 The IRS also asserted successfully that the amount passing to the charitable lead trust was not eligible for a charitable deduction. The daughter’s disclaimer was not qualified with respect to the property passing to the trust because the daughter retained an interest in the disclaimed property, the court held. A disclaimer is not qualified if a person other than a surviving spouse receives an interest in the disclaimed property (Sec. 2518(b)(4); Regs. Sec. 25.2518-2(e)(3)).

    26 Estate of Christiansen, 130 T.C. at 15–16.

    27 Id. at 17.

    28 Estate of Petter, T.C. Memo. 2009-280, aff’d, 653 F.3d 1012 (9th Cir. 2011).

    29 Estate of Petter, T.C. Memo. 2009-280 at *11 (footnote omitted).

    30 Id. at *35–*37.

    31 Estate of Petter, 653 F.3d 1012, slip op. at 10200–10201.

    32 Hendrix, T.C. Memo. 2011-133.

    33 Id. at *21–*22.

    34 Knight, 115 T.C. 506 (2000).

    35 Wandry, T.C. Memo. 2012-88 at *25.

    36 AOD 2012-04, 2012-46 I.R.B.

     

    EditorNotes

    John Skarbnik is a professor of taxation at Fairleigh Dickinson University in Madison, N.J., and is tax counsel to the law firm Walder, Hayden & Brogan, PA, in Roseland, N.J. Ron West is director of the M.S. in taxation program and an associate professor of taxation at Fairleigh Dickinson University. For more information about this article, contact Prof. Skarbnik at skarbnik@fdu.edu.

     




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