Wandry v. CIR T.C. Memo.2012-88 March 36, 2012
Wandry v. CIRT.C. Memo.2012-88March 26, 2012Gift Tax Case
Involving Gifts of LLC units under IRC. 2503 and 2505
1Wasatch Business Valuation & Litigation Support Services,
LLC www.wasatchbusval.com
1Wandry Tax Court CaseThese slides are intended to provide
educational content, not legal advise. This is part of a
presentation made by Wasatch Business Valuation & Litigation
Support Services, LLC for NACVAs Around the Valuation World in 60
Minutes, part of the organizations ADAM effort.For more information
on ADAM and NACVA, please visit http://www.nacva.comWasatch
Business Valuation & Litigation Support Services, LLC provides
qualified estate and gift tax reports. Contact Roberto H Castro,
JD, MST, MBA, AVA, CPVA at [email protected] for
further information.Wasatch Business Valuation & Litigation
Support Services, LLC www.wasatchbusval.com2
2Wandry CaseFactsIn 1998 Husband and wife, from Colorado, funded
a FLP with cash and property.They met with their tax attorney to
discuss gift tax consequences.At the time the annual exclusion for
each donor was $11,000 per doneesec. 2503and $1 million in excess
of the annual exclusion for each donor under sec. 2505(a) (federal
gift tax exclusion)3Wasatch Business Valuation & Litigation
Support Services, LLC www.wasatchbusval.com
3Wandry CaseFacts (continued)On January 1, 2000, H & W began
gifting FLP interests based on a specific dollar amount, rather
than a specific partnership interest. A valuation would be prepared
and it would provide a basis to determine what % was gifted; that
would happen at a future date. Their children and grandchildren
were donees of these interests.4Wasatch Business Valuation &
Litigation Support Services, LLC www.wasatchbusval.com
4Wandry CaseFacts (continued)In April of 2001 the Wandrys (H
& W) and children started a business. They formed an LLC in
August 2001. By 2002 the FLP interests were transferred to this
LLC.The gift giving program continued.On January 1, 2004, the
Wandrys (H & W) transferred an interest worth $11,000 to each
grandchild and $261,000 to each child (4).5Wasatch Business
Valuation & Litigation Support Services, LLC
www.wasatchbusval.com
5Wandry CaseFacts (continued)The gift document provided that a
valuation would be prepared and that if the value was not contested
that would be used to determine the % gifted to the respective
donee, otherwise, if contested, there would be an adjustment based
on the FMV.The valuation for these gifts was prepared in June 2005.
The report concluded that a 1% interest in the LLC was worth
$109,000. The capital account for the LLC was also adjusted (it
seems, for the first time then).6Wasatch Business Valuation &
Litigation Support Services, LLC www.wasatchbusval.com
6Wandry CaseFacts (continued)The706 valued the combined 2004
gifts at $1,099,000. Based on the gifts made, the children received
approximately 2.39% (each) and grandchildren each received
.101%.Deficiency notices were issued in February 2009. The Service
valued the 2.39% at $366,000 and the .101% at $15,400.Subsequently,
the parties reached an agreement that the 2.39% was worth $315,800
and the .101% was worth $13,346. 7Wasatch Business Valuation &
Litigation Support Services, LLC www.wasatchbusval.com
7Wandry Issues and ArgumentsServices ArgumentWandrys ArgumentIRC
2501 imposes a tax on the transfer of property by gift. The IRS
argues that the Wandrys owe tax on these gifts because interest
transferred exceeded the annual federal gift tax exclusion.
Wrong! We did not transfer a fixed % of the LLC. We are bound by
the gift document, which provided the gifts are intended to equal
the federal exclusion.The Service also argues that the adjustment
clause does not save petitioners from the 2501 tax because it is a
condition subsequent and void under public policy grounds.
No public policy issues are at stake to warrant voiding the
intended gifts.8Wasatch Business Valuation & Litigation Support
Services, LLC www.wasatchbusval.com
8Wandry Issues (continued)Wasatch Business Valuation &
Litigation Support Services, LLC www.wasatchbusval.com9Services
PositionWandrys PositionCourts OpinionOr OutcomeRe: Tax ReturnThe
signed tax return is proof that a fixed % was gifted.Not so, the $
amount is what controls.Taxpayer wins.Re: Capital Account
EntriesAdditional proof that a fixed % was giftedNot so, the
entries are not admissions, rather they are an estimate pending the
outcome of the matter.State law controls the nature of the
taxpayers legal interest. Book entries alone will not suffice to
prove the existence of facts recorded when other more persuasive
evidence points to the contrary. Taxpayer wins.Public policy
argumentAllowing an adjustment is a reversal of a completed
gift.Not so.Reliance by Service in Procter and other cases is
misguided, this case is distinguishable.Public Policy #2
argumentProcter is on point and formula clauses violate public
policy.The gift document should control; there is no attempt to
rescind a gift made.No established policy against formula clauses.
Taxpayer wins.
9ConclusionThis case is available for download.The case
highlights for attorneys an opportunity available in the gift and
estate tax areas. For families, this is another viable way to pass
on assets efficiently.Note that the taxpayers experts opinion in
the valuation report was not an admission. Thank you!10Wasatch
Business Valuation & Litigation Support Services, LLC
www.wasatchbusval.com
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