Wandry v. Comm'r
2012 T.C. Memo. 88, 2012 Tax Ct. Memo LEXIS 89, 103 T.C.M. 1472 (2012)
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Rule of Law:
A gift of a specific dollar amount of interests in a limited liability company (LLC), where the number of units transferred is determined by a formula based on a future, final valuation, is a valid formula clause. Such a clause is not a prohibited savings clause and is not void as against public policy, as it defines the gift at the time of transfer rather than attempting to revoke a completed gift upon a condition subsequent.
Facts:
- Albert and Joanne Wandry created a family company, Norseman Capital, LLC (Norseman), and sought advice from a tax attorney for a gift-giving plan to their children and grandchildren.
- The attorney advised them to gift specific dollar amounts of Norseman membership units, rather than a fixed number of units, because the precise value of the units would be unknown on the date of the gift.
- On January 1, 2004, the Wandrys executed gift documents stating they were gifting 'a sufficient number of my Units... so that the fair market value of such Units for federal gift tax purposes shall be' specified dollar amounts to each family member.
- The gift documents included a clause providing that if a final determination of value by the IRS or a court differed from the initial valuation, '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.'
- An independent appraiser later valued a 1% interest in Norseman at $109,000 as of the gift date.
- Based on this appraisal, the Wandrys' CPA described the gifts on their 2004 gift tax returns as specific percentages (e.g., 2.39% for children) that corresponded to the intended dollar amounts, while also reporting the total gift value in dollars.
Procedural Posture:
- The Internal Revenue Service (IRS) examined the 2004 gift tax returns filed by Joanne and Albert Wandry.
- The IRS determined that the fair market value of the gifted Norseman membership units was higher than the value reported by the Wandrys' appraiser.
- Treating the gifts as transfers of fixed percentage interests rather than fixed dollar amounts, the IRS calculated that the value of the gifts exceeded the Wandrys' federal gift tax exclusions.
- On February 4, 2009, the IRS issued notices of deficiency to the Wandrys, asserting they owed additional gift tax.
- The Wandrys filed petitions for redetermination of the deficiencies in the United States Tax Court.
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Issue:
Does a gift transfer document that defines a gift as a specific dollar amount of membership units in a limited liability company, with a clause adjusting the number of units transferred to conform to that dollar amount upon a final valuation by the IRS or a court, constitute an invalid savings clause that is void as against public policy?
Opinions:
Majority - Haines, J.
No. The clause in the gift document is a valid formula clause that defines the gift as a fixed dollar amount, and it is not an invalid savings clause that is void as against public policy. The court distinguished this from a 'savings clause' as seen in Commissioner v. Procter, which attempts to retroactively undo a completed gift if it is found to be taxable. Here, the Wandrys' intent was to gift a fixed dollar value, making the value the constant and the number of LLC units the variable. The adjustment clause does not create a condition subsequent to 'take property back'; instead, it is part of the definition of the gift itself, ensuring the number of units transferred conforms to the originally intended value. The public policy concerns from Procter are not implicated because the court's decision has real tax consequences by reallocating the LLC units, and it does not render the case moot or discourage the IRS from enforcing tax laws.
Analysis:
The Wandry decision provides significant validation for the use of 'defined value' or 'formula' clauses in estate and gift tax planning, particularly for transferring hard-to-value assets like interests in closely-held businesses. By distinguishing this type of clause from the prohibited 'savings clauses' of Procter, the court provides a clearer framework for structuring gifts to maximize use of annual and lifetime exclusions without the risk of substantial tax liability from a subsequent valuation challenge by the IRS. This precedent encourages precise drafting that defines a gift by its value rather than its quantity, thereby shifting the focus of potential disputes from the existence of a tax deficiency to the correct allocation of assets based on an accurate valuation.
