Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Thursday, April 19, 2012

Tax Courts Upholds the Use of a Formula Value Clause in Wandry

IRSMr. and Mrs. Wandy formed a LLC titled Norseman Capital. Three years after the formation of Norseman Capital, the Wandrys gifted portions of the LLC to their children and grandchildren subject to a few conditions. On the advice of their attorney, the Wandrys placed a condition within the documents used to make the gifts. The condition was that while the number of units gifted would be set at the time of the gift, the actual value of the gift would not be determined until a later time and set at the fair market value of the gift. The condition further stated that once the actual amount was determined, the amount of the gift would be adjusted to reflect the original amount that was gifted in the documents. A dispute later arose about whether the court should use the formula value clause to place a value on the transfers, or whether the court should place the value of the actual amount gifted before the adjustment was made.

The Tax Court in Wandry v. Comm'rT.C.M (RIA) 2012-88 (2012) upheld the use of formula value clauses in estate planning. The court determined that the formula value clause was valid because courts have allowed the use of gifting document allocation to determine the value of the property before. The court cited Knight v. Comm'r, 115 T.C. 506 (2000) to support this assertion. Furthermore, the court also stated that because the petitioners only sought to transfer portions of Norseman Capital, LLC that have an unascertainable value, it was a valid formula value clause. The court also determined that the formula value was not against public policy even though it lacked a charitable component.

See Espen Robak, Ori Bash, David Gaynor, Tax Court Draws Estate Planner's Roadmap in Wandry, Wealth Strategies Journal, Apr. 2, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.


Estate Tax, Gift Tax, Income Tax, New Cases | Permalink

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