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Friday, March 14, 2014

Article on Gift Planning with Formula Clauses

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N. Todd Angkatavanich (Withers Bergman, LLP), Liam D. Crane (Stoel Rives, LLP), Stephen Putnoki-Higgins (Withers Bergman, LLP) recently published an article entitled, Gift Planning with Formula Clauses: From Procter’s Progeny to Wandry World (Part 2), 28 Prob. & Prop. 37 (March/April 2014).  Provided below is the introduction:

Historically, the IRS has generally viewed valuation clauses with hostility, taking the position that they violate public policy by disincentivizing IRS gift tax return audits.  This antagonistic view of valuation clauses has been supported, until recently, by the weight of judicial precedent.  But particular rulings from the past decade, both in the U.S. Tax Court and at the federal appellate level, have indicated a softening of this view and have provided some guidance for certain acceptable uses of valuation clauses.

This softening was recently illustrated in the Tax Court’s March 2012 decision in Wandry v. Commissioner, 103 T.C.M. (CCH) 1472 (2012), which upheld a formula gift of as many units of a closely held LLC as equaled a specified dollar amount.  Along with a number of cases from the past decade that were indicative of a growing acceptance of formula transfers in certain circumstances, Wandry, has given many estate planners reason to believe that valuation clauses are becoming a less controversial, and therefore safer, way to reduce gift tax exposure when planning with hard-to-value assets. 

The first part of this article, which appeared in the January/February issue of Probate & Property, provided an in-depth overview of valuation clause jurisprudence, from its genesis in the Fourth Circuit’s Procter decision of 1944 to several 21st century TAMs that still echo the public policy concerns first voiced in Procter.  The first part having tracked the path by which the IRS established its antagonistic view of valuation clauses, the second part will provide an analysis of the Wandry ruling and of how practitioners should view it against the backdrop of over 50 years of jurisprudence on this controversial topic.  But first this article will examine several rulings from the past decade that evidence a gradual change in the way valuation clauses are viewed, before finally turning its focus toward the aforementioned discussion on Wandry and its implications for the future use of valuation clauses. 

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