Academic journal article Journal of Accountancy

IRS Won't Follow Wandry

Academic journal article Journal of Accountancy

IRS Won't Follow Wandry

Article excerpt

In Action on Decision 2012-004, the IRS stated it will not acquiesce to the Tax Court's decision in Wandry, T.C. Memo. 2012-88, in which the court accepted a taxpayer's use of a defined value formula clause.

In Wandry, decided in March 2012, the taxpayers, Joanne and Albert Wandry, executed assignments and memorandums of gifts to their four children and five grandchildren designed to not exceed their annual and remaining lifetime gift exclusion amounts of $1,099,000 for each taxpayer. Each gift document transferred an unstated number of units of the couple's member interests in their family limited liability company (LLC) having a fair market value (FMV) equal to $261,000 to each child and $11,000 to each grandchild. The documents further stated that although the number of units was fixed on the date of the gift in 2004, the number was based on the FMV of the gifts as determined after that date, based on "all relevant information." The donors stated their intent to base the value on an independent third-party appraisal by a qualified appraiser, but that, if the IRS or a court later made a final determination of a different value, the number of gifted units would be adjusted to maintain the dollar values stated in the documents. They obtained an appraisal that determined the value of a 1% member interest in the LLC as of the date of gift.

On their gift tax returns for 2004, the couple reported the dollar amounts of the gifts and, based on the appraisal, further described the gifts as interests of 2.39% and 0.101% in the LLC to each child and grandchild, respectively The LLC's financial records for 2004 showed capital account transfers from the donors to the donees that were greater than the dollar amounts in the gift documents.

The IRS redetermined the value of an LLC member interest unit and, applying the gift percentages, increased the values of the gifts. After negotiations, the parties agreed that the percentage interests given each child and grandchild would yield values of $315,800 and $13,346, respectively However, the taxpayers continued to argue in a petition to the Tax Court that they had not transferred fixed LLC percentage interests. The IRS contended that the gift tax returns, capital accounts, and the gift documents themselves all supported fixed percentages. It also argued the adjustment clause created a "condition subsequent" to completed gifts and thus was void as contrary to public policy, as courts have held in a line of cases from Procter, 142 E2d 824 (4th Cir. …

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