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Tax Court rejects specific dollar gift clause

August 11, 2020

Related PeopleDavid B. Shiner

Practice AreasTax & Employee Benefits

Taxpayers’ specific dollar gifts failed to avoid an IRS challenge to gift tax valuation. For years, the IRS and taxpayers have been litigating valuations of interests in family limited partnerships for the purposes of gift and estate tax. The taxpayers in Nelson v. Commissioner[1] sought to avoid the dispute by gifting an interest in a family limited partnership equal to a specific dollar amount, rather than by gifting a fixed percentage interest in the family limited partnership.

Specifically, the taxpayers engaged in two transactions: (1) a December 31, 2008, gift of a family limited partnership interest having a value of $2,096,000; and (2) a January 2, 2009, sale of an interest in the family limited partnership equal to $20 million in exchange for a promissory note. The transactions were documented using language that stated the taxpayers were assigning an interest in the limited partnership having a fair market value of a specific dollar amount as determined by a qualified appraiser. The taxpayers’ qualified appraiser determined a gift of $2,096,000 was equal to a 6.14% limited partnership interest and that a $20 million sale was equal to a 58.65% limited partnership interest.

Taxpayers assumed that even if a court ruled that the limited partnership interests were undervalued, it would not result in a taxable gift because taxpayers gifted a specific dollar amount and not a fixed percentage interest. The Tax Court, however, determined that taxpayers in fact gifted a 6.14% limited partnership interest and sold a 58.65% limited partnership interest and that these transfers were greatly undervalued resulting in gift tax. The court reasoned that the transfer language stated that the fair market value was dependent on the qualified appraiser’s determination and was, therefore, not a true specific dollar gift.

In contrast, in other prior cases[2] the Tax Court respected specific dollar gift clauses. In those cases, the transfer documents used language that defined fair market value as finally determined for federal gift and estate tax not as dependent on a qualified appraiser.

The IRS frequently challenges the value of interests in limited partnerships for purposes of gift and estate tax and the IRS has a clear aversion to formula gift clauses. Contact an attorney at Chuhak & Tecson, P.C. for proper planning on limited partnership transfers and formula gift clauses or for any other tax issue.

Client alert authored by: David B. Shiner (312 855 4319), Principal

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

[1] T.C. Memo 2020-81 (June 10, 2020)
[2] Such as Estate of Petter v. Commissioner, T.C. Memo 2009-280 and in Wandry v. Commissioner, T.C. Memo 2012-88