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IRS loses another 'defined value' gifting case

August 05, 2011

Just because the IRS hates something doesn't mean it can't work. The IRS hates "defined value" gifts. In these deals, a donor makes a gift -- either a charitable gift or a gift as part of an estate plan -- of property, typically shares of closely-held stock. As part of the gift, the donor states an agreed value for the gift; the donor also agrees to add enough shares to the donation to get to that value if the IRS reduces the share value on examination.

The IRS hates these because if it wins a valuation argument on examination, there is no deficiency; the charity is still entitled to the same value of donation, just split over more shares.

The Eighth Circuit, which covers Iowa, has upheld these clauses. Now the Ninth Circuit, which covers California and other Western states, has upheld such a clause. From the opinion:

Absent the audit, the foundations may never have received all the units they were entitled to, but that does not mean that part of the Taxpayer's transfer was dependent upon an IRS audit. Rather, the audit merely ensured the foundations would receive those units they were always entitled to receive.

Victory for taxpayers. These formula clauses are likely to become a standard planning tool now that they have been approved by the Tax Court and two appellate courts.

Cite: Estate of Anne Y. Petter, CA-9, No. 10-71854 (8/4/2011)

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