Case Update: Gift-Giving in Specific Dollar Amounts

Albert and Joanne Wandry formed the Wandry Family Limited Partnership, and they wanted to make transfers to their children and grandchildren, so they consulted a tax adviser. Their adviser told them that they could use their annual gift tax exclusions of up to $11,000 per donee and their lifetime exclusion of up to $1 million per petitioner for additional gifts. On January 1, 2000, the Wandrys began a gift-giving program using Wandry LP partnership interests. Their tax attorney advised them to give gifts in specific dollar amounts, not as partnership units.

In April of 2001, the Wandrys and their children started a family business, and formed Norseman Capital, LLC. By 2002, they had transferred all of Wandry LP’s assets to Norseman and the Wandrys continued their gift-giving program through Norseman. Again, their tax attorney advised them to give all gifts as specific dollar amounts, and that all gifts should be given on December 1 or January 31 of the year that they gift.

The Tax adviser drew up a document designating the shares, and the Wandrys hired an independent appraiser to value Norseman’s assets as of January 1, 2004. On July 26, 2005, the appraiser concluded that a 1% Norseman membership interest was valued at $109,000. The Wandry’s tax adviser filed proper tax forms and tax returns for 2004, reporting total gifts of 1,099,000 on each gift tax return. The schedules supporting the gift tax returns reported net transfers from each petitioner of $261,000 and $11,000 to their children and grandchildren.

In 2006, the IRS determined that the values of the gifts exceeded the Wandrys’ Federal gift tax exclusions. They issued deficiency notices on February 4, 2009.

Respondent, the Commissioner of Internal Revenue, argues before the court, the following four points: (1) the gift descriptions on the gift tax returns are admissions that the Wandrys transferred fixed Norseman percentage interests to the donees; (2) Norseman’s capital accounts control the nature of the gifts and their capital accounts were adjusted to reflect the gift descriptions; (3) the gift documents transferred fixed Norseman percentage interests to the donees and the adjustment clause does not save the Wandrys from the tax; and (4) the adjustment clause if void for Federal Tax purposes.

The Court ruled in favor of the Wandrys, stating the following on each point respectively:

(1) At all times, the Wandrys believed, understood, and claimed that they were giving gifts equal to $261,000 and $11,000 to each of their children and grandchildren – they used specific dollar amounts to describe the gifts and their consistent intent and actions prove that the dollar amounts were intended.

(2) The facts and circumstances determine Norseman’s capital accounts, not the other way around and the capital accounts do not control the nature of the Wandrys’ gift to the donees. Even if the court did accept the respondent’s argument, the respondents gave no proof that the capital accounts were adjusted to reflect the gift descriptions.

(3) Estate of Petter pointed out a distinction between a “savings clause”, which a taxpayer may not use to avoid section 2501 tax,  and a “formula clause”, which a taxpayer may use in a document because it does not take property back. After comparing the language in the adjustment clause to the Court of Appeals language in Estate of Petter, the court found that the clauses at issue are valid formula clauses, because they correct the allocation of Norseman membership units among petitioners and donees as opposed to allowing for the Wandrys to take the property back.

(4) There is no well-established public policy argument against formula clauses. Congress has an overall policy of encouraging gifts to charitable organizations. Though there is no charitable organization involved in this case, there is not a “severe and immediate” policy concern.

See Wandry v. Cmmr. Of Internal Revenue, T.C. Memo. 2012-88 (Mar. 26, 2012).

Special thanks to Matthew Bogin, (Esq., Bogin Law) for bringing this memorandum to my attention.