Summary on the True and Wandry Cases & Price Adjustment Clauses
Steve R. Akers recently published a Summary entitled, True v. Commissioner, Tax Court Docket Nos. 21896-16 and 21897-16 (petitions filed October 11, 2016): IRS Attack on “Wandry” and Price Adjustment Clauses, Bessemer Trust (Nov. 2016). Provided below is a synopsis of the Summary:
Mr. True made gifts of interests in a family business to one of his daughters and made sales of the business interests to all of his children and a trust. The transfers were made based on an appraisal from a recognized reputable national appraisal firm. The transfers to his children were subject to a “transfer agreement” with a defined value/price adjustment provision. The spouses made the split gift election, so any gift was made one-half by each spouse; hence separate Tax Court petitions for Mr. and Mrs. True.
A gift of units in the family business was made to one daughter (Barbara True), and the transfer agreement provided that if the transfer of those interests is determined for federal gift tax purposes to be worth more than the anticipated $34,044,838 amount of the gift, “(i) the ownership interest gifted would be adjusted so that the value of the gift remained at $34,044,838, and (ii) Barbara True would be treated as having purchased the ownership interests that were removed from her gift.”
Sales of business interests were made to that daughter, the other two children, and a trust. According to the petition, the transfer agreement for the sales to his children “provided that if it is determined for federal gift tax purposes that the interests sold were undervalued by FMV Opinions, the purchase price would be increased to reflect the finally-determined fair market values.”
The IRS has alleged a gift tax deficiency of $16,591,418 by each of Mr. and Mrs. True. The taxpayers contend that the valuations were correct, but if the transferred interests are determined to have a higher value, no gift should result because of the price adjustment provisions in the transfer agreement. Karen S. True v. Commissioner, Tax Court Docket No. 21896-16, and H.A. True III v. Commissioner, Tax Court Docket No. 21897-16 (petitions filed October 11, 2016).
The IRS filed a nonacquiescence in the Wandry case (a case approving a transfer of that percentage interest in an LLC equal to a specified dollar value), and has indicated informally that it is still looking for the “right case” to mount another attack on Wandry clauses. Apparently, this is that case.
Mr. Akers goes on to describe some of the planning observations from this case, which include the general description of defined value clauses, formula allocation clauses, the formula transfer clause, the distinction of True clause, sale transactions with defined value transfers, the good faith independent appraisal, the current status of Wandry clauses, and “the right case.”