It's the Most Wonderful Time of the Year, for Defined Value Gifting...

December 21, 2020

If you are planning to put closely held business interests under the tree in 2020, don’t forget to pay close attention to the wrapping. On June 10, 2020, the Tax Court published Nelson v. Commissioner,[1] on the issue of defined value gifting of certain family business interests. In Nelson, the taxpayer claimed to have transferred limited partnership interests of a fixed dollar amount[2] to a family trust, but the taxpayer failed to state the gift’s tax value (“Gift Tax Value”)[3] was to be “as finally determined for federal gift tax purposes.” Rather, the taxpayer merely stated the value of the gift was to be determined by a qualified independent appraiser. Consequently, the IRS successfully challenged the valuations of the gifts, found significant tax deficiencies, and imposed penalties.

Although the Nelson decision was ultimately adverse for the taxpayer in that case, the Nelson decision should not be read as adverse to the practice of defined value gifting.[4] Rather, the Nelson case provides guidance to those intending to make defined value gifts. Taxpayers should pay special attention to the language employed by their gift instruments to make sure these instruments include specific language blessed by the IRS and the Tax Court. Taxpayers should also be aware of their remaining unified estate and gift credit, and how potential subsequent valuation disputes may impact their gift tax liabilities.

All in all, there are practical difficulties associated with valuing closely held business interests, and the IRS has a history of challenging these valuations.[5] Taxpayers giving closely held business interests should consult their tax advisers prior to putting closely held business interests under the tree to avoid turning a nice stocking stuffer into a lump of coal.

This Insight is intended only to provide an overview of the matters addressed herein and does not constitute legal advice.  If you have any questions regarding a specific issue, please seek appropriate legal counsel.

[1] Nelson v. Commissioner, T.C. Memo 2020-81 (June 10, 2020).

[2] In Nelson, the Taxpayer stated as follows: “[Mrs. Nelson] desires to make a gift and to assign to. . . [the Trust] her right, title, and interest in a limited partner interest having a fair market value of TWO MILLION NINETY-SIX THOUSAND AND NO/100THS DOLLARS ($2,096,000.00) as of December 31, 2008. . . as determined by a qualified appraiser within ninety (90) days of the effective date of this Assignment.” Nelson at *11.

[3] Practitioners frequently use “Gift Tax Value” as a defined term in gift instruments in reference to a gift of a business interest. The Gift Tax Value should state the value of the gift is fair market value as finally determined for federal gift tax purposes.

[4] Blattmachr et al., Defined Value Clauses: Ensuring No Adverse Surprises, Interactive Legal Blog ( posted on June 22, 2020.

[5] The IRS is known to collect more additional wealth transfer taxes on account of challenges to values reported by taxpayers than all legal issues combined. Blattmacher et al., at *1.

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