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.