IRS Issues Non-Acquiescence in Wandry – Formula Valuation Clauses Are Valuable But Uncertain

On November 13, 2012, the IRS issued an “action on decision” that it will not acquiesce in the Tax Court’s decision in Wandry, TC Memo 2012-88 (appeal dismissed) regarding formula valuation clauses.  In Wandry, the Tax Court held that the taxpayers who gifted membership units in a family LLC could limit their gift to the dollar amount stated in the transfer document by using a formula valuation clause.  In permitting the use of a formula valuation clause, Wandry follows several other recent cases (see, eg, McCord, Christiansen, Petter).  In its Wandry non-acquiescence, the IRS stated that the Tax Court erred in determining that the property transferred for gift tax purposes was anything other than the fixed percentage membership interest transferred on date of gift to each donee.

Formula valuation clauses remain valuable as a tool to protect against the assessment of gift tax (and interest and penalties) when transferring hard to value assets.  However, practitioners should be aware that the IRS may not follow the Wandry decision in cases involving other taxpayers.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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