Steve Akers, Associate Fiduciary Counsel of the Bessemer Trust, provides the following summary of Petter v. Commissioner, T.C. Memo 2009-820 (Dec. 7, 2009), which rejects the IRS's objections to a formula disclaimer, which acts like a defined value clause, violates public policy :
In mid-November the Eighth Circuit Court of Appeals decision in Christiansen recognized that a formula disclaimer, which acted much like a defined value clause, did not violate public policy. A mere three weeks later comes Petter v. Commissioner, T.C. Memo 2009-820 (Dec. 7, 2009), another resounding defeat of the IRS's public policy argument against defined value clauses. The case involves the transfer of separate blocks of LLC units in gift and sale transactions. A portion of the transferred assets passed to grantor trusts for the donor's children equal to the donor's remaining gift exemption amount (for the gift transactions) and the amount of notes given by the trusts (in the sale transactions), using values as finally determined for federal gift tax purposes. The balance passes to charities. The result is that an agreement by the IRS with the taxpayer on the valuation of the LLC units (using a 35% discount) resulted in a shift of more units to the charities, but did not result in any additional gift taxes.
The court discusses four major reasons that the defined value clauses in this case do not violate public policy: (1) there is a general public policy encouraging charitable gifts; (2) there are other potential sources of enforcement of the gift and sale transactions other than gift tax audits; (3) the mootness and declaratory judgment concerns mentioned in Procter are not appropriate, and (4) the existence of other formula clauses authorized in regulations suggest that there is no general public policy against lifetime transfers by formula clauses.
The "one-two punch" of Christiansen and Petter, rejecting the IRS's vehement objections to their types of clauses, may represent the most important estate planning development in 2009.
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Posted by Marc Patterson, Managing Associate Editor, Wealth Strategies Journal.