Steve Akers, Associate Fiduciary Counsel, Bessemer Trust, provides the following summary of Hendrix v. Commissioner, T.C. Memo. 2011-133 (June 15, 2011):
Click here for a summary of the case and a discussion of the implications of the case in using defined value transfers.
Posted by Brian Spring, Associate Editor, Wealth Strategies Journal.
In
a long awaited opinion (issued about 2 ½ years after the trial), the
Tax Court has approved transfers with "defined value" formula provisions
to limit gift tax exposure from the transfers. The court concluded that
a transfer of closely held stock in a gift/sale transaction to family
trusts and gift to a Foundation under coordinated formula provisions was
at arm's length and was not contrary to public policy. This is now the
fourth case that has upheld defined value transfer provisions (the other
cases being McCord, Christiansen, and Petter).
- The case involves a "McCord-type" clause, in which the stock was allocated between the family trusts and the Foundation on the basis of values under a willing buyer/willing seller standard agreed upon by the trusts and the Foundation (rather than being based on values as finally determined for federal gift tax purposes).
- The case is appealable to the Fifth Circuit Court of Appeals, and the case relied on McCord v. Commissioner, 461 F.3d 614 (5th Cir. 2006). The Tax Court addressed the IRS's arm's length and public policy arguments, which were not addressed in McCord.
- As to the arm's length issue, the Tax Court stated that having negotiations and adverse parties is not essential to the existence of an arm's length transaction. Furthermore, even the family trusts had adverse interests because they assumed "economic and business risks" (related to their purchase of some of the stock). The Tax Court gave various reasons for concluding that there was no collusion between the donors and the Foundation.
- The transaction was not contrary to public policy because these types of formula clauses do not immediately and severely frustrate any national or state policy. The Tax Court distinguished the Procter case because there was no condition subsequent and because the transfers further the public policy of encouraging gifts to charity.
Click here for a summary of the case and a discussion of the implications of the case in using defined value transfers.
Posted by Brian Spring, Associate Editor, Wealth Strategies Journal.
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