IRS Loses A Gift-Tax Battle

Wealthy taxpayers who wish to make large presents to family members recently got good news: A Federal government appeals courtroom affirmed a favorite technique to sidestep gift fees. The decision, Estate of Petter v. Commissioner, was released in August by the Ninth Circuit in the SAN FRANCISCO BAY AREA. It joins previous rulings on related issues by the Fifth and Eighth circuits.

All the instances originated in Tax Court, but appeals go directly to the Federal circuit court where the taxpayer lives. John Porter of Baker Botts in Houston, who argued all the situations. These and other victories have made him a rock star in the staid trust-and-estates bar. THE INNER Revenue Service dropped to comment on the case. The techniques affirmed by the Petter case are specially relevant now, says estate attorney Howard Zaritsky of Rapidan, Va. 5 million level, most are considering making large gifts.

But there is a hitch: valuations. They are always a concern with large presents, especially with real estate or a business. What if the IRS challenges an estimate and wants more gift taxes? Many taxpayers are loath to create a check, and some don’t possess ready cash. Petter offers a remedy. Anne Petter was a Washington condition teacher who passed away in 2008. In 1982 she inherited United Parcel Service stock from an uncle who was simply among the business’s first traders.

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22 million of stock. Estate planners advised Ms. Petter transfer all the UPS stock to a limited-liability company. In the eyes of the law, putting stock into an LLC decreases its value when models receive away or sold. That’s because nobody person in the LLC has a controlling fascination with it, and units can’t easily be traded.

This strategy also allowed Ms. Petter to retain some control. Being charitable, she provided models to an area nonprofit with a donor-advised fund also. Ms. Potter stated that placing the stock in the LLC entitled her to a 51% discount from its market value on the transfers made to her children.

The IRS challenged that, and both parties ultimately settled on a 36% discount. The crux of the situation: Was present tax due after the discount dropped to 36% from 51%? 1 million at the right time. The revised discount also raised the price of the units her children bought. As a result, some LLC models moved by Ms. Petter weren’t protected either by the gift-tax exemption or the amount her children paid her.

The IRS said she owed gift taxes on the transfer of the models. But she had specified that in such a case they would jump to her IRS-registered charity-with no present tax credited. The IRS didn’t like that one bit, since it supposed the charges for an exaggerated discount was just a donation to a charity, not a check to Uncle Sam. Carlyn McCaffrey, a lawyer at McDermott, Will & Emery in NY.