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Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

Dodgy Fairness Opinion Earns Financial Advisor a Trip to the Woodshed

July 2015 | Issue 81 Vice Chancellor Laster of the Delaware Court of Chancery was underwhelmed, to say the least, by the quality of the fairness analysis put forward by the Conflicts Committee and its Financial Advisor in connection with the approval of the pricing of a major financial transaction between two related public companies. […] More...

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The Wandry Taxpayers Found The Formula

April 2012 | Issue 57


Taxpayers making gifts of hard-to-value property will sometimes employ a “formula clause” which enables them to retroactively adjust the size of their gift based on a value determination carried out subsequently to when the gift was made.  This is usually done in order to keep the overall size of the gift within the bounds of a gift tax exclusion.

The IRS has taken a dim view of formula clauses, attacking them without success in Estate of Christiansen, Estate of Petter, and Estate of McCord. In these three cases, the formulas provided that any excess value created by the formulas was to be given to charity.

A Recent Case

A more recent case, Wandry v. Commissioner – T. C. Memo. 2012-88, March 26, 2012, also involves a formula clause, but one differing from the others in that it does not pour the excess value over into a charity.

In August, 2001, petitioners, Joanne and Albert Wandry, formed Norseman Capital, LLC, a Colorado limited liability company.  Norseman held cash, marketable securities and a family business.

On January 1, 2004, petitioners executed gift documents transferring gifts of membership units of Norseman to their children and grandchildren.  The documents specified the dollar value of each gift, with the number of units gifted to be based on the fair market value of the units of Norseman as finally determined by the IRS or a court of law.

The IRS Weighs In

The IRS issued a notice of deficiency related to these gifts.  It argued that the Norseman gifts represented a transfer of fixed percentage interests of Norseman rather than a specified dollar value.  This, they said, creates a condition subsequent to a completed gift and voids the adjustment clause as being contrary to public policy.

The Court’s Decision

The court, for various reasons, rejected this argument, drawing a distinction between a “savings clause,” which a taxpayer may not use to avoid the imposition of gift tax, and a “formula clause,”  as was used in this case, which the court held to be valid.

The court also commented on the charitable gift aspect of the case, stating that “this factor contributed to our conclusion, but it was not determinative.  The lack of a charitable component in the cases at hand does not result in a ‘severe and immediate’ public policy concern.”

The Takeaway

Wandry is the first case dealing with a formula clause that doesn’t have a charitable element.  It worked for the petitioners.  It might be worth taking a look at to see if it can work for your clients.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.