Federal Appeals Court Rules Against IRS in Gift-Tax Case

7:01 pm Asset Protection, California Trusts, Estate Planning, Trust Litigation

money gift 2 e1316545217983 Federal Appeals Court Rules Against IRS in Gift Tax CaseA San Francisco federal appeals court ruling in Estate of Petter v. Commissioner has affirmed a popular estate planning technique to avoid gift taxes – for now.

According to a Wall Street Journal article, the techniques affirmed by the court in the Petter case are especially relevant now, when many are considering making large gifts because of the generous estate- and gift-tax exemptions that expire in 2013.

The Ninth Circuit appeals court case concerns the estate of Anne Petter, who inherited UPS stock in 1982 that by 2001 was worth $22 million.  She placed the stock in a limited-liability company (LLC), and then both gave and sold units of the LLC to two of her three children.  She also gave units to two charitable foundations.

By putting the stock in an LLC, the law allows for a lower valuation when units are sold or given away since no one member of an LLC owns a controlling interest and units cannot be traded easily.  Petter claimed that putting her UPS stock in an LLC entitled her to a 51 percent discount on its market value; the IRS challenged the valuation and the parties settled on a 36 percent discount.

The question before the court: was gift tax due once the discount dropped to 36 percent from 51 percent?  The IRS said yes.  However, Petter had specified in such a case that units transferred by her not covered by the gift tax exemption or the amount her children paid would go to the foundations, with no gift tax due.

The court sided with Petter, ruling that she was entitled to a charitable deduction equal to the value of the units the foundations initially received — and that she was also entitled to a charitable deduction equal to the value of the additional units the foundations will receive.

Help is available to you by contacting your Southern California financial planning experts today.

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