Court Rules Against IRS in Defined-Value Transfer Cases; Clear the Way for Optimizing 2010 Tax Act Gifting Guidelines

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Defined-value transfers, a mechanism for gifting hard-to-value assets, has long been a target of the IRS, with the agency often attempting to revalue the assets for a higher amount at a later date. Although previous, successful taxpayer actions have weakened the IRS’ argument, says Attorney Richard Morgan, the latest case—Wandry v. Commissioner (U.S. Tax Court; Docket Nos. 10751-09, 10808-09)—represents a major victory in the effort to protect these gifting strategies. That outcome is particularly beneficial now, given that the 2010 Tax Act, which allows individuals to exclude up to $5.12 million in gifts from taxation, is set to expire at the end of 2012.

"There are many reasons for individuals to make beneficial gifts now and take maximum advantage of the current, unparalleled gift tax exclusion," said Attorney Richard Morgan.

Defined-value transfers, a mechanism for gifting hard-to-value assets, has long been a target of the IRS, with the agency often attempting to revalue the assets for a higher amount at a later date. Although previous, successful taxpayer actions have weakened the IRS’ argument, says Attorney Richard Morgan, the latest case—Wandry v. Commissioner (U.S. Tax Court; Docket Nos. 10751-09, 10808-09)—represents a major victory in the effort to protect these gifting strategies. That outcome is particularly beneficial now, given that the 2010 Tax Act, which allows individuals to exclude up to $5.12 million in gifts from taxation, is set to expire at the end of 2012.

“In Wandry v. Commissioner, the judge rejected the IRS’s policy arguments against defined-value transfers and offered clearly elucidated, specific reasoning for his decision,” said Morgan. “Individuals who structure defined-value transfers properly with guidance from a knowledgeable advisor will now have strong precedent to protect them, should the IRS pursue action. This is one more reason for individuals to make beneficial gifts now and take maximum advantage of the current, unparalleled gift tax exclusion.”

Defined-value transfers are a mechanism for taxpayers to gift hard-to-value assets, such as business interests or land. With these transfers, the gift is a stated amount of the asset’s value rather than a percentage; for example, $234,000 instead of 4%. Historically, recipients of percentage-interest gifts have struggled with the unintended tax consequences of the gift being revalued by the IRS at more than the stated amount. By giving a specified dollar amount of value, the giver is assured that the recipient’s taxable gift amount will be predetermined.

The IRS has challenged defined-value transfers, just as it has argued against other methods of eliminating the possibility of additional taxation for the recipient. However, in light of the Wandry v. Commissioner decision, Morgan said, the IRS is likely to find itself being billed for legal fees if it continues to pursue this action.

“The courts have clearly confirmed that defined-value transfers are a legitimate mechanism for gifting assets without the shadow of future IRS scrutiny and liability risk,” says Morgan. “However, much of the benefit this shift achieves will likely evaporate at the end of 2012.”

About Morgan and DiSalvo
Morgan and DiSalvo, PC is a partnership between Attorneys Richard Morgan and Loraine DiSalvo. Their reputation for personal service and compassion, combined with their expertise in estate planning, tax law and dispute resolution, has earned Morgan & DiSalvo the highest possible Martindale-Hubbell Peer Review Rating every year since the firm’s inception in 1995. For more information visit http://www.morgandisalvo.com.

Note to Editors: Attorney Richard Morgan is available for in person or phone interviews on Defined-Value Transfers and a number of other tax law issues.

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Jennifer Koon
Michael Mackenzie Communications
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