‘Charitable Lid’ Defined Value Clause Upheld


Federal transfer tax laws provide for various fixed exemptions and credits, such as the unified credit amount, the annual exclusion gift maximum amount, and the generation-skipping tax exemption. Taxpayers seeking to make inter vivos transfers of difficult-to-value assets that are at or under an exemption amount have a practical problem. To make the transfer they need to transfer property (such as shares of a closely-held business), but unless and until the IRS audits the transfer, there can be a large swing in potential transfer tax value between the estimate provided by the taxpayer’s appraiser, and what the IRS may assert or believe. Attempts to make transfers based on a formula such as “so many XYZ Corp. shares that are equal in value to $x” are vigorously opposed by the IRS. They can also be impractical because some number of shares would need to be transferred based on the initial valuation, with a later adjustment and transfer of shares one way or the other if the value is adjusted by the IRS. The IRS generally challenges such formula gifts as being invalid “savings clauses” under Procter, 142 F2d 824 (4th Cir. 1944). The precise scope of Procter has never been fully delineated by the courts, with King in the 1970’s, and Harwood and Ward in the 1980’s, helping somewhat to define its parameters.

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