Certain gifts with adjustment clauses may not produce desired tax results.

• Author: Keith, Bryan

A recent ruling serves as a reminder that gifts subject to certain types of adjustments based on IRS actions may not produce the intended tax results.

Facts

In Letter Ruling (TAM) 200337012, the taxpayer and his spouse formed a limited partnership. The taxpayer executed an assignment gifting a portion of his limited partnership interest. The assignment language specified that thee transferred interest would be a percentage of the assignor's interest equal to a specified fair market value. According to the IRS, the clause would operate to reduce the percentage interest the taxpayer transferred if the IRS subsequently determined that the dollar value of the partnership interest was greater than the dollar value stated in the assignment. Thus, the dame was intended to protect the taxpayer from an assessment of gift tax on an IRS revaluation.

Ruling

The IRS determined in the TAM that the portion of the assignment transferring an interest with a specified dollar value was not effective for gift tax purposes; this type of adjustment clause was void as contrary to public policy. The gift had to be revalued and additional tax determined without the voided clause. The IRS rejected the taxpayer's argument that nothing would be returned to him through the operation of the clause, because he never intended to transfer any interest beyond a certain dollar value. In substance, a portion of the transferred interest equal to the percentage interest in the partnership that exceeded the specified value would be transferred back to the taxpayer.

The IRS relied on case law and its own revenue ruling in its conclusion, including Proctor, 142 F2d 824 (4th Cir. 1944), War(t, 87 TC 78 (1986) and Rev. Rul. 86-41. In Proctor, a frequently cited decision in this area, the Fourth Circuit analyzed a provision that would rescind a...