Post-gift evidence used in valuation.

• Author: Anderson, Erin

The timing of gifts can be a very significant part of succession and estate planning. While the valuation of various assets comes into play frequently in estate planning, gifts offer more tax planning opportunities related to anticipated value changes. Unlike testamentary transfers, taxpayers can choose when to make gifts based on current market and other conditions that can cause fluctuations in fair market value (FMV).

Example: J holds stock in a closely held business. J plans to gift the stock to his children, because he believes it will increase in value in the future. He hopes the company will go public in three to five years. Therefore, the gift should be made now, while the value is low, to decrease the amount of gift tax liability that J will incur.

A gift's FMV is determined as of the date it is made. In Regs. Sec. 25.2512-1, Rev. Rul. 59-60 and numerous court cases, FMV is defined as "the price at which a willing buyer will purchase the property from a willing seller, when neither is acting under compulsion and both are fully informed of the relevant facts and circumstances." The willing buyer, therefore, would make the decision based on information reasonably known at that time.

In a recent decision, a district court allowed a slightly different interpretation of this definition. In Hartmann, DC Ill (6/24/99), a taxpayer gifted shares of stock in a closely held construction company to her children and grandchildren. The company had an April fiscal year-end, and the gift was made the previous December. The gift's valuation was based on interim financial information of the company as of that December. The court allowed the IRs to use the financial information for the entire fiscal year (which included the four months subsequent to the gift) as evidence in valuing the gift.

Citing Estate of Jung, 101 TC 412 (1993), the court stated,"[T]ax courts have drawn a distinction between subsequent events that affect fair market value as of the valuation date and later-occurring events that may be considered as evidence of fair market value as of the valuation date."

The court went on to say, "in the absence of some external occurrence, one would not expect the financial figures available to a prospective buyer in December 1988 to vary significantly from those available four months later at the end of the fiscal year ... the Court finds the actual financial performance information to be more closely analogous to the evidence of [the] sale...