Petter Affirmed -- Formula Transfer to Mitigate Gift Tax Risk Approved on Appeal

By Richard S. Franklin

On August 4, 2011, the United States Court of Appeals for the Ninth Circuit affirmed the decision of the United States Tax Court in Estate of Anne Y. Petter v. Commissioner of Internal Revenue. The appellate court approved of Mrs. Petter giving and selling interests in a private company to trusts for her children and using a formula allocation clause that eliminated the risk of any gift tax exposure if Mrs. Petter and the IRS disagreed over the value of the private company interests. This case, along with other recent cases, likely means the IRS has lost any chance of success in continuing to litigate such formula allocation clauses. It also means that all significant gifts and sales of hard to value assets should be made using such a formula allocation clause or similar formula transfer arrangement to mitigate gift tax risk.

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