Before we learn of Uncle Nils's decision on major gifts, let's look at a second case about a "defined value clause." In 2004 Mr. and Mrs. Wandry made gifts of interest in their Colorado limited liability company as follows: $261,000 worth to each child, and $11,000 in value to each grandchild. The gift document stated that a third-party valuation would be obtained to determine the ownership percentages equivalent to these dollar amounts. Gift tax returns were filed reporting the dollar amounts of the transfers.
The IRS audited the returns, objecting for much the same reason as in the McCord case we reviewed last week. As the Tax Court opinion put it, the IRS argued "that the adjustment clause does not save [taxpayers] from the tax imposed by section 2501 because it creates a condition subsequent to completed gifts and is void for Federal tax purposes as contrary to public policy." The gift formula, if successful, shielded the taxpayers from any additional tax consequence by audit; if the family LLC interests were found to be worth more, then the only result would be that a smaller percentage was transferred to children and grandchildren.