Formula Clauses Properly Set Value of Gifts of Stock in Closely Held Corporation (Hendrix, TCM)

The value of stock in a closely held corporation (CHC) transferred by a husband and wife to family trusts and a charitable foundation was the value reached by using a formula clause that was set forth in an assignment agreement. After converting the CHC to an S corporation, the couple decided to transfer a portion of their stock in the CHC to their three adult daughters, in trust, and a charitable foundation. Because the stock in the CHC was difficult to value, the couple chose to utilize a formula clause in their assignment agreement in order to set the value of the stock in dollars as opposed to percentages at the time of the transfer.

Formula clauses are not, as a rule, against public policy. Distinguishable fromF. Proctor, CA-4, 44-1 USTC ¶10,123, the formula clause in this case did not provide a condition subsequent that would defeat the transfer. The formula clause also furthered a public policy goal of encouraging gifts to charities. In addition, there was no evidence of collusion between any of the parties. The foundation was represented by independent counsel and had a fiduciary duty to make certain that it received the proper number of shares under the formula clause. Thus, the formula clause was a product of an arm’s-length transaction. Consequently, the couple was entitled to deduct the full value of the charitable contribution made to the foundation and did not owe any additional gift tax for the transfer of stock in the CHC to the trusts.

J. Hendrix, TC Memo. 2011-133, Dec. 58,662(M)

Other References:

Code Sec. 2512

CCH Reference – FINH ¶10,730.62

Code Sec. 2522

CCH Reference – FINH ¶11,513.28

Tax Research Consultant

CCH Reference – TRC ESTGIFT: 3,064


Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

All stories by: Wolters Kluwer Tax and Accounting