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IRS Continues to Reject Formula Gifts

by | Jan 23, 2004 | Uncategorized


In TAM 200337012 (September 12, 2003), the IRS has specifically rejected the effectiveness for gift tax purposes of a clause attempting to make a gift of whatever percentage of interest in a family limited partnership equal to a stated dollar amount.

The IRS states that the formula gift clause was ineffective for gift tax purposes because it violates public policy and that it is actually a gift of the specified percentage of the family limited partnership, without regard to value. The IRS refused to distinguish a formula which seeks to transfer a specific dollar value of an asset from a clause that rescinds any portion of the gift that exceeds a specified amount, stating, “[a] different label does not nullify the effect Paragraph B [the formula clause] would have on the gift.” The IRS noted that the formula clause had the same effect as the revaluation clause and that it violated the same public policies.

Analysis of the decision indicates that the formula gift clauses of a defined sum should work. Congress has specifically approved them with regard to marital deductions and GST elections, and they are used all the time to allocate assets between the various sub-trusts of an RLT after the death of the first spouse.