2. Gift Tax Case Involving Gifts of LLC units under IRC. §§ 2503 and 2505 1 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

3. Wandry Tax Court Case These slides are intended to provide educational content, not legal advise. This is part of a presentation made by Wasatch Business Valuation & Litigation Support Services, LLC for NACVA’s Around the Valuation World in 60 Minutes, part of the organization’s ADAM effort. For more information on ADAM and NACVA, please visit http://www.nacva.com http://www.nacva.com Wasatch Business Valuation & Litigation Support Services, LLC provides qualified estate and gift tax reports. Contact Roberto H Castro, JD, MST, MBA, AVA, CPVA at Roberto.Castr@wasatchbusval.com for further information. Roberto.Castr@wasatchbusval.com Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com2

4. Wandry Case Facts In 1998 Husband and wife, from Colorado, funded a FLP with cash and property. They met with their tax attorney to discuss gift tax consequences. At the time the annual exclusion for each donor was $11,000 per donee—sec. 2503—and $1 million in excess of the annual exclusion for each donor under sec. 2505(a) (federal gift tax exclusion) 3 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

5. Wandry Case Facts (continued) On January 1, 2000, H & W began gifting FLP interests based on a specific dollar amount, rather than a specific partnership interest. A valuation would be prepared and it would provide a basis to determine what % was gifted; that would happen at a future date. Their children and grandchildren were donees of these interests. 4 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

6. Wandry Case Facts (continued) In April of 2001 the Wandry’s (H & W) and children started a business. They formed an LLC in August 2001. By 2002 the FLP interests were transferred to this LLC. The gift giving program continued. On January 1, 2004, the Wandry’s (H & W) transferred an interest worth $11,000 to each grandchild and $261,000 to each child (4). 5 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

7. Wandry Case Facts (continued) The gift document provided that a valuation would be prepared and that if the value was not contested that would be used to determine the % gifted to the respective donee, otherwise, if contested, there would be an adjustment based on the FMV. The valuation for these gifts was prepared in June 2005. The report concluded that a 1% interest in the LLC was worth $109,000. The capital account for the LLC was also adjusted (it seems, for the first time then). 6 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

8. Wandry Case Facts (continued) The706 valued the combined 2004 gifts at $1,099,000. Based on the gifts made, the children received approximately 2.39% (each) and grandchildren each received.101%. Deficiency notices were issued in February 2009. The Service valued the 2.39% at $366,000 and the.101% at $15,400. Subsequently, the parties reached an agreement that the 2.39% was worth $315,800 and the.101% was worth $13,346. 7 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

9. Wandry Issues and Arguments Service’s ArgumentWandry’s Argument IRC §2501 imposes a tax on the transfer of property by gift. The IRS argues that the Wandry’s owe tax on these gifts because interest transferred exceeded the annual federal gift tax exclusion. Wrong! We did not transfer a fixed % of the LLC. We are bound by the gift document, which provided the gifts are intended to equal the federal exclusion. The Service also argues that the adjustment clause does not save petitioners from the 2501 tax because it is a condition subsequent and void under public policy grounds. No public policy issues are at stake to warrant voiding the intended gifts. 8 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com

10. 9 Service’s PositionWandry’s Position Court’s Opinion Or Outcome Re: Tax ReturnThe signed tax return is proof that a fixed % was gifted. Not so, the $ amount is what controls. Taxpayer wins. Re: Capital Account Entries Additional proof that a fixed % was gifted Not so, the entries are not admissions, rather they are an estimate pending the outcome of the matter. State law controls the nature of the taxpayer’s legal interest. “Book entries alone will not suffice to prove the existence of facts recorded when other more persuasive evidence points to the contrary.” Taxpayer wins. Public policy argument Allowing an adjustment is a reversal of a completed gift. Not so.Reliance by Service in Procter and other cases is misguided, this case is distinguishable. Public Policy #2 argument Procter is on point and formula clauses violate public policy. The gift document should control; there is no attempt to rescind a gift made. No established policy against formula clauses. Taxpayer wins.

11. Conclusion This case is available for download. The case highlights for attorneys an opportunity available in the gift and estate tax areas. For families, this is another viable way to pass on assets efficiently. Note that the taxpayer’s expert’s opinion in the valuation report was not an admission. Thank you! 10 Wasatch Business Valuation & Litigation Support Services, LLC www.wasatchbusval.com