Another blow to IRS: 9th Circuit upholds defined value clause

As reported in prior BVLaw Alerts, the Tax Court delivered a first blow to the IRS’s long-held opposition to formula-defined value clauses in Estate of Petter v. Commissioner. The government appealed, and earlier this month the 9th Circuit might have buried the “void for public policy” argument, as the IRS didn’t even assert this angle, but instead claimed that the defined value clause violated the regulations against application of a condition precedent to a charitable deduction.  The court disagreed: the estate’s transfers became effective immediately on execution of the controlling documents and delivery of the partnership interests, it ruled. The only post-transfer question left unanswered was the value of the transferred units, which was subsequently determined by the applicable Code provisions and principles:

Aside from the fact that only the dollar formula clause of the sale documents uses the phrase ‘as finally determined for federal gift tax purposes,’ a taxpayer who files a return cannot conjure up a value for federal gift tax purposes out of thin air; rather, she must use federal gift tax valuation principles. Under these principles, the value of an asset ‘as finally determined for federal gift tax purposes’ is the fair market value of that asset.
Another victory for Porter, et al.: Kudos once again go to attorney John Porter and his Baker Botts colleagues, who successfully represented the taxpayer during the Petter appellate proceedings, as he also did in the recent Hendrix decision by the Tax Court, which upheld a formula value clause. Look for the digest of the 9th Circuit decision (No. 10-71854, decided August 4, 2011) at BVLaw.