CCA 202152018, the IRS Office of Chief Counsel Memorandum
The Chief Counsel office (IRS) recently released a memorandum, which comes to two primary conclusions. First, under the fair market value standard, the hypothetical willing buyer and willing seller of a company would consider a pending merger when valuing stock for gift tax purposes. Second, the retained interest is not a qualified annuity interest under § 2702 of the Internal Revenue Code (Code) because the donor used an outdated appraisal that did not take into account all the facts and circumstances of a pending merger.
The first conclusion is not necessarily new as there is prior case law to support this conclusion. As with many, if not most, valuations, this issue often comes down to whether the pending merger was known or knowable at the date of the valuation. The hypothetical outlined in this memorandum indicates that, while the transaction had not closed at the date of the gift to the two-year grantor retained annuity trust (GRAT), the transaction would have been known or knowable. As a result, the stock donated to the trust was significantly undervalued in the appraisal used for the gift. Thus, the first conclusion is that the merger should have been taken into account and was not.
The second conclusion is the one that’s creating heartburn for some estate planners. Given the first conclusion of the memorandum, the second conclusion says that the retained interest is not a qualified annuity interest under Sec. 2702 of the Code. Thus the entire value of the interest donated to the trust would be a taxable gift at the date of transfer. The memorandum can be found here.
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