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Duly Noted

IRS Wins, But Charity Collects. The Internal Revenue Service successfully challenged the value that a Washington state woman assigned to property she transferred to trusts for two of her children, but the Service did not succeed in collecting any additional gift tax. Anne Petter, a retired schoolteacher whose uncle was one of the first investors in UPS, placed $22 million in UPS shares she inherited in a limited liability company. She gave shares in the LLC to trusts she established for the children and to two charities, and she sold additional shares to the two children’s trusts for a total of $8 million. As a condition of the sale, she stipulated that if the IRS determined the LLC shares were worth more than she anticipated, the shares would be given to the charities instead. The IRS determined that the shares Petter gave and sold were worth $4 million more than she reported on her gift tax return. But because that triggered an additional gift to charity, no gift tax was due. The IRS contended this “formula allocation clause” was void because it frustrates public policy by preventing examiners from collecting taxes, but Tax Court Judge Mark V. Holmes disagreed. He noted that public policy favors charitable gifts, and that Petter clearly intended charity to benefit from any excess value in the transaction. Petter v. Commissioner, T.C. Memo 2009-280.

Tax Court: We Were Right The First Time. Walter and Sandra Price gave shares in a family limited partnership to their three children, claiming the annual gift tax exclusion of $10,000 per donee each year from 2000 through 2002. Like many such partnerships, the Price entity did not allow the children to sell their interests, withdraw their capital or receive distributions without consent of the general partner or a majority of all the partners. The IRS therefore ruled that the gifts did not qualify for the annual exclusion because they were not “present interests” in property. The Prices challenged that position on the basis that the children’s direct ownership of the partnership interests was, by definition, a present interest in the partnership. They argued that in a similar case, Hackl v. Commissioner, the Tax Court erred by siding with the IRS. But the Tax Court, not surprisingly, disagreed. Hackl was upheld by the Seventh Circuit U.S. Court of Appeals, and the Tax Court said its reasoning still stands. Because the children derived no immediate benefit from the FLP gifts, they were not gifts of present interests. Price v. Commissioner, T.C. Memo 2010-2.

Sex-Change Operation Is Deductible. A fractured Tax Court ruled that a taxpayer who suffered from severe Gender Identity Disorder can deduct the cost of sex-reassignment surgery and hormone therapy, but not breast augmentation because the hormone therapy already had produced normal female breasts. Rhiannon G. O’Donnabhain was born male, served in the U.S. Coast Guard, was married for more than 20 years and fathered three children, but had felt that she was a woman trapped in a man’s body since early childhood, the court said. Because GID is a recognized mental disorder and reassignment is a standard treatment in severe cases, the medical deduction was allowed. 134 T.C. No. 4, 2010 TNT 22-8.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.