Page 647 - TaxAdviser_2022

ESTATES, TRUSTS & GIFTS

certificates of assignment from Mr. and subsequent transfer by the donee spouse [$2,096,000] as of December 31, 2008
Mrs. Smaldino to the LLC were also of that property by gift, one should fur- ... as determined by a qualified appraiser
undated, despite purporting to be ef- ther consider two predominant reasons within ninety (90) days of the effective
fective April 15, 2013. The court found why the transfers were not respected in date of this Assignment.”
it notable that the appraisal of the 49% this case: (1) the parties did not respect The sale instrument provided, in
LLC class B nonvoting member interest the formalities required for the donee pertinent part: “[Mrs. Nelson] desires to
was dated Aug. 22, 2013, which was four spouse to become a member of the sell and assign to [the trust] her right,
months after the transfers supposedly LLC, and (2) there was no distancing title, and interest in a limited partner
took place. between the two transfers such that interest having a fair market value of
Taking all the evidence into account, there were real economic benefits to [$20 million] as of January 2, 2009 ...
the Tax Court found it more likely than the donee spouse between the dates of as determined by a qualified appraiser
not that the undated certificates of as- the transfers. within one hundred eighty (180) days of
signment, in addition to the operating the effective date of this Assignment.”
agreement amendment, were executed Defined value clause locks in Neither the gift nor the sale instru-
on Aug. 22, 2013, at the earliest. Practi- FLP percentages ments contained a clause defining fair
cally, given the time gap between the In Nelson,12 the Fifth Circuit affirmed a market value (FMV) or subjecting the
effective dates of the purported transfers Tax Court decision13 holding that when FLP interests to reallocation after the
of the LLC class B membership to both a donor transferred partnership interests valuation date. The Nelsons contracted
Mrs. Smaldino and the trust, it was in an FLP, the transfer documents, and with an accountant to appraise the value
impossible for Mrs. Smaldino to exercise not subsequent events, controlled. Be- of the FLP interests. Based on the ap-
any ownership rights with respect to any cause the transfer agreements required praisals, Mrs. Nelson believed she gifted
LLC membership interests. an appraiser to determine the interests 6.14% and sold 58.65% of her interests
The Tax Court determined that Mr. transferred within a fixed period, the in the FLP.
Smaldino likely never intended for Mrs. court concluded that the donor trans- The Nelsons filed gift tax returns
Smaldino to exercise ownership rights ferred percentage interests determined for 2008 and 2009. The 2008 gift tax
in the LLC. Further, the court reasoned by the appraiser and not “as finally de- returns reported as a split gift the trans-
there was no economic significance for termined for [gift] tax purposes.” fer of the 6.14% interest in the FLP,
Mrs. Smaldino’s holding the interests in Mary P. Nelson and her husband, corresponding to the values of the FLP
the LLC for one day before retransfer- James C. Nelson, both residents of interests as set forth in the appraisal.
ring the interests to the ultimate donee Texas, owned interests in an FLP, which The couple did not report the sale on
that Mr. Smaldino had sought to receive had as its assets mainly shares of stock their 2009 gift tax returns. The IRS then
them. Finally, the court determined that in a holding company for several family audited the returns and issued notices
the LLC’s 2013 partnership return did businesses. As part of their estate plan, of deficiency determining that, based on
not list Mrs. Smaldino as a partner at Mrs. Nelson settled an intentionally the percentage interests set forth in the
any time. Only Mr. Smaldino, with his defective grantor trust in 2008. In 2008 gift instrument, the amount of the gift
51% interest, and the trust, with a 49% and 2009, Mrs. Nelson transferred her of the FLP interests on both spouses’
interest, were included in that return. limited partner interests in the FLP to gift returns combined was $3,522,018,
Thus, the court concluded that Mr. the trust in two separate transactions as opposed to $2,096,000, and in the
Smaldino never transferred any LLC — a gift and then a sale. The gift and sale instrument, the amount of the sale
membership interest to Mrs. Smaldino sale transfer instruments contained the of the FLP interests was $33,607,038, as
and, as a result, that the trust received following clauses regarding the amount opposed to $20 million.
the 49% class B membership interests as of FLP interests to be transferred: The The Nelsons challenged the deficien-
a gift from Mr. Smaldino. gift instrument provided, in pertinent cies in Tax Court. They argued that the
While one might conclude that a part: “[Mrs. Nelson] desires to make a initial valuation was correct and, even if
transfer to a spouse for the spouse to gift and to assign to [the trust] her right, it was not, that Mrs. Nelson had sought
make use of his or her gift tax exemp- title, and interest in a limited partner to transfer specific dollar amounts
tion will not be respected if there is a interest having a fair market value of through a formula clause and that the

12. Nelson, 17 F.4th 556 (5th Cir. 2021). 13. Nelson, T.C. Memo. 2020-81.

38 December 2022 The Tax Adviser