Secondary Sale to Deflect Powell/Moore Challenge

A Wandry clause or mechanism is t technique to reduce the risk of an adjustment to a gift tax return based on a valuation difference. If the IRS says the value of a gift was double your appraised value you could owe substantial gift tax. In the Wandry case the taxpayer successfully transferred a fixed dollar value of entity interests, not a percentage interest (or number of shares in the case of a corporation). So, when the IRS disputed that the value was too low, the mechanism contained in the legal transfer documents adjusted the percentage membership interests sold to equal the fixed dollar amount that was transferred, based on the gift tax value as finally determined. The result of a successful Wandry clause is, however, that part of your interests in the entity remain in your name. Under two famous cases, Powell and Moore the IRS maintained that because the decedent in conjunction with others controlled the entity whose interests were given, the entire interests they held were included in their estate. To endeavor to avoid this result consider signing a sale agreement to sell any interests that remain in your estate because of the Wandry mechanism at the price of the gift tax value as finally determined. Because this sale agreement is secondary to whatever the primary transfer document is, it might be called a “secondary” sale agreement. Attach a form of note to this that will require interest from the date of the initial transfer.