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Wednesday, October 09, 2019

Pending Merger Required to be Considered in Valuing Stock

In Chief Counsel Advice, the IRS concluded that in valuing a gift of publicly traded stock to a grantor retained annuity trust, the announcement of a merger shortly thereafter after the gift must be factored into the valuation.

FACTS: A taxpayer who was a co-founder and Chairman of the Board of a publicly traded corporation gifted shares of stock of the company to a newly-formed grantor retained annuity trust. After the transfer date, the corporation announced its merger with another corporation. Prior to the gift date, the corporation had undergone negotiations with multiple parties and on the gift date had been engaged in exclusive negotiations with the corporation that was the subject of the merger announcement. The IRS determined that the pending merger should have been considered in arriving at the value of the gifted stock.


A common issue in income and transfer tax planning is whether post-transaction events should impact the value of the subject asset. Oftentimes, there are subsequent events that in hindsight appear appropriate to the valuation, such as a post-transaction sale, merger, or business announcement. The planner and appraiser have the difficult task to determine the necessity of inclusion of such on-the-horizon events in valuation, and what weight to give them.

In determining that the merger announcement should be considered, the IRS relied on several valuation maxims, interpretations and precedents that practitioners should give consideration to. These include:

     (a) In applying the willing buyer and willing standard for valuation (here, as provided in Treas. Regs. § 25.25.12-1), a willing buyer and seller are presumed to have reasonable knowledge of relevant facts affecting the value of the property at issue, even if the facts are unknown to the actual owner.

     (b) Both parties are presumed to have made a reasonable investigation of the relevant facts. Thus, in addition to facts that are publicly available, reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase price of the property. Moreover, a hypothetical willing buyer is presumed to be “reasonably informed” and “prudent” and to have asked the hypothetical willing seller for information that is not publicly available.

     (c) While publicly traded stock is generally valued based on the average of the highest and lowest selling price on the day of the transfer, if such prices do not represent the fair market value then a modification of the value is required. Treas. Regs. § 25.2512-2(e).

     (d) In Silverman v. Commissioner, T.C. Memo. 1974-285, aff'd, 538 F.2d 927 (2d Cir. 1976), cert. denied, 431 U.S. 938 (1977), the petitioners gifted shares of preferred stock while in the process of reorganizing with the intent to go public. The Tax Court rejected the expert testimony presented by the petitioners because the expert failed to take into account the circumstances of the future public sale.

     (e) In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), aff'g 108 T.C. 244 (1997), an assignment of income case, a transfer of shares was undertaken in stock of a corporation after an investment firm had located a purchaser for the corporation, a merger agreement had been entered into, and a tender offer was underway. The court concluded that the shares were transferred after the shares had ripened from an interest in a viable corporation into a fixed right to receive cash and the merger was “practically certain” to go through, and therefore applied the assignment of income doctrine to tax the transferor on the gain from the tender offer exchange that occurred after the transfer.

Various rules of thumb and factual inquiries are employed by taxpayers and the IRS in determining how to apply post-transfer events. One important element is time – how long after the subject transfer did the post-transfer event occur. Unfortunately, in the subject CCA, the date information that would advise of the time period between the gift and the merger announcement was redacted. Another factor is whether the subsequent event was contractually committed – again, the facts here do not disclose whether the merger was irrevocably committed to occur at the time of the gift. The CCA also demonstrates the similarity of inquiry that can exist between transfer tax valuations, and whether an assignment of income occurs as to a sale event that occurs after property is transferred.

Just because a subsequent event should be considered does not mean a tender or purchase price should be fully substituted for other measures of value. Case law typically requires that such events be considered in the valuation, but what weight should be given is always a facts and circumstances test. Of course, one important factor in such valuation should be the likelihood that the post-transfer event will occur, as measured on the date of transfer. This circles back to questions including whether the post-transfer event is the subject of a binding contract or agreement, and even then questions of whether the contract will close due to contractual contingencies and other applicable facts should be considered.

Chief Counsel Advice 201939002, September 27, 2019

Monday, September 30, 2019

Old and Cold Offshore Asset Protection Trust Assets Not Reachable by U.S. Creditors

In re Rensin involved an “old and cold” offshore asset protection trust arrangement which a trustee in bankruptcy sought to pierce. The case provided some interesting facts and conclusions that should be of interest for those contemplating offshore APTs.

The trust was established and funded well before the beneficiary had issues with the Federal Trade Commission, a holder of a judgment of over $13.4 million arising in 2018. The debtor could withdraw assets from the trust, but the trustee could veto those distributions. The debtor could not remove the trustee and could only fill vacancies if the protector did not fill them. The trust was initially established in the Cook Islands and was later moved to Belize.

In 2015, the debtor transferred $350,000 to the trustee. The trustee purchased a deferred variable annuity, of which the debtor would be the lifetime annuitant and the trust would be the owner. Also in 2015, the trustee purchased a fixed annuity with similar payment and ownership using $1.7 million of trust assets.

In trying to gain control over the annuity payments and the trust interests in the annuities, the court ruled on various issues:

  1. The debtor argued that the bankruptcy estate was barred by the spendthrift clause of the trust from treating the trust assets as subject to bankruptcy administration, per the respect for such clause given under Belize law. The Florida court rejected the application of Belize law, under the principal that choice of law under a contract is binding in Florida unless it offends Florida public policy. Since Florida courts will not enforce a spendthrift clause in favor of a settlor in a self-settled trust, the Belize law violates Florida public policy and thus Florida law instead applies and the assets of the trust are subject to bankruptcy estate administration.
  2. Under Fla.Stats. § 736.0505(1)(b), in a discretionary trust, creditors can reach the maximum amount that can be distributed to the settlor. Thus, the entire amount of the trust is reachable by the bankruptcy trustee.
  3. Notwithstanding the above inclusion in the bankruptcy estate, the annuity protections of Fla.Stats. §222.14 may apply.
  4. A Florida debtor can use the annuity exception as annuitant, even though the owner of the contract is not a Florida person. There is mixed law on this question, but the majority view is this.
  5. The purchase of the annuities paid by the trustee of the trust with trust assets was not a fraudulent asset conversion that would void the annuity exception. Fla.Stats. §222.30(2), which voids a fraudultent asset conversion, applies to conversion to an exempt asset by the debtor. The debtor here was not the trust and did not purchase the annuity, so Fla.Stats. §222.30(2) did not apply. The same result would apply, even if the debtor had requested the trustee to make such purchases – so long as the debtor did not have the power to comple the trustee to do so.
  6. Similarly, the transfer of the $350,000 into the trust by the settlor was not a fraudulent conversion, since Fla.Stats. §222.3)(2) requires the debtor have made a transfer that results in the transferred assets becoming “exempt by law from the claims of a creditor. Since there was no provision in Florida law that exempts the trust assets from claims of the debtor’s creditor, that transfer alone did not result in the assets becoming so exempt by law. Thus, Fla.Stats. §222.30(2) did not apply. Thus, from a planning perspective, if a settlor directly acquires exempt assets, then the fraudulent transfer statute can apply – but it won’t (at least under the facts and analysis of this case) when the assets are transferred first to an APT, and the APT then purchases an exempt annuity interest for the settlor.
  7. Therefore, while the trust assets are subject to bankruptcy administration, the debtor’s annuity interest was an exempt annuity interest. The bankruptcy trustee nonetheless argued that it can obtain ownership of the trust’s annuity ownership rights, including the power to withdraw from and/or surrender the annuities and the remainder rights. However, the court declined to provide that relief since the trustee of the trust was not joined as an indispensable party.
  8. The Court indicated it could not use the precedent of In re Lawrence to order the beneficiary to have the property be delivered from a discretionary trust without joinder of the trustee. In that case, a key fact was that the settlor/debtor had the power to replace the trustee, so that it effectively had the power to replace the trustee until one complies with the wishes of the beneficiary to distribute the subject assets. Here, the debtor did not have such a power. This suggests that the power to replace the trustee may not be advisable in APTs, even though it is commonly used for protective purposes.
  9. Even if the trustee had been a party to the litigation, it is questionable whether Belize would order the trustee to comply with a U.S. bankruptcy court order. Failing that, perhaps the bankruptcy court could proceed to enforce the court’s order against the insurance companies that issued the annuities in their home jurisdictions, if allowable under the law of such jurisdictions.

The case is a Bankruptcy Court decision, so its precedential authority is limited.

In Re Rensin, 600 B.R. 870 (S.D. Florida 2019)

Sunday, September 15, 2019

More on Passport Revocation

I previously wrote about passport revocation or denial to those with significant unpaid federal tax liabilities – see, for example, the post here. Last month, an IRS News Release provided various details about the program.

Highlights include:

  • The current threshold of delinquent tax debt is $52,000 (or more)
  • When the IRS certifies a taxpayer as delinquent to the Dept. of State, the taxpayer will receive a Notice CP508C, which provides information on resolving the debt.
  • For taxpayers with current travel plans, the IRS has an expedited reversal mechanism to help get the certification reversed faster once the debt is addressed.
  • Ways to resolve the debt include payment in full, timely paying under an approved installment agreement, timely paying under an accepted offer in compromise, timely paying under a settlement agreement with the Dept. of Justice, having a pending collection due process appeal with levy, and having collection suspended based on innocent spouse relief.
  • Other exceptions from delinquent certification not directly related to paying the debt include taxpayers in bankruptcy, taxpayers that are identity theft victims, accounts that are not collectible due to hardship, taxpayers in a disaster area, pending requests for an installment agreement or offer in compromise, and an IRS accepted adjustment to satisfy the debt in full, taxpayers in a combat zone,

The Acting national Taxpayer Advocate has also shared information in a blog that taxpayers who are working with the Taxpayer Advocate Service may also avoid certification.

IR News Release 2019-141