From our CPA office in St. Petersburg, FL – The recent tax court ruling in the case Wandry v. Commissioner will increase the ease and certainty of tax free ownership transfers of closely held businesses from one generation to the next.
Currently, until the end of 2012, taxpayers can give up to $5.12 million in assets under the lifetime tax-free exemption. Additionally, taxpayers can give up to $13,000 of assets per year to as many recipients as they choose. The lifetime exemption will drop to $1 million on January 1, 2013.
Business owners who want to transfer business interests to children or other beneficiaries can use the lifetime exemption to make the shift in ownership tax-free, to the extent the value of the interest transferred is less than the lifetime exemption an annual exclusions. Business owners can also use the $13,000 annual exclusion to transfer smaller pieces of the business each year over time, as opposed to having one large financial exchange.
In the Wandry case, Dean and Joanne Wandry each gave their heirs shares in their family owned business worth $1,099,000. To avoid tax, the Wandry’s specified the gifts should equal the dollar amount of their annual exclusion and lifetime exemption, which were $11,000 and $1 million, respectively, in 2004, the year of the transfer.
To complete the transfer, the Wandry’s were required to obtain a professional appraisal of the business in order to determine the value of the entire business and what percentage of business interests were to be transferred to gift a total value of $1,099,000. After the gift was made, the IRS contested the value of the gifts and reappraised the interests transferred at 20 percent higher than the original valuation.
Despite the IRS’s reassessment of the value of the gifts, the judge in the case believed that the couple did not intend to make any gifts that would exceed the value of their exclusions and exemptions and ruled no further tax was due. This new ruling can also be applied to entities holding publicly traded securities and wealthy families with Family Limited Partnerships.
Contact us for assistance in valuing your small business or other tax matters. As tax professionals, McAtee & Associates can help both individual and business taxpayers with all their tax matters.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
