Defining Value in a Formula Gift Clause

Written for Trust & Estates, Weaver’s Will Frazier discusses the results of the Fifth Circuit opinion in Nelson v Commissioner. The case highlights a dispute over the efficacy of defined value language in gift transfer documents, however, from a valuation standpoint, the Tax Court dealt with a wide range of issues including the valuation of holding companies, minority interest discounts, and discounts for lack of marketability.

• “Nelson provides estate planners with further instruction as to how the courts construe the drafting of defined value clauses (DVCs) in gift transfer documents. The most important objective of the DVC is to fix the dollar amount of equity gifted while allowing the percent to change if the appraised value were later found to be incorrect. A major revelation of Nelson is that, even when the intent of the document drafters is clear, failure to define value and when it’s fixed render the key terms of the transfer instruments inoperative. The decision also describes the role played by appraisers in qualifying or disqualifying the functionality of these clauses.
• The Tax Court’s discussion about the valuation of holding companies is unique and worth exploring further. It’s also worth noting that, with respect to the lack of marketability discounts, the Tax Court preferred the work of the Internal Revenue Service expert because it was found to be more thorough and included quantitative models.”

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