Appeal from a Decision of the United States Tax Court Tax Ct. No.25950-06
The opinion of the court was delivered by: Bybee, Circuit Judge:
Argued and Submitted June 14, 2011-San Francisco, California
Before: Diarmuid F. O'Scannlain, Ferdinand F. Fernandez, and Jay S. Bybee, Circuit Judges.
Anne Y. Petter ("Taxpayer" or "Anne") transferred membership units in a family-owned LLC partly as a gift and partly by sale to two trusts and coupled the transfers with simultaneous gifts of LLC units to two charitable foundations. The transfer documents include both a dollar formula clause -which assigns to the trusts a number of LLC units worth a specified dollar amount and assigns the remainder of the units to the foundations-and a reallocation clause-which obligates the trusts to transfer additional units to the foundations if the value of the units the trusts initially receive is finally determined for federal gift tax purposes to exceed the specified dollar amount. Based on an initial appraisal of the LLC units, each foundation received a particular number of units. But after an Internal Revenue Service ("IRS") audit determined that the units had been undervalued, the foundations discovered they would receive additional units. Everyone agrees that the Taxpayer is entitled to a charitable deduction equal to the value of the units the foundations initially received. But is the Taxpayer also entitled to a charitable deduction equal to the value of the additional units the foundations will receive? The Tax Court answered that she was. We agree.
After inheriting a large amount of United Parcel Service ("UPS") stock, Anne devised a complex estate plan designed to give some of her wealth to charity and as much of her stock as she could to two of her children, Donna and Terry, without having to pay gift tax. To accomplish these goals, the Taxpayer first created the Petter Family LLC ("PFLLC"), a Washington limited liability company, and transferred approximately $22.6 million worth of UPS stock to it in exchange for membership units in the PFLLC. Then, the Taxpayer created the Donna K. Moreland 2001 Long Term Trust, which named Donna as trustee, and the Terrence D. Petter 2001 Long Term Trust, which named Terry as trustee, and transferred PFLLC units to these two trusts.*fn1 This appeal centers around these latter transfers, which are discussed in more detail below.
Because Anne did not want to pay gift tax in connection with the transfer of LLC units to the trusts, the transfers were coupled with simultaneous donations of units to two tax-exempt public charities*fn2 and occurred in two phases: first a gift, then a sale. On March 22, 2002, the Taxpayer gave the trusts PFLLC units equal in value to the unused portion of her unified tax exemption.*fn3 On the advice of her estate planner, Richard LeMaster, these units served as a baseline that limited the amount of units later sold to the trusts; specifically, the units transferred as a gift were meant to make up 10% of the trusts' assets.*fn4 On March 25, 2002, Anne sold the trusts additional PFLLC units that, when added to the units already transferred as a gift, were worth 90% of the trusts' assets.*fn5 As consideration for the LLC units, each trust executed a 20-year promissory note, undertaking to pay $4,085,910 at 5.37% interest in quarterly installments of $83,476.30. The trusts have made regular quarterly payments since July 2002.
As regards the March 22 gifts, there were two sets of gift documents: one for Donna's trust, which named it and the Kitsap Community Foundation as transferees, and one for Terry's trust, which named it and the Seattle Foundation as transferees. The relevant sections of Terry's gift document- Recital C, the dollar formula clause (section 1.1), and the reallocation clauses (sections 1.2 and 1.3)-provide:
C. Transferor wishes to assign 940 Class T Membership Units in the Company (the "Units") including all of the Transferor's right, title and interest in the economic, management and voting rights ...