Wednesday, October 8, 2014

A merger of two family-owned companies may result in taxable gifts

In Cavallaro, v. Comm., T.C. Memo 2014-189 (2014), the Tax Court determined that a merger of one co. owned by the parents and the other co. owned by their sons, resulted in a taxable gift from parents to sons. The ruling was based upon the Tax Court determining the parents' company to have been undervalued. Background. Code Sec. §2501(a) imposes the gift tax on any transfer of property by gift regardless of the form of the gift transaction. Any time that property is transferred for less than full and adequate consideration, the excess value is considered a gift. (Code §2512) Taxable gifts include "sales, exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor." (Treas. Reg. §25.2512-8) Conclusion: Any type of transaction can be a deemed gift. This is especially so when there are transactions involving family members. Be sure to be vigilant in any transactions that could contain any type of gifting element so that the gift tax consequences, if any, can be ascertained and proper planning done to consider non-gift alternative transactions.

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