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IRS tables can't be used to value remainder interest in low-dividend stock.

In 1985, the O'Reillys donated 20 shares of stock in their closely held corporation to various grantor retained income trusts with terms of two to four years. They retained the right to income from the shares. At the end of each trust term, the shares passed to their children. The stock, which was worth $9,639 per share at the time the trusts were set up, had paid dividends of only $13 per share in the past three years, a .2% yield.

To calculate the gift tax on the trust transfers, the income interest was valued at 25% to 30% of the stock's worth in accordance with IRS table B in regulations section 20.2512-5(f). Thus, the taxpayers' claimed gift tax base was 25% to 30% less than the stock's value.

The IRS argued use of table B was inappropriate and produced an unreasonable result, and the O'Reillys had to pay gift tax on the entire value of the shares. It claimed the value of the income interest was not "susceptible of measurement" under regulations section 25.2511-1(e).

The Tax Court ruled use of table B was proper.

Result: For the IRS in part. The income interest is "susceptible of measurement," but use of table B, which assumes a return of 10%, produces a "wildly unrealistic measurement." Use of the IRS tables is required unless, as is the case here, there is a substantial reason for departure from them. The case was sent back to the Tax Court for a more accurate valuation of the gifts.

* O'Reilly (8th Cir., 1992).

Edited by Anne Wagenbrenner,JD, LLM, editor, AICPA client newsletters.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Nov 1, 1992
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