In the recently decided United States Tax Court case Hendrix v. Commissioner, the IRS suffered yet another defeat in its attempt to void formula clauses in a gifting context. Generally when one makes a gift and uses a formula clause the assignment is worded in terms of a gift of a specified number of shares in a corporation (or interests in a partnership) to be allocated among individuals (who are gifted a fixed dollar value) with the remainder to a non taxable entity such as a charity.
This was essentially the fact pattern in Hendrix. The IRS argued that the formula clause was invalid because it was not the result of an arm's length transaction and also because it was void as contrary to public policy.
The Tax Court reiterated the long standing proposition that avoiding taxes is permissible. It dismissed the arm's length transaction argument. Dealing with public policy, the court held that public policy encourages gifts to charity and that formula clauses support that policy.
Stay tuned for more taxpayer favorable victories in this rapidly developing area of the tax law.