The Audit Airbag: Defined Value Clauses & The “Wandry” Strategy
The Audit Airbag: Defined Value Clauses & The “Wandry” Strategy
The IRS loves to challenge the value of private assets to trigger gift taxes. How to use “Formula Gifts” to ensure that even if the IRS doubles your valuation, your tax bill remains exactly zero.
Executive Summary
- The Valuation Risk: You gift 10,000 shares of your startup to a trust, claiming they are worth $10M (within your exemption). Three years later, the IRS audits you and says, “These shares were actually worth $20M.”
👉 Result: You owe 40% tax on the extra $10M ($4M check) plus penalties. This “Valuation Surprise” destroys estate plans. - The Solution (Defined Value Clause): Never gift “10,000 shares.” Instead, gift “That number of shares equal to $10,000,000 in value.”
👉 The Mechanism: If the IRS successfully argues the price is higher, the *number of shares* transferred automatically adjusts downward. The dollar value ($10M) remains fixed. - The “Wandry” vs. “Petter”:
1. Wandry: Excess shares stay with you (the donor). Simple and aggressive.
2. Petter: Excess shares “spill over” to a Charity or Spouse (non-taxable entities). Safer and audit-proof.
The “Poison Pill” for Auditors
Why it Works: IRS auditors are incentivized to find tax revenue.
👉 The Logic: With a Defined Value Clause, even if the auditor spends 100 hours proving your valuation was wrong, no additional tax is generated (the shares just move to a charity or back to you). Because there is no “Tax Win” for the IRS, they often skip the audit entirely.
Mechanic: The Self-Correcting Gift
Simulation: Gifting Pre-IPO Stock (Appraised at $10/share)
| Feature | Fixed Quantity Gift | Defined Value Clause (Wandry) |
|---|---|---|
| Transfer Language | “10,000 Units of LLC” | “Units worth $10,000,000” |
| If IRS Increases Value | Gift Tax Triggered | Number of Units Reduces |
| IRS Audit Risk | High (Easy Money) | Low (Waste of Time) |
“In the high-stakes game of valuing private assets, the Defined Value Clause is your ‘Save Game’ button. It ensures that no matter what number the IRS invents, your liability cannot exceed the exemption you set.”