## Facts

- Six family shareholders owned all stock of a closely held corporation and sought to transfer ownership to the next generation while maximizing annual gift-tax exclusions.
- On December 31, 1992, each shareholder transferred approximately $10,000 of stock to each of their children, nieces, and nephews in a coordinated pattern so that each younger family member received stock from multiple adults.
- On January 5, 1993, three of the shareholders made additional, similar transfers of stock to their nieces and nephews.
- Gift-tax returns claimed annual exclusions for each recipient, including nieces and nephews.
- The IRS allowed exclusions only for each donor’s gifts to the donor’s own children, disallowing exclusions tied to purported gifts to nieces and nephews on the theory that the arrangement created indirect “cross-gifts” to the donors’ own children.
- The Tax Court agreed the transfers were cross-gifts, sustained gift tax deficiencies, and sustained accuracy-related penalties in part; some assessments against two donors were dismissed as untimely.
- The donors and transferee trusts appealed.

## Issues

1. Whether coordinated reciprocal transfers of closely held stock to each other’s children constituted indirect “cross-gifts” to the donors’ own children, justifying denial of annual exclusions for nominal gifts to nieces and nephews.
2. Whether accuracy-related penalties under I.R.C. § 6662 were proper where the taxpayers relied on professional advice in implementing the plan.

## Decision

- The court affirmed the gift tax deficiencies, holding the Tax Court correctly treated the coordinated transfers as indirect cross-gifts to the donors’ own children.
- The court rejected the argument that a related family member’s transfers (who did not receive reciprocal benefits) defeated the inference of reciprocity among the donors with children.
- The court reversed the accuracy-related penalties, finding reasonable cause and good-faith reliance on professional advice under I.R.C. § 6664(c).

## Legal Principles

- Federal gift tax reaches transfers “whether direct or indirect”; courts may recharacterize formally separate transfers as indirect gifts based on their substance.
- For reciprocal or interrelated intra-family transactions, courts assess whether donors end in the same economic position as if each had transferred property directly to the intended beneficiary; coordinated “cross-gifts” may be treated as indirect gifts to the donors’ own children.
- Annual exclusion eligibility depends on the substance of the transfer; a reciprocal arrangement designed to multiply exclusions can justify denying exclusions for nominal gifts to non-primary beneficiaries.
- Accuracy-related penalties under I.R.C. § 6662 may be avoided if the taxpayer shows reasonable cause and good faith, including good-faith reliance on competent professional tax advice.

## Conclusion

The Eighth Circuit upheld gift tax deficiencies by treating coordinated family stock transfers as indirect cross-gifts that could not generate additional annual exclusions for nominal gifts to nieces and nephews, but it vacated accuracy-related penalties because the taxpayers acted with reasonable cause and good faith by relying on professional advice.


Sather v. Commissioner, 251 F.3d 1168 (8th Cir. 2001)