In private letter ruling 202406001 (February 9, 2024), the taxpayer requested a determination of the gift tax consequences of a capital reorganization. An executive had previously formed several trusts and GRATs that held shares of A Stock and B Stock in the Company. A limited liability company was created for a specific business purpose (not described in the PLR). The company and a disregarded entity wholly owned Sh.PK. The Company and its Board approved a share repurchase program whereby executives and funds would contribute shares of A and B Shares to the Company, which would then retire those shares and issue new shares of C shares for LLC. As part of the plan, the executive and the trusts planned to sign a contribution agreement under which they would contribute a proportionate number of shares back to the company. The LLC would then use the cash flowing from the C Stock for a business purpose.

A transfer of property from a shareholder of a company to a corporation is a gift to the other shareholders, unless it is made in the ordinary course of business, which means it is in good faith, at arm's length, and without charitable intent. In that case, the transfer is deemed to have been made for adequate and full consideration in money or money's worth.

The IRS held that the agreement applied to transfers that met these requirements. First, the entire structure of the agreement was for business purposes. Second, the executor and the trusts acted in their own self-interest and the non-contributing shareholders were not related to the executor or the trusts. Thus, indirect transfers resulting from stock contributions increased the value of the non-contributing stockholders but were not gifts because they were made in the ordinary course of business.

As between the executive and the trusts, transfers made by the executive increased the value of the shares held by the trusts, but the same was true for transfers made by the trusts to the executive. Because they contributed an equal share of their shares, the value each contributed will equal the value each received. Therefore, those indirect transfers were not gifts either.

Separately, the IRS held that the stock exchange did not interfere with a GRAT that qualified under IRC Section 2702. The question was whether the contribution of stock to the Company would be characterized as a transfer to the executive annuitant, which would violate the GRAT. GRAT correctly prohibits any distribution to the annuitant other than qualified annuity interest. The contribution of shares in the company resulted in an indirect transfer from the GRAT to the executive (as the annuitant) and an indirect transfer to the non-contributing shareholders (as the remainder). The IRS held that those transfers were indeed a reinvestment of GRAT assets, not an addition to the GRAT or a specific distribution to the executive annuitant.