"Gifting" has always been a popular tool for dealership succession planning. Prior to enactment of the Taxpayer Relief Act of 1997, the final tax effect of the transfer was never certain. The IRS could challenge the valuation and assess a higher tax to the dealer's estate. The 1997 Act provided some needed protection in this regard.

New relief provision For gifts made after Aug. 5, 1997, the Taxpayer Relief Act of 1997 precludes the IRS from challenging the valuation after three years have passed from the date a gift tax return is filed with regard to the transaction. In order to achieve protective status, taxpayers are required to provide "adequate disclosure" of the gift in a gift tax return. Prior to now, it has not been clear what would qualify as "adequate disclosure."

Regulations have now been issued which clarify the reporting process and provide a more predictable end result. With a proper appraisal and compliance with the regulations, a dealer can substantially decrease the amount of tax imposed on the transfer of his or her dealership to a successor through timely gifting with a greater degree of certainty than before.

Dealers who make transfers to a successor that do not exceed $10,000 are not required to report the gift to the IRS. The excludable amount is increased to $20,000 if a gift tax return is filed and the dealer's spouse consents to the gift.

Even though a gift tax return is not required to be filed if the value of the gift does not exceed $10,000, it might be wise to do so in order to invoke the protection provided by the statute if the gift is of a type that a question can be raised as to how it is valued.

Discounts for lack of control and marketability are allowable if the gift is of a minority interest. These combined discounts can amount to 40% or more of the undiscounted value. In addition, the future appreciation in value of the gifted shares will be excluded from the dealer's taxable estate.


Assume a dealership with a current market value of $2,000,000 has after-tax income of $300,000. The dealer gifts 20% of his or her equity to a son or daughter successor. The dealer's equity is thereby reduced by $400,000.

After claiming a 20% deduction for lack of marketability and an additional 30% of the remaining amount for lack of control, i.e., a minority interest, the value of the gift is reduced to $214,000 ($400,000 - $80,000 (20%) = $320,000 - $96,000 (30%) = $214,000.)

If the gift is split over two years and the dealer's spouse consents, an additional $40,000 can be deducted for annual exclusions. The amount of the reportable gift is thereby reduced to $174,000 (43.5% of the $400,000 by which the dealer's estate is immediately reduced).

The cycle does not stop there. If a gift is not made and the $400,000 gifted by the dealer continues to grow at 15% per year, it will amount to $1,618,223 in ten years. In that time frame, the amount of estate tax on the amount not gifted will grow to $890,023, assuming the dealer's estate exceeds $3,000,000 and will be taxed at 55%.

The foregoing example illustrates the value of timely gifting for dealership succession. If a minority interest is conveyed, substantial discounts are allowable for lack of control and lack of marketability. Once the transfer is made, the future appreciation in value is removed from the dealer's taxable estate.

For dealers to receive the protection provided by the new law, it is important to file a properly prepared gift tax return with a supportable valuation adequately disclosed in the return in any case where the valuation of the gift can be subject to question, whether or not the value of the gift exceeds the $10,000 annual exclusion.

Harold DeValk is a CPA and President of The DeValk Associates, Ltd. in Chicago. His firm specializes in dealership valuations, succession and estate planning, litigation support and buy/sell planning and negotiations. He can be reached at 312-697-1708.

PRIMEDIA Workplace Learning's ASTN launched its "Net Gain: Success on the Internet" series.

The broadcast series shows car dealers how to leverage the Internet, build websites and respond to consumers buying cars through the Internet.

Net Gain is produced by Automotive Satellite Television Network (ASTN), a leader in dealership training.

The auto industry, including both manufacturers and dealers, is undergoing a huge transformation as it adapts to the Internet. More than 80% of dealers now have websites, an increase of 8% in the last six months.

Net Gain responds by bringing together Internet and dealer experts to provide tips on building profitable websites, analyzing websites and providing prospecting ideas. Net Gain also provides the latest news on the Internet's impact on the car industry.

Each broadcast is hosted by ASTN's Programming Director Steve Walker, along with either Publisher Jim Muntz or Editor Mike Bowers from "Auto Retailing on the Web."

It includes critiques of websites from Peter Martin, Jr. CEO of MetroAutoMall.com, (www.metroautomall.com), the Internet's largest automotive dealership portal.

Mr. Muntz says, "We are pleased to work with ASTN to provide real-time Internet information supplementing our Auto Retailing on the Web newsletter. Dealers want to use the Internet channel to generate more customers."

PRIMEDIA Workplace Learing President Peter A. Gudmundsson says, "Net Gain enables dealers to proactively address the Internet's immense opportunities. It reinforces ASTN's commitment to being the one-stop information resource for dealers wanting to improve their bottom line."

Net Gain can be seen live by satellite on the first Monday of each month at 12:30 p.m. EST. It is repeated 19 times a month through ASTN satellite programming or through streaming video at www.astn.com.