In the annals of family business succession planning, it is worth noting some clever, albeit flawed, attempts to transfer ownership interests in a mature enterprise to family members while avoiding the transfer tax toll.

The Saga

This is not a new story but is an interesting one that bears revisiting. Cavallaro v. Commissioner, 842 F.3^rd 16 (1^st Cir. 2016), affirming in part, reversing in part, and remanding, T.C. Memo. 2014-189, is one such instance. (In this connection, see also the final Tax Court decision on remand at T.C. Memo 2019-144.)  In 1979, William Cavallaro and his wife Patricia founded the contract manufacturing company known as Knight Tool Co. (Knight). William owned 49% of the stock and Patricia owned 51%. Their sons, Ken, Paul and James began working in the business.

Some years later, on Nov. 30, 1987, Camelot Systems Inc. (Camelot) was formed by Ken, Paul and James with its capital stock being issued equally among them. Camelot was organized for the purpose of further developing certain technology owned by Knight.