The IRS is on the hunt. Are you a target?

If one thinks the IRS has nothing to do at the estate and gift tax division (because of the increased estate and gift tax exemptions to $5.0 million), think again. 

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Discussion of Jorgensen, Another FLP Case

Steve Akers of Bessemer Trust discusses the Jorgensen case here. Make particular note of the things you should avoid if you want to have your family limited partnership respected for estate tax purposes, including:

  • You need to have real and provable, non-tax reasons to form the FLP.
  • You need to respect the FLP as a separate entity.
    • you must follow all the legal formalities.
    • you should keep business books and records.
    • you should make sure that partnership management has charge of the partnership's assets, including its checkbook
    • don't make disproportionate distributions particularly to pay personal expenses.


Estate Tax Articles on ABA website

Some recent articles of interest:

Stever Akers article on Bianca Gross v. Commissioner, which discusses the formation of a family entity, followed by a gift of interests in the entity.

Jim Roberts note on Simplicity in Valuation, which describes the Supreme Court's denial of certiorari in an 11th Circuit valuation case. This strenthens the argument that a valuation of a C corporation should reduce the value, dollar for dollar, by the amount of "built-in" taxes.

Taxpayer Victory in "Family" LLC Case

In a new Tax Court case (March 26, 2008), the taxpayers successfully withstood the IRS' challenge of a family entity formed shortly before the death of the family matriarch. Estate of Anna Mirowski, et al. v. Commissioner, (2008) TC-Memo 2008-74. It seemed that the IRS was on its way to "running the table" on family limited partnerships and family limited liability companies. So, it is encouraging to see that the Tax Court is not going to apply Code Section 2036 to ignore all family owned entities in which a decedent had an interest.

I have not yet fully digested the case and all of its implications. However, it is clear that the issues are factual when a court decides whether to apply Code Section 2036 to a family owned entity. Exactly what facts are fatal is still not clear. But this case did have some facts that are common to other IRS victories. So, the "lists" of things to do and not do will have to be adjusted after this case.

More will follow on this subject after I have had more time to examine the case and its facts.

IRS Rules There is No Statute of Limitations on Appraiser Penalty

In Chief Counsel generic legal advice (EMISC 2007-0017), the IRS has concluded that it may assess a Code Sec. 6695A penalty against an appraiser for appraisals prepared after May 25, 2007 that are used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement. In addition, the IRS concluded that there is no period of limitations that applies to the assessment of a Code Sec. 6695A penalty.
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Eleventh Circuit Agrees with Fifth that Corporate Stock Values at Death Must Reflect a Reduction Equal to the Corporation's Full Built-In Capital Gain Tax Liability

The Eleventh Circuit recently held that in determining the value of a decedent's holding company stock for estate tax purposes, the company's value is reduced by the entire built-in capital gain tax liability as of the date of death. (Estate of Frazier Jelke III v. Comm’r) The decision puts the Eleventh Circuit in agreement with the Fifth Circuit. We now have two Circuit Courts disagreeing with the Tax Court and the IRS, which argue a full discount should only be allowed if there is evidence that a purchaser would liquidate the corporation.

Allowing a discount for the full amount of the tax that would be incurred on recognition of all built-in gains, I think, better reflects reality. In my experience, a purchaser of stock always negotiates for a reduction in purchase price equal to the full amount of the tax on the built-in gains. Hopefully, if this issue goes to the Supreme Court, as it may due to the difference of opinion among the Circuit Courts, the Supreme Court will follow the realities of the business world in valuing stock in a corporation and follow the Fifth and Eleventh Circuits. Continue Reading...

Permanent Changes in the Estate Tax Introduced in the House *

We see these blurbs on a regular basis, and thought we would keep you updated on the legislative rumblings from the Hill.  Please keep watch here for any updates on this bill.

"Rep. Harry E. Mitchell, D-Ariz., introduced HR 3170 (July 25, 2007), which would permanently reform the estate tax and fix the capital gains tax rate at 15 percent. HR 3170 includes the following proposed changes, which are effective January 1, 2010, except as noted:

  • Increasing the unified credit to the equivalent of a $5 million exclusion is phased in as follows:
    • $3.75 million in 2010
    • $4 million in 2011
    • $4.25 million in 2012
    • $4.5 million in 2013
    • $4.75 million in 2014
    • $5 million after 2014
  • By reunifying the estate and gift tax exemptions, the increased unified credit applies to the estate, gift and GST tax.
  • The unified credit and GST exemption is indexed for inflation after 2015.
  • The estate and gift tax rates are reduced to the top capital gains tax rate (currently 15 percent; increasing to 20 percent January 1, 2010) on estates between $5 million and $25 million and twice that rate on estates above $25 million.
  • The $5 million definition of the top rate bracket is indexed for inflation after 2014.
  • The GST tax rate is reduced to the same as the top estate tax rate, as phased-in.
  • The executor of the estate of a deceased spouse is permitted to elect to give any unused applicable exclusion amount to the surviving spouse (usable for gift and estate tax purposes, but not for GST tax purposes).
  • The state death tax deduction is reduced in 2010.
  • The scheduled repeal of the estate and GST taxes is eliminated.
  • The present basis step-up rules are retained.

Note. This bill was referred to the House Committee on Ways and Means and has not yet been reviewed by the committee or the full House of Representatives."

* From Howard Zaritsky's Estate Planning Update,08/15/2007, Volume 07, No. 12, RIA.