Tags: Adell | estate | tax | valuation

Freezing Valuations — Your Estate Tax Depends On It

Monday, 13 October 2014 08:08 AM Current | Bio | Archive

In a recent estate tax case, the IRS determined a federal estate tax deficiency of nearly $40 million. This included a hefty estate tax valuation understatement penalty of a little more than $15 million.

The estate initially filed an estate tax return claiming an estate tax due of a little over $15 million. Later, the estate amended its estate tax return taking an aggressive position that a major asset — a 100 percent interest in a closely held company — should really be valued at zero instead of $9.3 million. This had the effect of reducing the total estate tax due down to $8.1 million.

The IRS responded by determining an estate tax deficiency of $39.7 million. The IRS had a hissy fit and determined that the closely held stock was worth more than $92.2 million.

However, by the time the case made it to tax court, the IRS calmed down, revised its valuation and claimed that the closely held stock fair market value for estate tax purposes was $26.3 million.

The estate finally took the position that the stock value was $4.3 million and not zero.

The problem facing the tax court in the Estate of Franklin Z. Adell was to determine the fair market value of the closely held stock and whether the substantial estate tax valuation penalty was applicable.

In this kind of dispute with the IRS, the determinations of the IRS are presumed to be correct and the taxpayer — in this case the Estate of Adell — has the burden of proving the IRS wrong.

Here is a situation where a seriously wealthy man (the kind with a Bentley GT and two Rolls Royces) planned for the efficient transfer of his assets at death by using trusts but didn't take the additional planning effort necessary to freeze the valuation of those assets. It was, in effect, the crack in the door that allowed the IRS to come marching into the room — or estate in this case.

The estate tax is an insidious tax. Originally it was enacted into law to pay off the World War I bonds. This happened three times before in U.S. tax history. All for the same purpose — to pay for war bonds. With the previous estate taxes, the war bonds were paid off and the estate tax was promptly repealed. Not this time.

The World War I estate tax took on a life of its own. No longer does it have anything to do with raising revenue to pay for something. Now it exists only as a matter of social engineering and political policy. A tax that is costly to both the taxpayers and the government.

In fact, the Congressional Joint Committee on Tax has issued reports several times in recent years demonstrating that the estate tax is actually a net revenue loser for the government.

Estate tax professionals who regularly work on larger estates many times can use well-established tools and techniques to reduce or even eliminate the impact of estate tax on closely held assets. Essentially, estate tax becomes a voluntary tax only paid by people who do not get the right estate tax planning advice during their life.

Failing to fix for tax purposes the valuation of assets is a costly mistake that leaves the legacy of a lifetime of hard work and the future financial security of the family and business first in the hands of the IRS, and then a solitary tax court judge.

In the end, the tax court judge valued Adell's closely held stock at $9.3 million and determined that the substantial understatement penalty was not applicable. But, the IRS was still given a piece of the pie for their efforts since the court found that the accuracy-related penalty might still be applicable on the valuation of other items in the estate.

There is a lesson to be learned from the Estate of Adell. That is, freezing the valuations of closely held assets that will be subject to federal estate tax is a part of the estate plan that should never be overlooked.

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In a recent estate tax case, the IRS determined a federal estate tax deficiency of nearly $40 million. This included a hefty estate tax valuation understatement penalty of a little more than $15 million.
Adell, estate, tax, valuation
Monday, 13 October 2014 08:08 AM
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