After enactment of ATRA 2012 in early January, 2013, there was much confusion in estate and succession planning, including whether such planning was even relevant any longer! The high transfer tax (gift, estate and GST taxes) exemption level (in 2014, $5.34 million per person) in effect exempts over 99% of all U.S. families from any Federal estate tax worries. But then the reality of succession planning set in, i.e. that even no having any death tax liability just meant there were more assets to deal with within the family.
The past couple of years there have been significant developments in Valuation for transfer tax purposes (see cases discussed below), the debate has continued over the use of bypass and marital deduction trusts compared to the new Portability Election, same-sex couples saw the U.S. Supreme Court find in their favor for Federal law purposes, but State laws still vary greatly, The Domestic Asset Protection Trust, with "self-settled" trusts allowed in more jurisdictions has become a reality, and "Decanting" an irrevocable trust (i.e. the trustee transferring assets to another trust for the same beneficiaries, but in different fashion) is allowed by many jurisdictions now as a matter of State law. So there is much to consider in estate and succession planning.
Coming CPE Events
I continue to be involved in continuing education for tax professionals, principally CPAs. For WesternCPE (see www.westerncpe.com) I have about a dozen webcasts scheduled between October and December, 2014, and I am leading a succession planning conference, November 10-12, 2014 for WesternCPE, namely, The 4th Annual Family Wealth & Business Succession Planning Conference - check it out and join us! Also, as detailed in the WesternCPE website, I am presenting courses on succession planning in Hawaii and New Orleans in November, and in Las Vegas in early December.
I continue to work with Steve Leimberg of LISI on commentaries regarding FLP, valuation and other estate planning cases. This year there have been several valuation cases decided by the courts that are quite interesting, and are outlined briefly below.
Valuation - A Core Concept Constantly the Subject of Tax Litigation!
First, we lead off with Estate of Helen Richmond v. Commissioner, T.C. Memo. 2014-26 (2/11/14), which already was reviewed in my March 5, 2014 Newsletter (check for it in my website archives). Here the decedent estate, in an estate tax case, was owner of a 23+% interest in an IRC Sec. 541 personal holding company which owned highly appreciated, dividend paying marketable securities. The Tax Court reviewed the valuation issue carefully, dealing with differences among the appraisers as to the valuation methodology. A "BIG" Discount (built-in capital gains tax liability potential) was allowed, on a present value computed approach by the court, and it was confirmed that the proper valuation methodology was the NAV (net asset value) method for an investment company. Reading the case (check it out at www.ustaxcourt.gov), you will see that the values proposed by the estate and the IRS were all over the place, and the Tax Court came down somewhat in the middle in its own determination.
Next, we have the case of Estate of Franklin Adell v. Commissioner, T.C. Memo. 2014-155 (8/4/14), and I have written and had published an LISI commentary on this case as well. Father owned STN.Com, a taxable C corporation providing satellite linkup and facilities for a related 501(c)(3) corporate entity, "The Word" which broadcast, including through Direct TV, religious programming. The contract between the entities called for (1) 95% of The Word revenues to be paid to STN.Com, BUT (2) subject to the limitation (never followed by the parties!) of actual cost of providing the satellite uplink and facilities. In effect, the profit-making corporation siphoned off most of the revenues, and thus profits included, from The Word. The Tax Court pointed out it was not dealing here (no doubt IRS will!) with the "private inurement" issue that could lose the tax exempt status of The Word. The profits of STN.Com were considered by the court, even though they legally were way overstated, to be the basis for valuation of Mr. Adell's stock in his estate!
Third, I commented back in 2013 for LISI on the next case, an estate tax case involving the value of decedent's co-tenancy interests in art work. Estate of James Elkins, Jr. v. Commissioner, 140 T.C. 86 (2013) - here the court, without any real evidence and with the Service firmly positing there should be NO co-tenancy discount at all, came up with a 10% overall discount for some 60+ works of art.Then in weighed the 5th Circuit Court of Appeals, Case #13-60472, deciding on September 15, 2014 that the Tax Court was out of line and thus should be reversed. Further, the 3-Judge panel of the 5th Circuit determined that the only evidence of value was that presented by the taxpayer estate, that it was relevant, reliable and credible, and so the appellate court went totally with the estate on its trial evidence of value, with substantial co-tenancy discounts allowed on a per art work analysis. So what was the final result now - an over $14 million refund due the taxpayer estate!
Finally, I have just submitted to LISI my commentary on a gift tax case, decided by the Tax Court on September 17, 2014, namely, William and Patricia Cavallaro v. Commissioner, T.C. Memo. 2014-189. This is a "must read" case opinion, especially as it involves indirect or constructive gifts on a merger based on IRC Sec. 2511, and the obviously way "over the top" advice of accountants and lawyers to the donors that had no real foundation in the true facts! The advisors were a tax partner at the well-respected Boston-based law firm of Hale & Dorr, and the accountant was the firm of Ernst & Young! The parents, William and Patricia Cavallaro, owned Knight Tool Co., a contract tool and machine manufacturing company, incorporated after being run as a sole propretorship. In 1987, after experimenting with a proprietary product ("CAM/ALOT") without much success, but having developed the technology with Knight engineering expertise, the 3 sons formed Camelot Systems, Inc., which the facts showed really was but a sales corporation for the eventually quite successful proprietary product line. Yet the Hale & Dorr attorney, in 1994 created "out of whole cloth", it seemed, affidavits and a "Confirming Bill of Sale" to the effect that in 1987 the product technology was "transferred" to the sons' corporation, Camelot Systems, Inc. There really was no true factual support for this, as you can see in reading the 70+ page opinion of Tax Court Judge Gustafson. So, in 1995, when the two companies were merged with Camelot the surviving entity, the parents received only 18% of the stock while the sons got the over 80% balance - - as the court said, there clearly was a substantial overallocation of stock to the sons and underallocation of stock to the parents - - a perfect place for IRS to raise the issue of Sec. 2511 indirect or constructive gift (note: for a taxable gift, "intent to gift" is NOT required!). The date of the gifts was 12/31/95, and yet this Tax Court opinion was only issued last month here in 2014! - - think of the compound interest on the total detrmined gifts of $29.6 million from 1995-2014 and beyond! As to the failure to file gift tax returns and the understatement of gift tax penalties, the court let the donors off the hook, finding they reasonably relied on professional (even though quite misguided) tax advice. The parents were not well-educated, and the professionals, especially Louis Hamel of Hale & Dorr, were quite insistent, even though there were disagreements among professionals along the way. So watch out for indirect or constructive gifts in family business transactions.
I hope you have enjoyed the discussion in this Newsletter, and send me any comments or questions you might have after reviewing the Newsletter, to email@example.com.
Have a great coming holiday season in 2014, and a healthy and prosperous 2015!
owen fiore "On the Wild & Scenic Designated Middle Fork of the Clearwater River, North Idaho"