Spring Is Here, The River Is Up, And The Fiores Are Fine!
After a busy couple of months with great trips to Tahiti and to Hawaii (Kauai), Mary Ann and I are enjoying the high water on the Middle Fork of the Clearwater River running fast in front of our Idaho log house. However, the winter snows were not near the usual North Idaho winter, so we hope for continuing Spring and early Summer rains to lessen the forest fire danger.
Our wonderful news arrived on April 12th with the announcement that son Mark Fiore - the youngest (age 40) of our 6 children) had received the 2010 PULITZER PRIZE for editorial cartooning! Mark does his animations and journalism solely on the Internet - and this was a "first" for the Pulitzer Committee to award one of the annual 14 awards to an Internet journalist. See www.Pulitzer.org for details, or go to Mark's site at www.markfiore.com (or to www.SFGate.com). We are on our way to New York City for the Pulitzer Prize awards luncheon on Monday, May 24th - what a great time to be had in the Big Apple!
Other family news includes our grandson, Anders Ericson, graduating from the University of Oregon Honors College next month. And our newest grandson, Col Makai Fiore Cassily, continues to grow and learn during his first year with his loving parents, Sean and our daughter Susie, in Taos, N.M.
ONCE AGAIN - THE ESTATE & GST TAX GAP MESS!
My last newsletter, March 13, 2010, discussed this year's mess and confusion regarding estate planning, and yet Congress has yet to act. However, it was reported last week several Senators are nearing agreement on some "estate tax fix" - those apparently working on this include Senate Finance Committee Chair Max Baucus (D-MT) and committee members John Kyl (R-AZ) and another one, Blanche Lincoln (D-Ark.).
Noone really knows what will happen, but perhaps there is some hope for a retroactive restoration of the estate tax with permanence for the future. Probably the worst thing that could happen is for nothing to happen and the 2001 transfer tax law come back as of 1/1/11. In the meantime, while some quick document changes may be appropriate for interim planning and some states have enacted legislation to allow documents to be properly interpreted for persons dying during the gap period (2010), lots of important planning awaits advisors and their clients. Let's hope that my next newsletter has something more definite to report.
CHECK OUT CCH BUSINESS VALUATION ALERT PUBLICATION.
For the past couple of years, I have been a regular contributor to the Commerce Clearing House, Inc. (CCH) publication, CCH Business Valuation Alert - published bi-monthly by CCH. Generally, my articles cover FLPs and LLCs and various valuation developments of interest to practitioners. In Vol. 11, Issue No. 2, April, 2010, my article covers two important taxpayer estate tax case victories: "The Black and Shurtz FLP Cases: Two Taxpayer Victories". In June's issue, I will be discussing the cases outlined below, namely, Holman, Pierre and Ludwick.
HOLMAN, PIERRE AND LUDWICK.
First of all, I initially discussed Holman v. Commissioner, 130 T.C. No. 12 (5/27/08)in my 9/14/08 newsletter. Tax Court Judge Halpern reviewed a gift tax case with Dell Computer stock, volatile in price on the public markets, wherein the parents had contributed the stock to an FLP and made gifts of FLP interests just 6 days later. The court refused to buy into the IRS attacks based on IRC Sec. 2511 "indirect gifts" of the Dell stock and "step transaction". However, the court indicated that there must be careful consideration of the type of investment involved - and the step transaction doctrine applied to simultaneous funding of an FLP or FLLC and then gifting or selling of interests therein to family members has legs. Obviously, planners and their clients can - and should - avoid the problem, having clear separation of funding the entity from gifts or sales of interests therein - how long? - who knows? But Judge Halpern also dealt with valuation of the gifted interests and, since the FLP owned only passive investment assets, he applied IRC Sec. 2703 to disregard certain of the partnership agreement provisions (yet substantial valuation discounts were allowed). More recently, Holman was affirmed on appeal, and so we need to consider carefully its facts and the legal analysis involved.
Next we have the two(2) Suzanne Pierre v. Commissioner gift tax cases: First, my 9/7/09 newsletter reported by the first case, 133 T.C. No. 2 (8/24/09), in which the issue was whether valuation discounts were available for gifts and sales made on the same day by the sole member of a single member LLC. The court, in a split opinion, concluded yes - and again note how this issue can be avoided easily in the planning of various transactions. But since the gifts and sales, by which the donor/seller transferred her entire interest in the LLC to trusts for a son and granddaughter, occurred all at once, on one day, again the step transaction issue raised its ugly head! In the recent case, "Pierre 2", T.C. Memo. 2010-106 (5/13/10), Tax Court Judge Kroupa found the step transaction doctrine did apply - therefore, the combined 9.5% gifts and 40.5% sales of LLC member interests (combined 50% to each trust) gave the hypothetical buyer the right to turn down an appointment of an LLC manager, thus a measure of control. All was not lost, in fact little was lost! The funding of the LLC by Ms. Pierre took place on September 15, 2000 and consisted of $4.25 million in cash and securities, and the gift/sale transactions took place 12 days later on September 27th - - so essentially the court's use of the step transaction doctrine only tweaked downward the FMV of the transferred LLC member interests. The concluded combined valuation discount allowed by the Tax Court here was 35.6% - not bad!
And now we come to an interesting co-tenancy interest valuation case, namely Ludwick v. Commissioner, T.C. Memo. 2010-104 (May 10, 2010). Here we have Judge Halpern of the Tax Court evidencing great frustration with the parties' valuation appraisers, causing him to somewhat go off on his own with a valuation determination. In Ludwick, actually two(2) consolidated gift tax cases, a husband and wife held Hawaii land as co-tenants (they were California residents), substantially improved the ocean front property with a resort home, and then got to the estate planning. The FMV of the land and home was $7.25 million, with annually $350,000 in operating and maintenance costs! First, in late 2004 two(2) separate QPRTs were established, per IRC Sec. 2702 allowing thus for the grantors to retain possessory rights for a specific term of years and thus reduce the gift values. In February, 2005, the separate undivided interests in the Hawaii property were transferred to the two, separate QPRTs.
1 - On the couple's separate 2005 gift tax returns (Forms 709), the 50% undivided interests were discounted by 30%, on audit thereafter, IRS proposed 15% (akin to the so-called "Propstra discount"). Litigation ensued with IRS arguing that only an 11% discount should be granted. Taxpayer's expert, Carsten Hoffman of FMV Opinions, Inc., proposed a 35% discount, while the IRS expert, Steve Bethel, concluded an 11% discount.
2 - What did Judge Halpern say? - 17% - the result seems like a lot of time and expense for not much of a result. Essentially, going into great detail even in the short 13-page opinion, the court disregarded virtually all of the analysis and arguments of both appraisers. He was very critical of the appraisers and it should remind legal counsel and the appraisal community of the need to have all relevant facts and data continued within the written appraisal report - which is treated in Tax Court proceedings as the direct testimony of the testifying appraiser. Judge Halpern's own computation of the discount -worth reading - would appear to be subject to challenge, possibly even due to some discussion of the husband/wife combo here rather than following the hypothetical party standard of value in tax cases.
3 - But maybe the Ludwick couple received a gift?! A unique feature in this case, not even discussed in the court's opinion but rather contained in the email FMV Valuation Alert (TAM 9336002 Bites Taxpayer), May 12, 2010 (www.fmv.com), was that there was a Tenancy-in-Common Agreement that contained two(2) important provisions. First, the co-tenants gave up their respective rights of partition, and second, and perhaps more telling, each co-tenant had the right to sell his/her interest to the other, or, in the alternative, to sell the entire property and split the proceeds. This second provision in effect is a liquidation right provision - should not that have virtually eliminated any discount?
I hope my readers have enjoyed this May, 2010 Newsletter.
Have a great summer! Owen Fiore
