1998 Gift and Estate Tax Decisions of Note

The 5th Circuit, in Estate of McLendon, 98-1 USTC ¶60,303, reversing the Tax Court, held that the decedent, who was terminally ill and died six months later, was entitled to rely on Rev. Rul. 80-80, which permits the use of actuarial tables to value an annuity unless death is “clearly imminent.” The Court also remarked that the IRS must follow its own pronouncements.

In Estate of McClatchy v. CIR, __F3d__ the 9th Circuit reversed the Tax Court and held that the estate tax value of stock whose restrictions disappear at death is the (depressed) value immediately prior to death, not the value in the hands of the estate.

The Tax Court, in Williams v. CIR, 75 TCM 1758, allowed a 44 percent discount for a minority interest in an undivided one-half interest in real property. The taxpayer’s expert witnesses included a real estate appraiser, who valued the realty, a business appraiser, who valued the partial interest, and a real estate attorney, who valued partition costs.

In Estate of Newman, 111 T.C. __ (No.3), the Tax Court held that checks not actually cashed before the decedent’s death were includible in her estate, since the decedent still had the power to stop payment. Decedent’s son had written $95,000 of checks under a durable power of attorney shortly before her death.

McKeon v. U.S.  __F3d__, (9th Circuit) underscores the importance of consistency when drafting estate tax payment provisions. Estate taxes of $245,961 were paid out of nonmarital Trust B, and the IRS proposed a $98,282 deficiency, asserting that the estate taxes should have been paid out of marital Trust A, reducing the marital deduction and increasing estate taxes. The 9th Circuit, reversing the District Court, held that since the California Probate Code required estates taxes to be apportioned absent a clear indication otherwise in a testamentary instrument, those taxes must be paid from Trust B.

In Leggett v. U.S., 120 F.3d 592, the 5th Circuit, rejecting IRS arguments, held that no federal tax lien attached to a disclaimed inheritance. The 8th Circuit reached the opposite result in Drye 1995 Family Trust v. U.S., __F3d__ where the taxpayer disclaimed his entire interest in the estate of his mother, who had died intestate. There, the disclaimed property passed to the taxpayer’s daughter, who transferred the assets into a family trust which contained a spendthrift clause. The Court found that the disclaimer was void and fraudulent against the IRS.

In U.S. v. Simpson, __F.Supp.__, the court held no federal tax lien attached to real property where the taxpayer deeded his interest in property held jointly with his wife as tenants by the entirety, where the transfer preceded the filing of the federal tax lien. The Court noted that property held by the entireties was not reachable by any creditor.

The Tax Court, in Estate of Davis v. CIR, 110 T.C.__ (No. 35), recognized a lack of marketability discount reflecting built-in capital gains.  IRS had argued that federal law precluded the consideration of built-in gains in calculating such a discount. Judge Chiechi noted that earlier cases holding that capital gains taxes do not reduce the value of closely held stock were decided prior to the repeal of the General Utilities doctrine, which had permitted tax-free liquidations.

In Hewitt v. CIR, 109 T.C. 258, the Tax Court upheld an IRS decision to allow a charitable deduction equal to the basis, but not the higher FMV, of charitable gifts made by a closely held corporation. Despite correctly reported valuations, the taxpayer had not substantiated the values as required by attaching a qualified appraisal to the income tax return.

In NYS Bar Assoc. v. Reno, 97-CV-1768, (N.D. NY), the Constitutionality of 42 USCS 1320-7b, which provides for criminal penalties against attorneys engaging in Medicaid planning, was challenged. Attorney General Reno announced that the Justice Department would not defend the Constitutionality of the law since the statute was plainly unconstitutional under the 1st Amendment.

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