The Tax Court, in Estate of Mellinger, 112 T.C. 26, held that estate tax valuation discounts are applicable to property part of which resides in a QTIP trust and part of which is owned outright by the surviving spouse at her death. In rejecting the IRS position that multiple portions of an asset should be aggregated in the surviving spouse’s gross estate, the court noted that QTIP property does not actually pass to or from the surviving spouse and that §2044 does not mandate tax consequences identical to an outright transfer to the surviving spouse.
Reversing earlier doctrinal case law, Eisenberg, 74 T.C.M. 1046, rev’d 115 F.3d 50 and Estate of Davis, 110 T.C. 530, pre-1999 cases, held that potential capital gains tax liability was an appropriate factor to consider determining the appropriate lack of marketability discount. This trend continued in 1999, when the Tax Court, in Estate of Desmond, 77 T.C.M. 1529, allowed a 10% increase in lack of marketability discount due to potential environmental liabilities. Similarly, in Estate of Jameson, 77 T.C.M. 1381, the Tax Court held that a willing buyer would consider built-in capital gains tax liability.
Estate of Fagan, 77 T.C.M. 1427, held that charitable bequest deductions must be reduced where tax payment provisions in the decedent’s will and trust were inconsistent. The will poured the residue of the probate estate into the trust which contained a charitable bequest. However, the amount which poured into the trust was reduced due to a drafting error in the will which called for payment of taxes before funding the trust. Ironically, the drafting even overcame the state’s default equitable apportionment law, which would have accomplished the decedent’s intent.
In Neal v. U.S., 99-1 USTC ¶60,343 (3rd Cir. 1999), the taxpayer relinquished an interest in 1989 after Congress enacted §2036(c), and paid a gift tax of $420,000. That section was retroactively repealed, nunc pro tunc when Chapter 14 was enacted. The taxpayer sued for a refund of the taxes claiming that a “mistake” in not knowing that §2036(c) would be repealed justified a refund. The court agreed, and held that the government “may be made to refund taxes paid on previously taxable events that have become non-taxable.” [The Supreme Court held in U.S. v. Carlton that retroactive changes to transfer taxes are constitutional. 512 U.S. 26 (1994).]
With four federal circuit courts of appeal split on the critical issue of whether a federal tax lien can be defeated by a qualified disclaimer, the Supreme Court granted certiorari in April, 1999. While the 5th and 9th circuits have held that a qualified disclaimer relates back to the decedent’s death and precludes a federal tax lien, the 8th and 2nd circuits have reached the opposite result, deciding that a federal tax lien cannot be defeated by a qualified disclaimer under §2518.
In Griffin v. U.S., 42 F.Supp.2d 700, the taxpayer first transferred 45% of shares in a wholly owned corporation to his wife. Shortly thereafter, each transferred a 45% interest to a trust for the benefit of their child, claiming substantial minority discounts. The court concluded that it was a sham transaction, disallowed the discounts, and treated the taxpayer as having made 90% of the transfer personally to the trust.
In Estate of Simplot, CCH Dec. 53,296, the Tax Court held that after applying a control premium, 76 voting shares were each worth $215,539, rather than $2,650, as had been reported by the estate. Since the ratio between voting and nonvoting shares was “skewed,” the court instructed that the premium should be expressed as a percent of the equity of the entire corporation. The court’s abatement of penalties suggests that aggressive valuation positions may be warranted by tax counsel.
The Tax Court, in Estate of Smith, T.C.M. 799-368 accepted a 76% discount for a minority interest in a landholding and farming corporation. The case clearly illustrates that valuation planning discount opportunities abound for holding companies which possess high asset values but low earnings (e.g., farms, orange groves, ranches and timber tracts). The 76% discount resulted from a 50% minority discount and a 30% lack of marketability discount. The decision also underscores the importance of a valuation report prepared by an expert.