The 5th Circuit, in Estate of Jameson v. Comr., 267 F.3d 366, made further inroads into the doctrine of precluding valuation discounts for built-in capital gains. Reversing the Tax Court, it held that a full discount for accrued capital gains tax liability should have been allowed when assessing the value of the estate’s holdings in a privately held C corporation.
Although family holding entities are often created to achieve valuation discounts, the Tax Court allowed a 30% fractional interest discount for undivided minority interests in real estate held outright. The court cited the “limited pool of potential buyers” and the likely costs of partitioning various parcels. Est. of Forbes, T.C. Memo 2001-72.
Est. of Simplot, 249 F.3d 1191, was reversed by the 9th Circuit. Tax Court had ascribed an astronomical value to a small percentage of voting shares. The appellate decision cast doubt on the IRS theory of a swing-vote premium (PLR 9436005) and also soundly rejected the Tax Court’s view that an enormous premium, measured as a percentage of the total value of the company, could be ascribed to a relatively small percentage of a company’s stock.
The IRS suffered a string of defeats in the FLLC-FLP context: Church v. U.S., 268 F.3d 1063, decided that an FLP created shortly before death was not a sham, despite a failure to file proper state documents until after the decedent’s death. Est. of Jones, 116 T.C. 121, rejected the gift on formation argument and held that limitations on transfer and withdrawal are not “applicable restrictions” under §2704. Knight v. Comr, 115 T.C. 506, upheld a 44% discount for lack of control and marketability, despite the fact that the partnership kept no records and the children’s trusts never participated in management. The Tax Court reasoned that the agreement was valid under state law, and could not be disregarded because a hypothetical buyer or seller would not disregard it. 115 T.C. 506. Estate of Strangi, 115 T.C. 478, held that a partnership validly existing under state law must be respected for estate tax purposes, despite doubtful nontax motives. Finally, Est. of Dailey, T.C. Memo 2001-263, rejected the IRS’s appraisal, and allowed a 40% discount in an FLP holding only marketable securities.
Est. of True, T.C. Memo 2001-67, held that a buy-sell agreement, which adopted a book value formula designed by the family accountant who was not a professional appraiser, although legitimate as a business arrangement, did not establish estate tax values. The court reasoned that the same formula was used to value different companies, the agreement failed to provide for re-evaluation, and the children had no opportunity to negotiate its terms.
Est. of Rosano, 245 F.3d 212, held that checks used to make annual exclusion gifts were includible in the estate when they were deposited, but not cashed before the donor’s death. Est. of Swanson, 46 Fed. Cl. 388, held that gifts made pursuant to a durable power of attorney were includible in the decedent’s estate since that power was not expressly stated and could not be implied. This decision suggests that it would be prudent to expressly include such language in New York durable powers if these gifts are contemplated.
Hahn v. Comr, 110 T.C. 140, held that a decedent’s gross estate includes the full value of property jointly owned by the decedent and the surviving spouse where the decedent had contributed the entire consideration in 1972, prior to the enactment of the automatic 50% rule of IRC § 2040(b)(1) in 1981. Thus, the surviving spouse was entitled to a higher income tax basis at no estate tax cost, due to the unlimited marital deduction. The Tax Court followed the rule first enunciated in Gallenstein v. U.S., 975 F.2d 286. The IRS has acquiesced to the decision.
O’Neal v. U.S., 258 F.3d 1265, held that post mortem events must be ignored when valuing unpaid income taxes for estate tax purposes. (Income taxes had been paid on an assessed estate tax deficiency. When the estate tax dispute was eventually settled, an income tax refund was claimed.) Similarly, the 10th Circuit, in McMorris v. Comr, 243 F3d 1254, reversed the Tax Court and, quoting Regs. §20.2053-1(b)(3), held that an estate may properly deduct amounts that are “ascertainable with reasonable certainty” at death. The estate had deducted income tax on disputed capital gains which, after resolution, actually resulted in a taxable loss. Est. of Smith v. Comr., T.C. Memo 2001-303, similarly held that an estate may properly deduct income taxes that it may never pay.
Branson v. Comr., 264 F.3d 904 held that an estate may equitably recoup an overpayment income taxes, despite the expiration of the statute of limitations.