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Below is the latest edition the Lawgic’s Case Analysis Newsletter. We realize it has been many months since the last edition was distributed. The gap in delivery was caused by a number of reasons mostly related to our rapid growth. In any case, we fell behind but we have added staff dedicated to the publication of the newsletter to rectify the situation.

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Bruce W. Grewell

Ownership determines tax liability among joint account holders (TC Memo 2007-61)

In the matter of Estate of Freedman v. Commissioner of Internal Revenue (http://www.ustaxcourt.gov/InOpHistoric/freedman.TCM.WPD.pdf), a mother contributed stock to a standard joint account (JTWROS) held with her son who never made a contribution to the account.  The mother later sold the stock she contributed profiting nearly $3 million.  She immediately transferred the majority of the gain to her personal bank account.  An investigation by the IRS identified a $700,000 deficiency.  Upon her death, the decedent’s Estate filed an amended tax return identifying the son, as joint tenant to the account from which the gain was realized, as owing an equal portion of the identified deficiency.

The Tax Court ruled that the Estate was ultimately responsible for all taxes due on the stock sales.  While alive, only the mother contributed to the joint account, an indication under Texas law that the son had no ownership.  Additionally, the Court ruled that the mother’s death did not result in a gift to the son, as she alone transferred the gains from the stock market to her personal account and failed to file a gift return.

Taxes remain due on assets regardless of improper handling (Estate of Wendell Hester v. U.S.)

In the matter of Estate of Wendell Hester v. U.S. (http://www.vawd.uscourts.gov/opinions/wilson/506cv00041.pdf), the husband was left with approximately $4 million from his wife’s trust, which he improperly transferred to his personal account. Upon the husband’s death, his Estate included all such funds in the determination of taxes owed, but later requested partial refund based on the improper inclusion of trust funds from the wife’s Estate. The husband’s Estate alternatively requested deduction under Section 2503(a) for any claims that may be made against the assets in question.

The U.S. District Court for the Western District of Virginia determined estate taxes to be based upon incidents of ownership and not necessarily on lawful possession. In this instance, the husband had exercised sufficient control and dominion over the transferred assets even though he improperly commingled the funds. Regarding the deduction, the Court noted the applicability of Section 2053(a)(3) to claims against “the estate”; no such claims had been made nor would there be due to the expiration of the claim filing period. Section 2053(a)(4), the Court noted, permits deductions for certain types of indebtedness; theoretical liability, however, does not constitute “indebtedness.”

Refund permitted beyond three-year limitation due to reclassification of funds (Estate of Phillip Goldstein v. U.S.)

Following the sale of a condominium, the Estate sent the net proceeds of the sale to the IRS. The check included a notation that payment was to go towards estate taxes, and a letter accompanied the check specifically identifying the funds as a deposit to be applied to the decedent’s estate taxes though at the time, the IRS had not assessed any such liability.

In the Estate of Phillip Goldstein v. U.S. (http://www.uscfc.uscourts.gov/Opinions/Braden/07/BRADEN.Huskins.pdf), the U.S. Court of Federal Claims ruled in favor of the Estate citing the inappropriate application of the three-year limitation for refunds as required by Section 6511. Specifically, proceeds from the sale of the aforementioned property were indicative of a deposit and not a payment. Such guidance was consistent with the Federal Circuit Court’s previous guidance in VanCanagan v. US, 231 F3d 1349.

Tax shelter provides little protection - Civil penalties determined not to abate at death (Estate of Reiserer v. U.S.)

In April 2007, the IRS issued a shelter promoter summons for the bank records of an attorney who had marketed offshore employee leasing arrangements designated as listed transactions. Though the attorney filed a motion to quash the indictment, he died before a ruling could be made. The IRS continued its investigation despite opposition from the decedent’s estate.

In the appeal of Estate of Reiserer v. U.S. (http://www.ca9.uscourts.gov/ca9/newopinions.nsf/A0C0745D00D79B73882572A30077FE2E/$file/0535615.pdf?openelement), the U.S. Court of Appeals for the Ninth Circuit granted motion by the IRS for summary enforcement based on the determination of such penalties to be civil in nature, which places them under Chapter 68 of the Code thus negating the impact of the taxpayer’s death.

IRS oversteps boundaries of Mandatory Security rule when reviewing installment plans (Estate of Roski v. Commissioner of Internal Revenue;128 TC No. 10 (2007))

The U.S. Tax Court’s determination (http://www.ustaxcourt.gov/InOpHistoric/EstofRoski.TC.WPD.pdf) was based on the Service’s current approach to requiring security in all cases of installment arrangements applicable to estate tax payments.  At issue was the Service’s use of discretion towards the denial of installment elections as provided for under Section 6165 of the Code.  The Court determined the Service’s jurisdiction under Section 7479 for requiring security (e.g., in the form of a bond or special lien) was not to be limited to the taxpayer’s qualifications for installment elections, rather jurisdiction was/is to include the Service’s use of discretion in the denial of such elections.

Estate finds no relief from FLP when it comes to tax liability (Estate of Erikson v. Commissioner of Internal Revenue; TC Memo 2007-107)

In the matter of Estate of Erikson v. Commissioner of Internal Revenue (http://www.ustaxcourt.gov/InOpHistoric/erick8son.TCM.WPD.pdf), the daughter, acting as power-of-attorney for her mother, formed a family limited partnership (FLP) utilizing primarily her mother’s property.  After the mother’s death, the IRS assessed estate and gift tax liability on the property, an amount which was subsequently challenged by the decedent’s estate.

The U.S. Tax Court based its determination in favor of the Service’s treatment of the FLP on the fact that several properties were not contributed to the partnership until immediately prior to the decedent’s death indicating the tenants did not respect the formalities of the partnership arrangement.  Also considered by the Court was the fact that significant estate expenses were covered by the FLP, an indication that the decedent intended to be rendered insolvent thus expecting the partnership to handle all outstanding expenses upon death.   As such, the assets transferred to the FLP were determined to be properly included in the Estate.

FLP assets in mid-transfer permitted to be included in contributor’s Estate (Estate of Gore v. Commissioner of Internal Revenue; TC Memo 2007-169)

In the matter of Estate of Gore v. Commissioner of Internal Revenue (http://www.ustaxcourt.gov/InOpHistoric/GoreIII.TCM.WPD.pdf), the husband left approximately $4 million to his wife via marital trust.  The daughter, as attorney-in-fact, arranged for the assignment of the trust funds to a FLP, which included the daughter, her sibling, and their mother.  The mother died before the completion of the funds transfer leaving at issue the payment of taxes on the $4 million.

The Tax Court concluded that the mother’s trust money was the only contribution made to the limited partnership.  Therefore, her estate was responsible for payment of taxes regardless of whether the transfer of funds was completed under local law.  According to the Court, the partnership was merely another form in which the decedent was able to hold her assets, and she retained use of the funds up to the time of her death such that the retained benefit rule supported the assignment of property to the decedent’s estate.