Each week with Case Notes I will endeavor to provide a summary of a recent case or ruling which stands out as an important precedent. This weeks case can be found on the Lexis Nexis website in its Tax Notes Today as 2016 TNT 62-13.
The case involved the post death manipulation of the value of the decedent’s interest in a closely held corporation established to engage in real estate management activities. In summary the decedent wanted a large part of the value of the corporation to be used to fund a charitable bequest. She had transferred shares into a trust appointing her son as trustee. The son engaged in some redemption activity which in effect reduced the value of the shares for estate tax purposes and reduced the amount of the charitable contribution. The Service challenged the reduced value and assessed a deficiency and also an accuracy related penalty under the provisions of I.R.C. Section 6662. The estate contested the deficiency and penalty in the Untied States Tax Court contending that the redemption activity was based on a legitimate business reason. In short the Tax Court upheld the Service’s determination on the basis that the actions of the son thwarted the decedent’s intention in making the charitable bequest.
One important point to stress is that inter-family transactions receive” heightened scrutiny” both from the Service and the Courts, so beware.
A reprint of a case summary from Tax Management’s Tax Notes Today of April 2, 2016
SONS THWART MOTHER’S DYING WISHES IN ESTATE VALUATION CASE.
Published by Tax Analysts(R)
The Tax Court, imposing an accuracy-related penalty, held that the IRS properly determined that the value of an estate’s charitable contribution was lower than the estate claimed, finding that actions taken before the distribution of the assets changed the nature and reduced the value of the property that was eventually transferred to the decedent’s foundation.
Victoria Dieringer and several family members owned Dieringer Properties Inc. (DPI), a closely held real property management company, of which Victoria was the majority shareholder. During her life, she established a trust and foundation, with her son, Eugene, the sole trustee of both. She left her entire estate — consisting primarily of DPI stock — to the trust and to several charitable organizations. On her death, the acting trustee of the foundation was to distribute the assets according to the trust agreement.
However, several events occurred after Victoria’s death but before the transfer of her bequeathed property to the foundation, including the redemption of all the bequeathed shares from the trust, which was a modification of the redemption agreement that resulted in DPI redeeming all the voting shares but only some of the nonvoting shares from the trust. Then Eugene and another of Victoria’s sons, on behalf of DPI, signed a short-term and a long-term promissory note. The two sons and a third son also signed subscription agreements, purchasing additional shares in DPI. Lastly, the trust transferred the two promissory notes and the foundation reported the receipt of additional nonvoting DPI stock on its tax return. The estate asserted that these events occurred for business purposes and did not affect the amount of Victoria’s charitable contribution.
A firm hired by DPI’s lawyer conducted two appraisals, with the appraiser testifying that he was instructed to value Victoria’s DPI stock as a minority interest. The first appraisal did not include any discounts for lack of control or marketability, and the appraisal of the bequeathed shares included those discounts without explanation. The court said that Victoria’s majority interest in DPI, therefore, was appraised at a significantly higher value only seven months before the redemption transactions.
Tax Court Judge Kathleen Kerrigan found that even though there were valid business reasons for the redemption and subscription transactions, the record does not support a substantial decline in DPI’s per share value in just seven months. Noting that intra-family transactions in a close corporation must receive a heightened level of scrutiny, Judge Kerrigan wrote that Victoria’s majority interest was redeemed for a fraction of its value without any independent accountability.
“Eugene and his brothers thwarted decedent’s testamentary plan by altering the date-of-death value of decedent’s intended donation through the redemption of a majority interest as a minority interest,” she wrote. “The trust did not transfer decedent’s bequeathed shares nor the value of the bequeathed shares to the foundation. Accordingly, we hold that the estate is not entitled to the full amount of its claimed charitable contribution deduction