In Estate of Mildred T. Quidley and Karen Q. Pierce v. Commissioner, Docket No. 7799-10 (Jan. 10, 2014), the Tax Court denied an estate taxpayer’s costs and fees, because it failed to meet one of the requirements under Internal Revenue Code Section 7430.  Under IRC Section 7430(a) and (b)(3), a court may award reasonable administrative and litigation costs and fees when a taxpayer is the prevailing party and it didn’t unreasonably protract the litigation proceedings.  To be a “prevailing party,” a taxpayer must: 1) substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented, and (2) meet certain net worth requirements found in 28 U.S.C. Section 2412(d)(2)(B), as in effect on Oct. 22, 1986 (the net worth requirement).  It’s this net worth requirement that did the estate taxpayer in.

 

The Net Worth Requirement

In January 2012, both parties filed a stipulation of settled issues. The parties agreed that there was no estate tax deficiency due and no penalty due.  The Internal Revenue Service conceded that the taxpayer met the first prong of Section 7430 and substantially prevailed with respect to either the amount in controversy or the most significant issue or set of issues presented.  The dispute between the IRS and the taxpayer focused on whether the taxpayer met certain net worth requirements under the second prong.  After some filing delays, the court asked the parties to file memoranda regarding the estate’s net worth and specifically, whether the estate’s net worth should be measured on the basis of acquisition costs or fair market value (FMV).  Additionally, the court asked whether the estate should be deemed to have acquisition costs separate from those of the decedent. 

A taxpayer meets the net worth requirement if the estate doesn’t exceed $2 million as of the date of a decedent’s death.  In this instance, the taxpayer claimed that it met this requirement because the estate’s current net worth was $567,465, representing land and buildings.  The taxpayer argued that it owned exactly the same property in 2012 as it did when the decedent died.  Other than make this assertion, the taxpayer never established its net worth as of the date of the decedent’s death, which is required by Section 7430(c)(4)(D)(i). 

The IRS claimed that the taxpayer didn’t meet the net worth requirement because on its Form 706, it reported a value of $2,162,404 as of the date of the decedent's death.  The taxpayer didn’t dispute the net worth value on the Form 706 but claimed that the “taxable estate,” after the taxpayer’s election to value certain property pursuant to IRC Section 2032A, was $1,363,512.

 

The Net Worth Definition

Both the taxpayer and the IRS agreed that the estate’s net worth should be based on the FMV as of the date of the decedent’s death.  Citing case law, the Tax Court defined “net worth” as constituting “assets minus liabilities.”

Rejecting the taxpayer’s argument, the court found that the Section 2032A election didn’t affect the FMV of the estate's assets for purposes of applying the net worth requirement. The special valuation rules in Section 2032A apply only to calculate estate tax liability and don’t apply to a determination under Section 7430.

The court found no convincing reason why the FMV of the estate's assets as of the decedent's death was any less than the $2,162,404—the amount the estate reported on its Form 706.  As such, the taxpayer failed to show that the estate met the net worth requirement.  Accordingly, the taxpayer wasn’t eligible for costs and fees under Section 7430.