• Tax Court determines value of decedent’s interest in family holding company—The Tax Court recently decided another family limited partnership valuation case in its memorandum decision, Estate of Helen P. Richmond, T.C. Memo. 2014-26. On her death, Helen owned a 23.44 percent interest in Pearson Holding Company (PHC), a family-owned company that owned primarily publicly traded stock. The stated purpose of PHC was to preserve capital and maximize dividend income. When preparing the Form 706, Helen’s estate relied on a draft valuation report prepared by an accountant. Using the capitalization of dividends method, the accountant valued Helen’s stock at $3,149,767.
The Internal Revenue Service issued a notice of deficiency, valuing the stock at more than $9 million. The estate filed a petition with the Tax Court, but the expert for the estate conceded that the value of the stock exceeded what had been declared on the return. He valued the stock using the same capitalization of dividends method, this time arriving at a value of approximately $5.046 million and, alternatively, by using the net asset value method, concluding a value of about $4.721 million.
First, the court held that the stock should be valued using the net asset value method. It explained that this approach is more appropriate because the assets of PHC were easily valued public stocks. According to the court, the capitalization of dividends method introduced too many uncertainties about general future economic performance that were unnecessary in this instance.
Next, the court agreed that the built-in capital gains attributable to the company’s stock holdings (estimated to be approximately $18 million) needed to be taken into account but held that the estate wasn’t entitled to a dollar-for-dollar discount for the tax liability. Instead, the tax liability should be discounted to its present value based on a reasonable holding period. When the court calculated the present values using a few holding periods and discount rates, it found that the IRS discount of $7.8 million was reasonable and upheld that discount. The court acknowledged that other circuits (notably the 5th and 11th) have determined that a dollar-for-dollar discount is appropriate. However, it reasoned that in a case in which a hypothetical buyer of an interest in the company would probably retain the stock held in the company for at least some time, it wasn’t likely that the capital gains would be triggered immediately; therefore, a dollar-for-dollar discount was inappropriate.
The court also approved a minority discount of 7.75 percent and a lack of marketability discount of 32.1 percent. In the end, after discounting the net asset value of the company for the built-in capital gains and discounting the interest for its lack of control and marketability, the court determined the value of Helen’s interest was $6.503 million. Because the value reported on the estate tax return was less than 65 percent of the value determined by the court, the estate was subject to accuracy-related penalties, unless it could prove that it acted with reasonable cause and good faith. The court wasn’t convinced by the estate’s arguments on this point and held that using an unsigned draft report of an accountant who wasn’t a certified appraiser didn’t qualify as reasonable cause or good faith. The fact that the estate itself adjusted the value of the interest with a new expert without explaining the accountant’s valuation on the Form 706 was particularly hard to overcome.
• PLR issued regarding late election-out of automatic GST allocation rules—In Private Letter Ruling 201407001 (Sept. 29, 2013), a law firm had drafted a trust for the taxpayer that was intended to hold real estate. The terms of the trust provided that each of the taxpayer’s children had a right to withdraw their respective share of the trust’s principal after reaching age 55, and in fact, the taxpayer intended the trust property to be distributed to the children prior to such age. Due to the intended use of the property by the taxpayer’s children, the law firm recommended that the taxpayer not allocate generation-skipping transfer (GST) tax exemption to the trust.
However, the accountants and consultants retained by the taxpayer to prepare the tax returns and provide tax planning advice weren’t informed that the taxpayer shouldn’t allocate any GST tax exemption to the trust. As a result, the gift tax return was incorrectly prepared, and the taxpayer didn’t opt out of the automatic allocation rules. The error was discovered a year later, when the law firm received copies of the gift tax returns.
The PLR notes that, under Notice 2001-50, a taxpayer may seek an extension of time for electing out of the automatic allocation rules under Treasury Regulations Section 301.9100-3. That section requires the taxpayer to show that he acted reasonably and in good faith and that the grant of relief wouldn’t prejudice the interests of the government. The IRS ruled that the taxpayer reasonably relied on a qualified tax professional and that the requirements under Treas. Regs. Section 301.9100-3 were met; the taxpayer was, therefore, able to elect out on a supplement Form 709, and the election would be effective as of the date of the original transfers.
• IRS publishes procedures for e-filing Forms 1041—In Publication 1437, the IRS lays out the new procedures for e-filing Forms 1041 for the calendar year ending Dec. 31, 2013 and fiscal years ending in January through June, 2014. Among a few others, amended returns aren’t eligible for e-filing. The Publication lists the forms and records that may be filed electronically with the return and those that must be filed as hard copies. If the return requires more than one of the papers or schedules that must be filed on paper, the entire return is ineligible for e-filing. The returns are either signed electronically using Form 8879-F or on paper using Form 8435-F.
• PLR confirms role of estate beneficiaries when there’s no executor—In PLR 201406010 (June 7, 2013), the IRS, in one sentence, confirmed that when there’s no executor of an estate serving, IRC Section 2203 considers each person who’s in “actual or constructive possession” of the property of the estate an executor. The PLR references Notice 2011-66 (which explains how to elect carry-over basis for the estates of decedents who died in 2010) and notes that if no executor is appointed, any such person in possession of estate property can file a Form 8939 for the property he possesses. The IRS seems to confirm a comment that once there’s no longer an appointed executor (that is, after probate has been closed), the beneficiaries of the estate would be able to act on behalf of the estate.