CASES:

Beneficiaries of Estate Must Use Discounted Estate Tax Values for Income Tax Basis Purposes (Janis v. Commissioner, T.C. Memo 2004-117, aff'd 98 AFTR 2d ¶2006-6075 (2nd Cir. 2006).

The Second Circuit has affirmed the Tax Court’s determination that the beneficiaries of an estate who inherited an art gallery and its collections are required to use the highly discounted estate tax values reported for those assets as their income tax bases.

Trust’s Investment Advisory Expenses are Subject to the Two Percent Adjusted Gross Income Floor of IRC Section 67(a) (William L. Rudkin Testamentary Trust v. Commissioner, CA, Second Circuit, 98 AFTR 2d ¶2006-5684).

The Second Circuit has affirmed the Tax Court’s determination that a trust's financial advisor fees are deductible only to the extent the amount paid exceeds two percent of the trust’s adjusted gross income, pursuant to §67(a). 

The Court ruled that such fees are not fully deductible under §67(e) as trust administration expenses, since they are not a type of expense that would not have been incurred if the investment assets were held outside of a trust.  The Court found that such expenses were of a type that would be incurred by an individual owning investment assets and, therefore, are covered by Treas. Reg. §1.67-1T(a)(1)(ii).  The Court was not persuaded by the taxpayer’s argument that §67(e) requires a “but for” analysis, finding that such a position incorrectly interpreted the language of the statute and ignored its objective standard of whether such expenses could be incurred if the investments were held by an individual rather than a trust.  The Court also rejected the taxpayer’s alternate argument that the statute was intended only to restrict trusts from using pass-through entities to avoid the two percent floor.

The Second Circuit’s opinion in Rudkin is consistent with the Federal Circuit’s opinion in Mellon Bank, N.A. v. U.S., 265 F.3d 1275 (Fed. Cir. 2001) and the Fourth Circuit’s opinion in Scott v. U.S., 328 F.3d 132 (4th Cir. 2003).  Only the Sixth Circuit in O’Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993) has held to the contrary.

Tax Court Uses Comparable Sales Method in Determining Value of Decedent’s Interest in Family LLC Owning Commercial Real Estate for Purposes of IRC Section 2031 (Estate of F. Wallace Langer, et al., v. Commissioner, (2006) T.C. Memo 2006-232). 

The Tax Court re-determined the value of a decedent’s interest in two parcels of commercial real estate held through a family limited liability company.  The Tax Court rejected the valuation analyses of the estate’s expert as to both parcels finding that such analyses were based in part on inapplicable comparables that involved transactions that occurred before the decedent’s death and before significant changes in the relevant property market occurred.  In addition, the Tax Court found that the estate’s expert improperly based his valuation report on a post-death date, rather than employing a hypothetical analysis of a sale between a willing buyer and willing seller on the date of decedent’s death, and that the estate’s expert used a discounted cash flow analysis that provided unreasonable and excessive discounts.  The Court also rejected the IRS’s expert in part with respect to the value of one of the parcels finding that the expert also used inapplicable comparables from an irrelevant market base.  As a result, the Tax Court determined the value of that particular parcel by using adjusted sales prices of relevant comparables properly focused on location, exposure, configuration, access and zoning.  As to the other parcel, the Tax Court accepted the valuation offered by the expert introduced by the Service, because it was supported by more detailed and reasonable analysis than the analysis of the estate’s expert.

Physical Injury of a Co-Administrator of an Estate Does Not Excuse Other Co-Administrator from Meeting the Estate’s Duty to File Form 706 and Pay Taxes in a Timely Fashion (Estate of Margaret Landers, et al. v. Commissioner, (2006) T.C. Memo 2006-230).

The Tax Court has held that injuries incurred by one co-administrator of an estate did not constitute reasonable cause for the late filing of the federal estate tax return and the late payment of estate tax.  The Court found that, even though one of the administrators suffered a fractured hip during the course of the estate administration, the estate did not exercise ordinary business care with respect to its federal estate tax liability, since the administrators were able to file other fiduciary returns and perform other tasks in a timely manner during the same time period.

Full Value of Property Decedent Owned with her Son as Tenant in Common Included in Decedent’s Gross Estate under IRC Section 2036 (Estate of Margot Stewart, et al. v. Commissioner, (2006) T.C. Memo 2006-225).

The Tax Court has held that a decedent’s transfer of an interest in real property to her son was a completed gift, but the full value of the property must be included in her gross estate under §2036 because she continued to receive economic benefit from the property until her death.  The Tax Court found the son’s claim that he and the decedent had an oral agreement to allocate the income and expenses of the property in accordance with their respective interests, and that it was their intention to reconcile their finances pursuant to such agreement prior to the decedent’s death, was unsupported by any documentation.  Moreover, due to that lack of such evidence corroborating the alleged oral agreement, the Tax Court ruled that the decedent’s estate was not entitled to deductions under §2053 for amounts the decedent’s son claimed the decedent owed him pursuant to the agreement and for property taxes he paid with respect to the property.

Decedent, who was a Co-Plaintiff in Personal Injury Case, is Sole Owner of Annuity Received under Settlement Agreement (Estate of Sarah Davenport, et al. v. Commissioner, (2006) T.C. Memo 2006-215).

The Tax Court has held that the annuities payable to decedent under an agreement in settlement of an action for personal injury are includable in the decedent’s gross estate.  The Tax Court found that, even though the decedent was one of three plaintiffs in the action, the annuity obtained under the settlement was held for her sole benefit and payable to her estate.