Tax Cases Going Into 2016 Cause Concern for Estate Planners

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By Matthew Beddingfield

Jan. 12 — A number of estate tax cases could be decided in 2016, addressing what constitutes a “gift” for tax purposes and assessing the way the IRS contests the transfer of nonvoting stock to a grantor trust.

Currently at the U.S. Tax Court, the estate of a Minnesota supermarket chain founder is contesting more than $4 million in deficiencies and penalties (Estate of Levine v. Commissioner, T.C., No. 9345-15, summary judgment response filed, 12/17/15).

The estate and representatives of Marion Levine, who died in January 2009, argue that the Internal Revenue Service erred in determining that $6.5 million paid in insurance premiums toward two life insurance policies constituted a “gift” within the meaning of tax code Sections 2501 and 2511. Levine's estate also argued that the IRS erred in asserting a Section 6662 accuracy-related penalty of more than $1 million.

Summary Judgment Motion

The Levine estate filed a motion for summary judgment Sept. 15, to which the IRS responded on Dec. 17, arguing that the Service timely issued its deficiency notice, and that the estate failed to reflect, or adequately disclose, a transfer of $6.5 million to the Marion Levine 2008 Irrevocable Trust.

“Petitioners provided no calculation, computation, or explanation for the value of the economic benefits reported on the gift return,” the IRS said in its summary judgment response, adding that the estate's gift return didn't even hint at the fact that very large transfers from a family revocable trust to an insurance trust occurred.

The Tax Court has yet to grant or deny the estate's summary judgment motion. Attorneys for the Levine estate declined to comment on the pending case.

Carmex Heirs Fight

A second Tax Court case, involving the heirs of Carmex lip balm magnate Alfred Woelbing, involves $32 million in gift taxes on each of two estates resulting from the transfer of nonvoting stock to a grantor trust (Estate of Woelbing v. Commissioner, T.C., No. 030261-13, continuance of trial motion, 10/14/15).

Ronald D. Aucutt, a partner at McGuireWoods LLP and co-chair of the firm's private wealth services group, listed the Woelbing case as one of his top 10 estate planning and estate tax developments of 2015.

In an interview with Bloomberg BNA, Aucutt said the case has caused concern in the estate planning community for the very broad approach that the IRS has taken.

“I think some have described the IRS's tactic as the ‘everything but the kitchen sink' approach,” Aucutt said, adding that the IRS's inclusion of property in gross estate and treatment of notes as having zero value are “pretty aggressive,” and that he didn't expect those to be reflective of the state of the law.

Continuance Filed

The Tax Court trial, initially scheduled for Feb. 29 before both parties filed a motion for continuance on Oct. 14, would also consider an IRS challenge to the valuation of transferred company stock, after the Service proposed a value of $116.8 million, almost double the $59 million value the estates reported.

Dennis Belcher, also a partner at McGuireWoods, who specializes in estate planning and trust and estate administration, predicts the case will settle.

“They've already filed the continuance. There's just so much money involved that for the taxpayer to risk the dollars and the IRS to try the case there really is a risk for a loss,” Belcher said.

According to Belcher, a taxpayer win in the case could potentially bring congressional action.

“It may give Congress an incentive to pass legislation on grantor trusts,” Belcher said, adding that many estate planners would like guidance on the issue whether the IRS wins or loses.

Davidson Estate Highlighted

In discussions with Bloomberg BNA, both Aucutt and Belcher highlighted a case involving Bill Davidson, the former owner of the Detroit Pistons and Tampa Bay Lightning (Estate of Davidson v. Commissioner, T.C., No. 13748-13, stipulated decision, 7/6/15).

The IRS stipulated to estate and generation-skipping taxes totaling about $321 million instead of the $2.8 billion it had sought from the estate of owner Bill Davidson. The IRS further stipulated to $3.5 million of the $10 million in gift taxes that it had claimed were owed by Bill's widow, Karen.

The Service based its $1.9 billion estate tax deficiency and $900 million gift and generation-skipping tax deficiency on the assertion that Bill made transfers to trusts for his grandchildren of self-cancelling installment notes (SCINs) in reliance on an unrealistic life expectancy.

The estate's petition said the IRS erred by disregarding tax code Section 7520 in refusing to treat the SCINs as bona fide debt. In its answer, the IRS said the estate had the burden to prove the SCINs were bona fide consideration.

Installment Debt Tools

According to law professor Jerome M. Hesch in an interview with Bloomberg BNA, the SCINs that Davidson used to transfer shares in Guardian Industries Corp. to the grandchildren's trusts were installment debt instruments under applicable IRS regulations.

“The estate-planning profession has naively assumed that SCINs are subject to the Internal Revenue Service rules governing private annuities,” said Hesch, an adjunct professor at the University of Miami, Vanderbilt University and Boston University law schools.

According to Hesch, SCINs aren't annuities, so the IRS isn't bound by the rules that require it to go by actuarial tables, a doctor's letter and the individual's having lived at least 18 months after the asset transfer. Hesch said the IRS can apply facts and circumstance to determine whether the transfer was in fact a taxable gift.

Aucutt also placed Davidson in his yearly top 10 list, and told Bloomberg BNA the Davidson and Woelbing outcomes could potentially make 2016 a year with even more gift tax cases.

To contact the reporter on this story: Matthew Beddingfield in Washington at

To contact the editor responsible for this story: Brett Ferguson at

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