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Yes, Taxpayers Can Beat the IRS
We recently won a case that literally "saved the family farm." A cattle ranching sister and brother had inherited several thousand acres of grazing land. The IRS wanted to increase the value of the estate by $523,448 due to an alleged undervaluation of the land, and by an additional $750,000 due to a defective special use valuation election by the attorney who filed the estate tax return. As a result of these adjustments, the IRS claimed an additional $654,919 in estate taxes (plus interest). The estate could pay these taxes only by selling the farm.
The family retained us to litigate the Tax Court case. In its opinion, the Tax Court rejected 88% of the IRS adjustments. Most significantly, the Court ruled that a special use valuation election may be effective even if the election was defective. This was the first time that the Court had ever made such a ruling.
In another of our recent cases, a closely-held Santa Barbara business worth millions of dollars was reported at a 35% discount on the estate tax return. The IRS claimed that the discount should be only 27%. In virtually a total victory for the taxpayer on this issue, the Court ruled that the business should receive a 33% discount.
Click here for recently reported cases.
The Tax Court Expedites Its Trials
Until recently, the Tax Court would not hear a case until a year or more after the time that the taxpayer filed the Tax Court petition. The Tax Court has now reduced its backlog of cases, however, and is scheduling trials for 5 to 6 months after the IRS files its answer.
As an example, we presently have a Tax Court case involving $3,000,000 in gift taxes (plus interest). The Court scheduled the case for trial only 5½ months after the IRS filed the answer.
A Tax Court Trial — Not That Expensive
Civil litigation typically involves detailed discovery that can result in huge legal bills. Litigation in the Tax Court, however, seldom involves any discovery at all. The reason is that the IRS attorney usually relies upon the information gathered at the audit, and the taxpayer seldom has any reason to gather information from the IRS. Accordingly, the cost of a Tax Court trial is usually much less than the cost of litigation in other forums.
Further, the costs of a tax dispute are deductible on the taxpayers's income tax return. In an estate tax dispute, the costs may alternatively be deducted on the estate tax return.
In an estate tax dispute, the actual out-of-pocket cost may be only 20% to 30% of the total legal fees. Why? Because the marginal tax rate for estate tax purposes typically is 55% (or even 60%). Every $100 of legal fees will reduce the estate tax by $55 to $60, and in addition will reduce the interest that must be paid on the estate tax. Thus, $100 of legal fees can reduce the estate's payments to the IRS by $70 to $80 ($55 to $60 in taxes, plus $15 to $20 in interest).
Qualified Settlement Offers
A provision of the IRS Restruc-turing and Reform Act of 1998 should increase the chance that the IRS must pay a taxpayer's attorney fees under Internal Revenue Code section 7430. Under the Act, a taxpayer may make a "qualified offer" to settle a case. If the offer is rejected by the IRS, and the final Tax Court judgment is more favorable to the taxpayer than the offer, the taxpayer will be the "prevailing party" for purposes of section 7430. Accordingly, if the other requirements of section 7430 are met (e.g., the taxpayer has a net worth less than $2,000,000), the taxpayer will be entitled to IRS payment of some or all of their attorney fees. The IRS does not like to pay the attorney fees of taxpayers, so the "qualified offer" procedure could pressure Appeals Officers to resolve cases on terms favorable to taxpayers.
Abatement of Interest
Under Code section 6404(g), tax-payers may have to pay only the interest and penalties accruing during the 18 months after the return is filed. Assuming certain conditions are met, this limitation will apply if within that 18-month period the IRS does not provide the taxpayer with a notice stating the taxpayer's liability and the basis of the liability. This new provision may help to eliminate the delays that now frequently occur in audits. If the IRS, nevertheless, drags out an audit for years, at least the taxpayer's interest bill will not be increasing the entire time.
Asset Protection Trusts: Are They For You?
Reports of enormous sums awarded to seemingly unworthy plaintiffs have lead wealthy individuals to look for methods to insulate themselves from risk. One method is to use a foreign asset protection trust (APT) in the Cook Islands or elsewhere. Assuming certain requirements are satisfied, an APT is a better method to protect someone from a U.S.-based judgment creditor than almost any other asset protection technique (except certain spendthrift trusts).
Part of our job as estate planners is to assure that most of a client's assets are passed to the next generation. Asset protection is part of that process. Click for further information and resources on asset protection.
Ambrecht & Associates: Here to Assist You
Ambrecht & Associates is over 20 years old. It is a tax law firm with three lawyers and three paralegals. We limit our practice to tax and trust controversy/litigation; complex estate planning from an intergenerational perspective; family business succession planning (with an emphasis on minimizing family conflict); estate administration; asset protection using foreign trusts and other tools; and certain criminal tax issues. The majority of our clients are in Santa Barbara County, California, but we also represents clients in other areas of Northern and Southern California. We work closely with our clients' professional advisors.
In our litigation practice, we represent taxpayers at the audit, at IRS Appeals, in Tax Court, and before the Ninth Circuit Court of Appeals. We also represent taxpayers in criminal cases. The majority of our litigation cases involve estate and gift tax issues, but we will handle any case involving a significant tax liability or a novel issue. The present projects at Ambrecht & Associates include two Tax Court cases involving the value of gifted stock in a closely-held corporation with a present value over $100 million. We recently completed a case involving the valuation of a shopping center worth over ten million dollars.
The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herin.
This article: www.taxlawsb.com/resources/lit/LitNews2001.htm
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