by Linda Suzzanne
Griffin
Estate Tax Value of Stock Reduced By Capital Gains Tax
In the Estate of Frasier Jelke, III, 100 AFTR 2nd 2007-5475, the 11th Circuit held that in valuing a company’s
stock, the value is reduced by the built in capital gain tax as of the date of death. Mr. Jelke passed away on
March 4, 1999 and his revocable trust owned a 6.44% interest in a commercial chemical company (the “Company”).
The Company ceased operations in 1974 and the only activity was to hold and manage investments for its shareholders.
The estate discounted the value of the Company’s stock reflecting the built in capital gain tax liability. Predictably
the Internal Revenue Service (the “Service”) disallowed such discount. The 11th Circuit determined that under the 5th
Circuit’s approach in Beatrice Allen Jones Estate v. Commissioner, 90 AFTR 2nd 2002-5527, the estate tax is based upon a
snapshot valuation at the date of death using only these facts known as of the date of death. The court stressed that this
approach bypasses the unnecessary expenditure of judicial resources being used to wade through a myriad of divergent
expert witness testimony. The 11th Circuit allowed the discount for the built in capital gain tax liability.
Advice:
As this case was decided in our circuit, carefully review the language in this case in analyzing discounts
reflecting built in capital gain tax liabilities values. Of course unless the Service acquiesces and if the
Service continues to litigate this matter, the outcome may ultimately have to be resolved by the Supreme Court.
Mileage Rate Increases for 2008
Revenue Procedure 2007-70, 2007-50 IRB, IR 2007-192 (11/27/07) provides that the optional mileage
allowance is 50.5 cents for business travel and 18 cents per mile for medical care travel. Mileage
allowance replaces separate deductions for lease payments, maintenance, repairs, tires, gas, oil, insurance and license.
Advice:
Do not forget to review this procedure if reimbursing your employees or yourself.
SUBSTANTIATE, SUBSTANTIATE, SUBSTANTIATE!
The Service denied a charitable contribution for Mr. Lorn and Ms. Claborn (it appears they were a married couple).
The taxpayers claimed a charitable deduction of $2,775 which included $2,096 in cash donations and the balance in
clothes and toys to the Salvation Army. The Service determined a deficiency for the church donations. The taxpayers
provided a self prepared list but the courts said the documents were not prepared contemporaneously and were not reliable.
The court found they were regular churchgoers and allowed $169 in cash gifts. The Salvation Army had given the couple a
receipt but the receipt did not state whether any goods or services were provided. Thus, the receipt did not qualify the
requirements of Section 170(f)(8)(E) of the Internal Revenue Code (the “Code”).
Advice:
Remember that the $250 threshold for cash gifts was eliminated. All cash gifts must be substantiated by a bank record
or a receipt, letter or other written communication from the donee, together with the name of the organization, the date of the gift and the amount.
Taking Care of Your Health
In Revenue Ruling 2007-72, 2007-50 IRB 1154, the Service determined that certain amounts paid by
healthy individuals for diagnostic or similar procedures qualify as deductible medical expenses.
In Situation 1 an individual has an annual physical examination for which she pays for the physician
services and lab tests. The cost is an expense for medical care. In Situation 2 an individual pays
for a full body electronic scan which scans the condition of internal organs and identifies disease
or other abnormalities. A physician did not make the recommendation. The amount paid for the full
body scan is for diagnosis and qualifies as an expense for medical care even though the individual
is not experiencing symptoms of illness and has not obtained a physician recommendation. In Situation
3 an individual purchases a test kit to determine if she is pregnant. The amount paid for the pregnancy
test qualifies as a medical expense even though its purpose is to test the healthy functioning of the body.
Advice:
Many individuals are obtaining the full body scans to learn of any problems. It is helpful that
these costs are deductible. But… remember the deductions may limited depending on whether you itemize.
So You Won The Lottery!
Currently Lotto winners can receive their winnings as a lump sum. Prior law required winnings to be paid in installments.
In 1999 Florida amended Section 24.1152 of the Florida statutes to allow an assignment of payments Lotto proceeds with court
approval. In Womack v. Commissioner, No. 07-11568 Mr. and Mrs. Womack and on behalf of 59 other winners reported all payments
received from the assignment of Lotto payments for a lump sum as capital gains taxable at the capital gains rate of 15% instead
of the income tax rate of 35%. Predictably the Service determined a deficiency. The Tax court found amounts paid for an
assignment of Lotto payments were not subject to capital gains rates as such payments were not paid for a capital asset
as the asset was neither an investment of capital nor a gain in the capital’s value.
Advice:
It seems to this author future litigation on this issue may approach the “frivolous” boundaries.
Supreme Court Decides Rudkin
In Michael J. Knight, Trustee v. Commissioner, 552 U.S. __ (1/16/08), (also known as “Rudkin”) the Supreme Court
determined that certain trust investment advisory fees are subject to the 2% floor (i.e. the expenses have to
exceed 2% of adjusted gross income to be deductible). The issue is whether certain expenses incurred by a trust
meets the exception under Section 67(e)(l) which allows certain expenses to be fully deductible rather than being
subject to the 2% floor. The exception only applies to costs paid or incurred in connection with the administration
of the estate or trust and which would not have been incurred if the property were not held in the trust or estate.
Thus, these expenses are expenses which are “unique” to an estate or trust and which an individual would not normally
incur. The Service also has proposed regulations which require an “unbundling of expenses.”
Advice:
Carefully review the opinion and the regulations. It is still not clear whether fiduciary fees must be unbundled. The proposed regulations are not final.
Elective Share - To Elect or Not to Elect?
The Florida elective share statute is currently being attacked as unconstitutional. Our own Judge Greer found
it constitutional and was affirmed. The question of constitutionality is now being certified to the Florida Supreme Court.
This issue was discussed extensively at the Florida Bar RPPTL Executive Council meeting in January 2008. A very interesting
constitutional issue is at stake – whether the right to devise property is a “constitutional right” under the Florida Constitution
(subject to a strict scrutiny analysis) or a statutory right (subject to a rational basis standard). The right to devise property
has been statutory as early as the Statute of Wills (enacted in 1540). The Florida Supreme Court in Shriners Hospitals for Crippled
Children v. Zirillic, 563 So. 2d 64 (Fla.19911), however, determined that the right is a constitutional property right while considering
the mortmain statute. The analysis is very interesting. If the right is a constitutional right then the court must apply a strict scrutiny
analysis. Thus the query is – If Bill Gates dies then what is the basis for giving Melinda Gates 30% of Bill Gates’ estate? The
argument is that the statute does not consider the spouse’s other assets so there is no “need based” evaluation and therefore no
basis for the statute which would satisfy the “strict scrutiny” test. Query. If the right is a statutory right then is the “rational basis”
test (protection of a surviving spouse) met? The lower courts have said yes.
Advice:
If the Florida Supreme Court decides to hear this case, then, if possible,
the author strongly recommends observing the oral arguments in person or online.
If the elective share statute is determined unconstitutional then this finding will
affect a myriad of other statutes such as the family allowance, exempt property, etc.
All
Contents © Copyright Linda Suzzanne Griffin,
P.A.
