What Is Estate Tax?

The estate tax is a tax on transferring assets from a deceased person to their heirs or beneficiaries. The federal estate tax in the United States is imposed on the transfer of the taxable estate of every decedent who is a US citizen or resident. The taxable estate includes all assets that the decedent owned or controlled at their death, such as real estate, investments, and personal property.

The history of the US estate tax dates back to 1797, when Congress imposed a tax on the value of legacies and inheritances. Since then, the estate tax has undergone numerous changes and revisions. In its current form, the federal estate tax was first enacted in 1916 and has since been subject to many amendments, including a temporary repeal in 2001.

Estate tax planning is an essential part of comprehensive financial planning. Proper estate planning can minimize the impact of estate taxes on an individual’s estate and ensure that their assets are distributed according to their wishes. Estate planning can also help reduce family conflicts and provide financial security for surviving family members.

How Estate Tax Works

To understand how estate tax works, knowing about exemptions and thresholds is essential. The current federal estate tax exemption is $13.61 million per person, meaning any estate worth less than this amount is not subject to estate tax. The estate tax exemption is adjusted annually for inflation, which may increase or decrease depending on the inflation rate.

For estates that exceed the exemption threshold, the estate tax is calculated based on the estate’s taxable value. The taxable value is determined by subtracting any debts, funeral expenses, and estate administration costs from the estate’s total value. The resulting amount is subject to the estate tax rate, which ranges from 18% to 40%, depending on the estate’s value. It’s important to note that the estate tax is a progressive tax, which means that the tax rate increases as the value of the estate increases. For example, if an estate is valued at $15 million, the first $13.61 million is exempt from the estate tax, and the remaining amount million is subject to a rate that increases until it reaches 40% for all amounts in excess of $1 million over the exemption amount.  The progression looks like the following:

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What Is A Foreign Trust?
Explaining a Foreign Trust In Easy-to-Understand Language

In this global economy, it’s becoming increasingly common for U.S. citizens and residents to have financial ties overseas. These financial ties often come in the form of foreign bank accounts, real estate holdings, and trusts.

Foreign trusts in particular are subject to special rules under the Internal Revenue Code (“IRC”).  However, understanding what constitutes a foreign trust and its treatment under the IRC can be difficult even for the most seasoned lawyer.

What Is A Trust?

The Internal Revenue Service (“IRS”) defines a trust as “an arrangement created either by a will or by an inter vivos declaration [in other words, a declaration during the life of the person setting up a trust] whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.”[1]

In the United States, trusts are formed under state law. Thus, the law of the particular state in which the trust has been or will be formed must be consulted for any particulars regarding trust formation and administration. However, below are some general definitions that may prove helpful in the discussion that follows:

  • “Settlor” or “Grantor”: The “settlor” or “grantor” is the person who creates a trust;[2]
  • “Trustee”: The “trustee” is the person who holds title to the property in the trust;[3]

“Beneficiary”: The “beneficiary” is the person for whose benefit the trustee holds the property in the trust.[4]

Is A Trust Domestic Or Foreign?

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Collection Due Process And A Lawyer’s Race Car Business Expense Deductions

Avery v. Comm’r, T.C. Memo. 2023–18| February 21, 2023 | Lauber, J. | Dkt. No. 23237–18L (Collection Due Process and a Lawyer’s Race Car Business Expense Deductions)

Summary: Since 1982, James William Avery (Avery) was a practicing lawyer, specializing in personal injury law as a solo practitioner primarily in Denver, Colorado for the period 2008–2013 but also some in Indiana during 2008–2010. Avery became involved in car–racing activities in 2005 after he moved to Indiana. He began attending car shows, thinking this might be a way to meet potential clients. He purchased a race car and placed a decal for the Avery Law Firm, his “sponsor,” on the car. His website dedicated to racing activities linked to the Facebook page for his law firm, hoping to attract potential clients or referrals. But, after his marriage dissolved during the period 2011–2013, he all but quit racing, and the race car sat idle in a garage.

Avery failed to file returns for 2008 and 2009, and the IRS accordingly prepared substitutes for returns (SFRs). In 2011, Avery hired a new CPA. Some of Avery’s financial records remained in the possession of his wife, her father (Avery’s former CPA), or her divorce lawyer. On April 29, 2013, his new CPA filed delinquent returns for 2010 and 2011. Avery timely filed his return for tax year 2012, reporting zero tax due. Avery did not file a return for 2013, and the IRS prepared an SFR on the basis of third– party reports. On January 14, 2016, the IRS sent Avery a notice of deficiency for 2008, 2009, and 2013. The notice was based on the SFRs and determined deficiencies of $3,752, $242,788, and $141,754, respectively, plus additions to tax for failure to timely file, failure to timely pay, and (for 2009 and 2013) failure to pay estimated tax. The IRS examined Avery’s 2010–2012 returns. It disallowed for lack of substantiation all deductions claimed on his Schedules C, Profit or Loss From Business, and determined unreported gross receipts for 2011 and 2012. The IRS issued Avery a notice of deficiency for 2010–2012 that determined deficiencies for each year. The notice determined late–filing additions to tax for 2010 and 2011. Later in 2016, Avery prepared and submitted to the IRS delinquent returns for 2008, 2009, and 2013, and amended returns for 2010–2012. On his delinquent and amended returns Avery claimed in connection with his Schedule C business $355,000 of deductions for racing– related advertising expenses (contending the expenses promoted his litigation practice), all reported in round–dollar amounts of $50,000, $60,000, $65,000, or $70,000.
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Section 179D Energy Efficient Building Property Deduction

Johnson v. Comm’r, 160 T.C. No. 2| January 25, 2023 |Nega, J. | Dkt. No. (Consolidated) 19973-18, 19975-18, 19978-18, 20001-18

Summary: In this 32-page, consolidated opinion, the Tax Court addresses deficiencies from disallowance of a 26 U.S.C. § 179D energy efficient building property deduction claimed by Edwards 4 Engineering, Inc. (Edwards), an S corporation, for the 2013 taxable year. Petitioners (6 total) are shareholders of Edwards and reported their proportionate shares of the claimed deduction on their individual tax returns.

Edwards contracted with a federal government entity, the VA, to supply and install components of a federal building’s HVAC system. The VA signed a letter that agreed, pursuant to I.R.C. § 179D(d)(4), to allocate to Edwards the full amount of the I.R.C. § 179D deduction to which the VA would otherwise be entitled for the installation of the property. Edwards maintained a full-time staff at the VA to perform the services. Edwards presented evidence of hours logged, invoices submitted, and payments received for the various projects involved in the overall service arrangement. Edwards also presented evidence of subcontractors engaged and paid. Edwards also engaged Alliantgroup, LP (Alliantgroup), to conduct an Energy Efficient Commercial Building Tax Deduction Study (study) for the 2013 taxable year with respect to a certain Building 200. An allocation letter was presented to Edwards, and a VA representative signed off on the letter. The allocation letter stated, in relevant part, that “the owner of the Building allocates the full federal income tax deduction available under Section 179D attributable to the HVAC . . . to Edwards . . . for their work on the Building.” Attached to the allocation letter was a table which stated the placed in service date and the cost of the property installed in Building 200 with respect to the projects at issue. Alliantgroup then proceeded with conducting the study. A certificate of compliance related to Building 200 was issued, stating, among other things, that the total annual energy and power costs of this building had been reduced by more than 50 percent due to the installation of the systems, among other qualifying and compliance conclusions regarding Edwards’ work and services performed on the building. The study was performed in accordance with section 179D(d)(6)(C) and Notice 2006-52, section 5.05, 2006-1 C.B. at 1179. See Key Points of Law below for further reference to Notice 2006-52. Alliantgroup informed the VA that Alliantgroup had completed the study for Building 200 and determined that Edwards had been allocated a section 179D deduction in the amount of $1,037,237. The letter provided the projected annual energy costs for Building 200 and a list of the energy efficient features installed in Building 200.
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Anticipatory Assignment Of Income, Charitable Contribution Deduction, And Qualified Appraisals

Estate of Hoenshied v. Comm’r, T.C. Memo. 2023-34 | March 15, 2023 | Nega, J. | Dkt. No. 18606-19

Summary: In this 49-page opinion the Tax Court addresses a deficiency arising from the charitable contribution of appreciated shares of stock in a closely held corporation to a charitable organization that administers donor-advised funds for tax-exempt purposes under section 501(c)(3). The contribution in issue was made near contemporaneously with the selling of those shares to a third party. The timeline (truncated heavily for this blog) is as follows:

On June 11, 2015, the shareholders of the corporation in issue unanimously ratified the sale of all outstanding stock of the corporation. Immediately following the shareholder meeting, the corporation’s board of directors unanimously approved Petitioner’s request to be able to transfer a portion of his shares to Fidelity Charitable Gift Fund, a tax-exempt charitable organization under section 501(c)(3). Thereafter, the corporation and the purchaser of shares continued drafting and revising the Contribution and Stock Purchase Agreement.

On July 13, 2015, Fidelity Charitable first received a stock certificate from Petitioner.

On July 14, 2015, the Contribution and Stock Purchase Agreement was revised to specify that Petitioner contributed shares to Fidelity Charitable on July 10, 2015, and on July 15, 2015, the Contribution and Stock Purchase Agreement was signed and the transaction was funded.

Fidelity Charitable, having provided an Irrevocable Stock Power as part of the transaction, received $2,941,966 in cash proceeds from the sale, which was deposited in Petitioner’s donor-advised fund giving account.
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Interpretation of Section 6015(e)(7)(B): “Newly Discovered or Previously Unavailable Evidence”

Thomas v. Comm’r, 160 T.C. No. 4| February 13, 2023 | Toro, J. | Dkt. No. 12982-20

Summary: This is a case of first impression concerning the meaning of “newly discovered or previously unavailable evidence” as contemplated by I.R.C. § 6015(e)(7)(B): “Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon—(A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.”

Sydney Ann Chaney Thomas (Ms. Thomas) and her husband filed joint federal income tax returns for 2012, 2013, and 2014, but did not pay the full amounts of tax shown on those returns. After her husband’s death, Ms. Thomas sought relief from joint and several liability pursuant to I.R.C. § 6015(f) (innocent spouse relief. The IRS denied the request, and Ms. Chaney petitioned the Tax Court seeking a determination under I.R.C. § 6015(e) (relief from joint and several liability on joint return). At trial, the IRS proposed to introduce into evidence certain posts from Ms. Thomas’s personal blog that reflected information about Ms. Thomas’s assets, lifestyle, business, and her relationship with her husband. But, the posts were not part of the administrative record. The IRS learned of the posts only after Ms. Thomas filed her petition with the Tax Court. She objected to the admission of the posts and ultimately moved to strike them from the record wherein the posts were conditionally admitted, pending further review. Ms. Thomas contended that the posts were not “newly discovered or previously unavailable evidence” as contemplated by I.R.C. § 6015(e)(7)(B). The IRS opposed the motion, arguing that the blog posts were “newly discovered” and “previously unavailable evidence” under I.R.C. § 6015(e)(7)(B).

Key Issues: Under I.R.C. § 6015(e)(7)(B), were Ms. Thomas’s blog posts “newly discovered or previously unavailable evidence” when the posts existed before the closing of the administrative record but not discovered by the IRS until the administrative record had closed?

Primary Holdings: The posts are “newly discovered” evidence within the meaning of I.R.C. § 6015(e)(7)(B) and as such were properly admitted. Motion to strike denied. The meaning of “newly discovered” as of 2019 (when section 6015(e)(7) was enacted) was “recently obtained sight or knowledge of for the first time.” The evidence in issue met that definition.
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Estate Tax Taxation And Deductions And QTIP Trust

Estate of Kalikow v. Comm’r, T.C. Memo. 2023-21 | February 27, 2023 | Thornton, J. | Dkt. No. 14436-10.

Summary: Pearl B. Kalikow’s (“Pearl”) husband died in 1990. On January 4, 2006, Pearl passed away. The SK Trust (“Trust”) was created with the remainder of Pearl’s husband’s estate. On Pearl’s husband will it was instructed to the trustees of the Trust to pay the trust’s net income to Pearl during her lifetime. After Pearl passed away the Trust assets were paid over to trusts for the benefit of her children Edward Kalikow (“E. Kalikow”) and Lauren Platt (“Platt”).

Mr. Shalik and Mr. DeVita executors of Pearl’s husband’s estate, elected to treat the Trust as a QTIP trust under § 2056(b)(7). The Trust property was included in Pearl’s gross estate at its fair market value as of the date of her death. E. Kalikow and Platt created a Kalikow Family Partnership, L.P. (“KFLP”). The Trust transferred the property to KFLP in exchange of 98.5% partnership interest. The Trust property consisted of the 98.5% partnership interest, cash, and marketable securities. The trustees of the Trust were E. Kalikow, Mr. Shalik and Patt. After the payment of certain expenses, the remainder of Pearl’s estate was bequeathed to a charitable organization.

From a dispute between Mr. Shalik and E. Kalikow and Patt over the Trust distribution, it was agreed that the Trust would pay a settlement payment for undistributed income (2002-2005), including certain commissions, accounting fees, and legal fees. The IRS issued a Notice of Deficiency determining the value of the Trust limited partnership interest is lower than the amount reported on Form 706. The IRS reduced the Schedule F assets by the value of the estate’s pending claim against the Trust. E. Kalikow and Patt on the Cross-Motion for Partial Summary Judgment established that the value of the Trust assets included in the estate were properly reduced by the undistributed income amount under the Settlement pursuant to § 2044 and various items of the Settlement payment are deductible from the gross estate as administration expenses under § 2053.

Key Issues:
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Gifts, Bequests, Deductible Expenses, And Estate Tax

Estate of Spizzirri v. Comm’r, T.C. Memo 2023-25 | February 28, 2023 | Urda, J. | Dkt. No. 19124-19


Short Summary. Decedent was a wealthy lawyer and investor. During the last few years of his life, decedent paid significant sums to one of his daughters, one of his stepdaughters, and multiple women with whom he was either socially or romantically connected.

At the time of his death, decedent was married to his fourth wife. Decedent and wife had entered into a prenuptial agreement, which was subsequently amended over the course of several years. As amended, the prenuptial agreement provided that wife would receive at decedent’s death the right to reside at one of decedent’s properties for five years free of charge and that decedent’s will would include a bequest of $1,000,000 to each of wife’s daughters. This provision of the prenuptial agreement acted as a “waiver and release . . . of all rights in and to each other’s estate under any rule or law . . . entitling a surviving spouse to all or any part of the estate or property of a deceased spouse or to any interest therein.”

Decedent passed away in 2015. Decedent’s will did not include the payments reflected in the prenuptial agreement. Wife and her daughters brought claims against decedent’s estate. Eventually, the estate entered into a binding settlement with wife and paid each of wife’s daughters $1,000,000. The estate reported these payments to the Internal Revenue Service on Forms 1099-MISC.

The estate’s Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, was due on February 10, 2016. On February 19, 2016, the estate requested a six-month extension to file the return, which was granted, extending the deadline to August 12, 2016. In July 2016 the estate’s tax return preparer requested a second extension of the filing deadline because of the ongoing probate litigation with wife. The IRS informed the estate that a second extension could not be granted as a matter of law.
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Denial Of Exemption Under IRC 501(c)(15):Tax Court In Brief

Commonwealth Underwriting & Annuity Services, Inc. v. Comm’r, T.C. Memo. 2023-27| March 2, 2023 | Carluzzo, J. | Dkt. No. 8228-18X

Summary: Commonwealth challenges the IRS’s denial of application for tax exemption under 501(a), claiming, by submission for declaratory judgment, to be an organization described in section 501(c)(15). Commonwealth was organized in Belize. Its sole shareholder was “its only flesh and blood officer.” It was formed to engage in any act or activity not prohibited under any law in Belize, including for carrying “on the business of an investment company.” It had no bylaws. It sold annuity contracts to individuals in consideration for purchase payments. Upon receipt, purchase payments were transferred to a segregated trust account and subaccounts administered by an independent trustee. By contract, the assets were the property of Commonwealth rather than of the clients that provided the purchase payments, and each fund was to be assessed investment management fees. The value of each segregated trust account and each annuity depended on the performance of the investment. Commonwealth received $82,621,231 and $2,131,442 in purchase payments in 2013 and 2014, respectively, as consideration for the sale of the annuity contracts. Commonwealth also received $150,000 and $194,782 in maintenance fees in 2013 and 2014, respectively.
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Tax Court In Brief | Patrinicola v. Comm’r | Taxability Of Pension Distributions

Patrinicola v. Comm’r, T.C. Memo. 2023-16| February 14, 2023 | Goeke, J. | Dkt. No. 498-19

Summary: In this opinion, the Tax Court considered whether a deficiency was appropriate for Tony and Barbara Patrinicola’s 2016 tax year. The IRS determined that they had received unreported taxable pension distributions of $6,750. For the 2016 tax year, General Electric Pension Trust (General Electric) issued Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to Mr. Patrinicola reporting payment of $22,773 in taxable pension distributions, and State Street Retiree Services (State Street) issued three Forms 1099–R that reported payments of $252, $4,627, and $3,412 in taxable pension distributions to Mr. Patrinicola. According to these Forms 1099–R, Mr. Patrinicola received total pension distributions of $31,064. Ms. Patrinicola received a Form 1099–R that reported that she received $2,592 in nontaxable retirement income. On their 2016 tax return, the Patrinicolas reported gross income from pensions of $24,610 and the taxable amount of such income as $19,687.

Key Issues: Whether the monthly pension distributions received by the Patrinicolas is excludable from income for federal income tax purposes?

Primary Holdings: No.

Key Points of Law:
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Nonresident Alien Individual And Sale Of Partnership Interest Attributable To Inventory In U.S.

Rawat v. Comm’r, T.C. Memo. 2023-14| February 7, 2023 | Gustafson, J. | Dkt. No. 15340-16

Summary: This case arises at the confluence of two areas of tax law—partnership taxation (subchapter K of the Code) and U.S. taxation of international transactions (subchapter N of the Code).

Ms. Rawat was a nonresident alien individual for federal income tax purposes during 2008 and 2009. She did not file returns for the 2008 and 2009 tax years. Innovation Ventures, LLC (“IV LLC”), is a U.S. business that manufactures and sells popular consumer products including 5-hour Energy drinks. IV LLC was treated as a partnership for federal income tax purposes. Ms. Rawat owned a 30% interest in IV LLC. In January 2008, Ms. Rawat executed a note for the sale of her interest in IV LLC to Manoj Bhargava for $438 million. The note provided for interest-only payments until 2028, when the note would mature. At the time the note was executed, IV LLC had inventory items with a basis of $6.4 million, which it held for future sale in the U.S. IV LLC later sold those inventory items for a profit of $22.4 million, and Ms. Rawat’s share of income “attributable to the inventory” was $6.5 million. Of the $438 million sale price, $6.5 million was allocable to inventory held in the U.S. for sale therein (“Inventory Gain”).

The IRS conducted an examination of IV LLC for the 2007 and 2008 tax years. The IRS issued Form 5701, “Notice of Proposed Adjustment”, to IV LLC and to Ms. Rawat, proposing to include in Ms. Rawat’s income for 2008 $6.5 million arising from the Inventory Gain issue. Ms. Rawat and the IRS signed an IRS Form 870–LT, “Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items”. The Form 870-LT included a “Schedule of Adjustments” that included, under “Other income (loss)”, an adjustment of $6,523,176, with the explanation that “[o]ther income relates to unrealized receivables as defined under Section 751.”
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Research Credit And Computation Of Research Expenses Under Section 41(a)

Moore v. Comm’r, T.C. Memo. 2023-20| February 23, 2023 |Colvin, J. | Dkt. No. 18632-19

Summary: Petitioner Gayla Moore was the sole owner of Nevco, Inc. (Nevco), a subchapter S corporation, during the tax years in issue (2014 and 2015). Nevco claimed the section 411 credit for increasing research activities (research credit) on its 2014 and 2015 Forms 1120S, U.S. Income Tax Return for an S Corporation. The credit flowed through to Gayla Moore and Scott Moore’s individual income tax returns. Nevco manufactured scoreboards and other types of equipment for sports venues. Mr. Moore was the vice president of Nevco. From 2004 to 2006 an outside consultant advised on Nevco’s personnel and inventory requirements. The consultant was hired as chief operating officer from 2006 to 2016 and served as president and COO during 2014 and 2015. He focused a majority of his time on new product development. He had a base compensation $85,092 in 2014 and $178,956 in 2015, and he received various bonuses during those years. Nevco also employed engineers, and the president and COO was the direct supervisor of a few. The engineers engaged in qualified research during 2014 and 2015. They developed a number of new sports-venue-related products for Nevco, and the president and COO made various executive decisions regarding the design and development. The Tax Court describes, at length, five of the products – Scoreboard Truss, Scorbitz, New Caney Ribbon Board, MPCX–2, and a Slim Shot Clock.

The Moores filed their 2014 and 2015 joint income tax returns on Forms 1040, U.S. Individual Income Tax Return. Nevco filed its 2014 and 2015 income tax returns on Forms 1120S. Nevco claimed research credits on those returns, which flowed through to the Moores individual income tax returns for 2014 and 2015. Nevco used the base period 1984 to 1988 to calculate the fixed-base percentage for its 2014 regular research credit. Nevco used the alternative simplified credit method to calculate its 2015 research credit. An accounting firm prepared the Moores’ Forms 1040 and Nevco’s Forms 1120S for both 2014 and 2015. The IRS determined deficiencies in the Moores’ income tax of $68,263 for 2014 and $141,945 for 2015.

Key Issue: Whether (and if so to what extent) Nevco is entitled to a research credit under section 41 for compensation paid to the president and COO during 2014 and 2015?
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