In addition to the court cases listed below, we are currently compiling real-life stories from people who have gone through challenging probate cases, either by trying to do the work themselves, or by using the services of well-meaning professionals who didn't understand the process fully.

Often these stories involve administering smaller, non-taxable estates--a process that should have been easy to achieve. Yet the challenges involved left people feeling helpless and frustrated, and the expenses to complete the process or to correct errors were unjustifiably high. We hope their experiences will help you avoid some of the more common pitfalls.

What can go wrong? According to these people...a lot!

Court Cases

Estate of Johnson V. Commissioner

In Estate of Johnson v. Comm’r, T.C. Memo. 1999-284, the executor (surviving spouse) filed a state inheritance return reporting $30,000 of federal income taxes owed by the decedent. The executor subsequently made $49,300 in distributions without first paying the income taxes. When the estate could not pay the income taxes, the IRS asserted personal liability against the executor. The court observed that the taxpayer has the burden of proving lack of knowledge of taxes. The executor tried to convince the court that she did not know about the income taxes when she made the disbursements. The court had no problem finding that the executor did have knowledge because of the executor’s acknowledgment on the state inheritance tax returns that the estate owed income taxes of $30,000. The court observed that the executor is personally liable for the amount of tax and interest owed by the estate , or the value of property disbursed, whichever is less. However, interest does not accrue on that personal obligation in excess of the amount described above. (The Eighth and Eleventh circuits have disagreed as to whether liability for interest can exceed the value of property disbursed.)

Estate of Thompson v. Commssioner

Special use valuation was denied in Estate of Thompson v. Comm’r, T.C. Memo. 1998-325 because (1) the expert’s report was unreliable as to whether any of eight “comparables” were indeed comparable to the subject property because of significant differences in size, location, land quality, or timber type/maturity, and (2) the expert’s report did not identify actual gross cash rentals, but attempted to estimate applicable rents for some properties that were under long term leases without rent escalation clauses.

Lemann v. U.S., 94-1 U.S.T.C.

Regulation §20.2031-6(a) requires a room-by-room itemization of all household goods and personal effects, valuing each item individually. In lieu of a list valuing each item, the executor may include a statement, under penalties of perjury, giving the total value of these items as appraised by a competent appraiser. If an item of household goods and furnishings has an intrinsic value of more than $3,000, or if the value of any collection exceeds $10,000, an appraisal, under oath, by a competent expert must be included with the Form 706. Reg. §20.2031-6(b); Form 706 instructions for Schedule F. In some cases the IRS has been successful in maintaining that retail value for the estate’s jewelry should be used rather than wholesale value. Lemann v. U.S., 94-1 U.S.T.C. ¶60,159 (E.D. La. 1994).

Estate of Branson v. Commissioner

In Estate of Branson v. Comm’r, T.C. Memo 1999-231, the court rejected valuing stock on the basis of “market method” appraisals by two nationally reputed appraisers. Instead, the court based the valuation primarily on sales that were made sporadically but in significant ratios just prior to and soon after death.

Estate of Hendrickson v. Commissioner

A less than 50% interest may be denied a minority discount if the block still has effective control. In Estate of Hendrickson v. Comm’r, T.C. Memo 1999-278, the decedent (within three years of his death) gave two shares of voting stock of a family bank to his son, reducing the decedent’s ownership to 49.97%. The court nevertheless valued the decedent’s 49.97% block of stock without a minority discount. The court reasoned that because the share ownership other than decedent’s was in small blocks, the decedent had effective control. (The court did allow a 30% marketability discount.)

Estate of Simplot v. Commissioner

Estate of Simplot v. Comm’r, 2001 TNT 95-13, 87 AFTR 2d Par. 2001-923 (9th Cir. May 14, 2001) (decedent owned 24% of voting stock, but voting stock represented only about 1/20th of 1% of the total outstanding stock, and decedent owned a small amount of non-voting stock; court refused to follow Tax Court approach of assigning a minimum [3%] value of the total company equity to the voting stock; the court reasoned in part that the decedent did not own a control block of the voting stock, but also reasoned that even a control block of stock should be valued at a premium only if the owner can use the control “in such a way to assure an increased economic advantage worth paying a premium for”; for example, the court noted that the voting shareholders would be liable for a breach of fiduciary duty to the other shareholders if they used their control to give other businesses that they owned special advantages in dealing with the company), rev’g, 112 T.C. No. 13 (1999).

Tax Court Memorandum: Estate of Elizabeth B. Murphy

One recent case of interest in which the IRS won its argument is Estate of Elizabeth B. Murphy, T.C. Memo. 1990-472. In that case, the decedent transferred a minority block of stock just prior to her death. The court determined that the transfer was made solely to avoid a control premium in valuing her majority interest, and refused to allow a minority discount. However, the court did allow a 20% lack of marketability discount. But see Estate of Frank, T.C. Memo. 1995-132

Estate of Davis v. Commissioner

The Tax Court and the Second Circuit Court of Appeals have now allowed discounts for the corporate built-in capital gains tax. In Estate of Davis v. Comm’r, 110 T.C. 530 (1998), the court allowed an overall discount of 48.4% for a corporation which had as 85% of its value stock in one publicly traded corporation. The court concluded that the existence of the corporate built in capital gains tax should be taken into account in determining the amount of the marketability discount. The court allowed a discount of $9.0 million where the anticipated corporate built-in gains tax would be $26.7 million. The stipulated total liquidation value of the corporation was $80 million, so the $9 million discount represented about 11.25% discount in valuing the corporate stock.

Estate of Davis v. Commissioner

Estate of Foote v. Commissioner

In Estate of Foote v. Comm’r, T.C. Memo. 1999-37, the estate argued for a 22.5% blockage discount for valuing a 2.2% block of a publicly traded company. In that case, the decedent was not considered an affiliate under Rule 144. The estate’s expert calculated the discount using a linear regression analysis based on the stock’s prior trading volumes. The IRS’s expert applied a 3.3% blockage discount. The Tax Court rejected the taxpayer’s position and adopted the IRS’s position. The court reasoned that “the relative size of the block of stock at issue in relation to the amount of Applied Power Stock outstanding, plus the monthly and yearly trading volumes for the stock of Applied Power, plus the fact that the entire block of stock was sold within an acceptable period of time after the valuation date … suggest that only a minimal blockage discount is warranted.” (The court observed that facts known on the date of death are primarily considered, but post death sales by the estate soon after death are relevant.)