What’s Yours is Ours?

November 5, 2012

Authored by: Kathy Sherby and Stephanie Moll

Estate of Alfred J. Richard v. Commissioner, T.C. Memo 2012-173 (6/20/2012), is an unusual case in which the government sought to include 140 shares of preferred stock in A.J. Richard & Sons, Inc. (the “Company”) in the gross estate of the decedent, Alfred Richard (“Alfred”).  The shares were initially reported on the estate tax return, but it was later determined that Alfred did not own the shares that passed through his predeceased wife’s will.  The government’s arguments in opposition to the estate’s amended Tax Court petition reducing the number of shares of preferred stock from the 740 shares reported on the estate tax return by the 140 shares in Mrs. Richard’s name at the time of Alfred’s death, were each resoundingly overruled by Judge Goeke.

Mrs. Richard had died in 1997 at a time when she owned 140 shares of preferred stock in the Company and Alfred owned 600 shares of preferred Company stock. No probate administration was commenced and no estate tax return was filed for her estate. No shareholder meeting had been held and no shareholder vote had been taken from 1997 until 2004 when Alfred died, and the 140 shares of preferred Company stock still remained in Mrs. Richard’s name on the Company books at that time.

After Alfred’s death, in September of 2005, his sons were appointed personal representatives of his estate, and Alfred’s sons enlisted the help of the Company’s CFO in preparing the estate tax return for Alfred’s estate. The CFO told counsel for Alfred’s estate that the 140 shares owned by his predeceased wife had passed to him at the time of her death . As a result, the personal representatives of Alfred’s estate reported on his estate tax return filed in March of 2006 that Alfred owned 740 shares, instead of the 600 shares that were actually on the books of the Company in his name. The personal representatives of Alfred’s estate likewise erroneously listed 740 shares rather than 600 shares on the inventory filed in the probate administration for Alfred’s estate and those shares were purportedly distributed from his probate estate in accordance with his will.

In 2009, the government issued a notice of deficiency determining that Alfred’s estate had undervalued the 740 shares shown on his estate tax return, and the personal representatives filed their petition in Tax Court contesting that liability.

In September of 2010, after the petition was filed in Tax Court by the personal representatives of Alfred’s estate, Mrs. Richard’s will was found, which will called for the distribution of her property to a credit shelter trust created under her will. Mrs. Richard’s will was then admitted to probate in November 2010. The inventory filed in her estate listed the 140 shares owned by her at the time of her death, with the result that those 140 shares were to pass to Mrs. Richard’s credit shelter trust and not to Alfred.

The personal representatives filed their amended Tax Court Petition in November of 2010, amending the number of shares of preferred Company stock from the initial 740 amount to reflect that the 140 shares had been mistakenly included in Alfred’s estate tax return, and the government opposed this reduction in the amount of shares that would be subject to any valuation adjustment in this case. The government argued that the 140 shares were more properly included in Alfred’s estate as opposed to Mrs. Richard’s estate, asserting that (1) the lack of formal ownership transfer was inconsequential and did not control whether these shares are subject to estate tax at Alfred’s death, (2) it was too late under Florida law to remove an asset from Alfred’s probate estate so that the 140 shares remained a part of his estate subject to estate tax on his death, (3) Alfred had exercised dominion and control over the 140 shares during his life, subjecting these shares to estate taxation on his death, and (4) the personal representatives were bound by the admissions made on the estate tax return by including the 140 shares in Alfred’s gross estate.

The Court rejected each of the government’s arguments, stating that state law determines the property rights subject to federal estate taxation. Even though the Tax Court was not bound by the admission of Mrs. Richard’s will to probate by a Florida circuit court, the Tax Court agreed that (1) Florida law provided that the property owned by Mrs. Richard was deemed to have passed to her credit shelter trust on her death even though the probate of her will did not occur until thirteen years later, and that as a result Alfred never owned the 140 shares, and that (2) the Florida statutes of limitation on claims against a decedent’s estate did not apply to correcting the inventory of Alfred’s estate to eliminate the 140 shares mistakenly included on his estate inventory. The Tax Court further determined that Alfred had not exercised dominion and control over the 140 shares, as they remained in Mrs. Richard’s name on the books of the company and he never sought to vote, transfer or otherwise benefit from the shares. Finally, while the Tax Court agreed that positions taken on a tax return signed by a taxpayer may constitute admissions that cannot be disavowed without cogent proof, the discovery of Mrs. Richard’s will disposing of the 140 shares to her credit shelter trust was “cogent proof” that the 140 shares were not owned by Alfred at the time of his death and were only mistakenly included on the return.

Given the difficulty in correcting mistakes imbedded in a decedent’s estate tax return, special care should be taken in confirming all of the information to be included in that return. However, it is never too late to correct an honest error as soon as it has been discovered.