Will Estate Tax Effort Hold Up in Court?

Story via POLITICO

If the IRS finalizes a proposal to crack down on a tactic that family-owned companies and partnerships use to reduce the value of their assets and avoid paying the estate tax, litigation is sure to follow - and plaintiffs suing the agency are likely to prevail, predicts Roger McEowen, the Kansas Farm Bureau Professor of Agricultural Law and Taxation at Washburn University School of Law, in Topeka. The IRS proposal, in general, would end most of the so-called valuation discounts, which can be applied to intra-family transfers of interest when there are restrictions attached, such as on liquidation and voting rights.

McEowen said these discounts are used to value the transferred interest at fair market value, reflecting the reality that those who obtain the assets do not have certain rights, and, thus, the assets are less valuable. For example, if the owner of a closely held entity transfers 20 percent of a $20 million private enterprise, or $4 million, to a family member, a valuation discount from anywhere between 20 percent and 50 percent can be applied to those assets because a buyer is unlikely to purchase it at full price ($4 million), because it wouldn't come with any control of the business. Under the proposal, family farms and other businesses wouldn't be able to utilize this type of discount, increasing the chances of having to pay the estate tax, McEowen said.

He added that the issue has been a source of litigation against the IRS, and courts have routinely held that the valuation discount is reasonable. "It's an overreach by the Treasury to cast those decisions aside," he argued.

Only estates valued in excess of $5.45 million are subject to the estate tax, and that doubles, to $10.9 million, for married couples. That means around 10,000 of the largest estates have to file estate tax returns in any given year, according to the IRS. The USDA estimates that less than 1 percent of farming operations owed the estate tax last year. In the proposal, the IRS makes a case for why the move is within the scope of its authority.

The American Farm Bureau Federation and its state branches - including Kansas, for which McEowen will be filing comments this week - plan to request that the IRS scrap the entire proposal. Farmers have long been in favor of repealing the estate tax altogether, arguing that it hampers their ability to grow their business and pass it on to future generations. Comments are due Nov. 2.