Recent Legislative Changes
The Corporate Transparency Act
On January 1, 2024, the Corporate Transparency Act (the “CTA”) will take effect. The CTA will impose significant new reporting requirements on most small businesses. The CTA requires most entities (referred to as “reporting companies”) to report information about the companies themselves, their beneficial owners, and company applicants (the persons who signed the formation documents for the entity). The CTA is quite broad and will apply to a vast number of companies, with severe penalties for not accurately and timely reporting required information to the government. Entities formed on or after January 1, 2024, and through December 31, 2024, will be required to report no later than 90 days after the entity is formed. Companies formed thereafter have initial filings due no later than 30 days after the company’s formation Reporting information for currently existing entities or entities formed before December 31, 2023, is due before January 1, 2025.
Corporate Valuation Includes Insurance Proceeds
In Thomas A. Connelly v. United States (U.S.T.C 60,737 June 2, 2023), the estate appealed a notice of deficiency concerning a corporate valuation. Michael Connelly died owning 77.18% of a C corporation; his brother Thomas owned the other 22.82%. The brothers had entered into a stock purchase agreement in which the surviving brother had the right to buy out the deceased brother’s shares, otherwise the company would redeem the shares. The agreement provided two methods to determine the value of the company: (1) executing a certificate of agreed value by mutual agreement at the end of every year; or (2) using at least two appraisals of fair market value (FMV). The company obtained life insurance on both brothers.
When Michael died, the company collected the $3 million of life insurance proceeds and redeemed Michaels shares. No appraisal was obtained. The actual redemption was part of a larger agreement between Michael’s son (who was the personal representative of his estate) and Thomas regarding the estate. On Michael’s estate tax return, the company was valued solely based on the insurance proceeds. The Internal Revenue Service issued a notice of deficiency, asserting that the company had significant value outside of the insurance proceeds, which resulted in higher estate tax.”
“The district court held for the IRS, and the U.S. Court of Appeals for the Eighth Circuit affirmed. Internal Revenue Code Section 2703(a) requires valuations to ignore options, agreements or other restrictions unless they’re created under a bona fide business agreement with terms comparable to arm’s length transactions and not a device to transfer property to family members for less than full and adequate consideration. However, the court noted that there was no restriction or fixed or determinable price in the agreement that even applied. The brothers didn’t follow its methods anyway. Michael’s son, as executor of the estate, had essentially come to a value together with Thomas. The court went on to determine the FMV of the company.”
Taxpayer Challenges IRS’ Aggregation of Two Minority Interests into One Controlling Interest for Valuation Purposes
In Estate of Epstein v. Commissioner, No. 11534-23 (T.C. 2023), the estate filed a petition challenging a $2.6 million tax deficiency, arguing that the IRS improperly combined limited partner (LP) and general partner (GP) interests when valuing an interest in an apartment complex for estate tax valuation purposes. On Jerry Epstein’s death, a marital trust created by his late wife held an 8.746% LP interest and a 1.2% GP interest, and a survivor’s trust held a 10.4% LP interest. The IRS valued the marital trust’s interests at a total of $15.59 million versus the estate’s value of $12.6 million, and the IRS valued the survivor’s trust interest at $16.4 million versus the estate’s $13.1 million, for a total difference of $6.29 million. Among other arguments, the estate claimed the IRS improperly aggregated the LP and GP interests in the two trusts to arrive at its valuation.
The IRS has lost on several attempts to aggregate two minority interests held in different capacities into one controlling interest and has now conceded the issue in the case of qualified terminable interest property (QTIP) martial trusts; that is, property passing to an individual’s estate isn’t aggregated, for estate tax valuation purposes, with property in a QTIP martial trust that’s included in such individual’s gross estate under IRC Section 2044. See Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981); Estate of Bonner v. U.S., 84 F.2d 999 (5th Cir. 1996); Estate of Mellinger v. Comm’r, 112 T.C. 26 (1999); Estate of Nowell v. Comm’r, 77 T.C.M 1239 (1999); Estate of Lopes v. Comm’r, 78 T.C.M. 46 (1999); and AOD-1999-006 (Aug. 30, 1999). The IRS has acquiesced to this line of cases.