Previous | Everything you need to know about emergency funds Next | How do I handle high inflation?
February 11, 2020 / The Merrill Anderson Company
An estate tax story

An estate tax story

When Anna Smith died in 1991, some 28 years ago, her estate’s main asset was a trust that she had created.

The trust held 9,994 shares of stock in State Line Hotel, Inc., a Las Vegas hotel and casino, valued at $11,508,400. The total value of Smith’s estate was some $15 million, triggering an estate tax liability of $6.6 million. The liquid assets of the estate were used to pay $4 million of the tax, and the balance was deferred for five years and then was to be paid over 10 years when the estate made the election to pay the tax in installments. 

Under Nevada law, the trust could not continue as the owner of the hotel beyond 1993 without going through additional regulatory hoops. Therefore, the trust was dissolved, and the shares were divided among Smith’s four children.

figurine house and tax sign on stack of papersIn 1995, the IRS decided that the estate had lowballed the value of the shares in the hotel, and it assessed additional estate taxes of $2.4 million. The estate contested the deficiency, and eventually, it settled for an increase in the estate tax due of $240,381.

In 1997, about a week before the first installment of the deferred tax was due, an IRS agent contacted the executors of the estate to suggest “an alternative to your continued personal liability for the unpaid estate tax.” The alternative was to execute a special lien for the estate tax, using the shares in the hotel as security. The four beneficiaries agreed to the arrangement. Shares worth some $6 million (based upon the 1995 settlement) secured the tax debt of some $1.8 million. 

However, after the IRS agent submitted the agreement to the District Counsel, she was advised that the IRS would not accept closely held stock as collateral because of potential problems with security laws. The executors responded, through their lawyers, that any security law issues were the IRS’s problem, not theirs. 

To cut to the chase, the hotel went bankrupt in 2002, rendering the shares owned by the children worthless — in fact, they took deductions of over $1 million for their losses.  That also rendered worthless the collateral that the IRS held for the tax debt.

Next, the IRS filed suit against Smith’s four children to collect the balance of the estate tax due, under trustee, transferee and beneficiary liability theories. By the time the lawsuit commenced, two of the children had died. Their estates could have been substituted as parties to the action, but the IRS never made the necessary motions, so the suit against them was dismissed. Ultimately, the beneficiaries prevailed on most of the issues before the District Court.

The beneficiaries then asked the IRS to pay half of their attorney’s fees. The District Court concluded that the government’s position was not substantially justified, and it awarded the estate fees, totaling $316,206.

The IRS appealed, and the Tenth Circuit Court of Appeals reversed that judgment. The taxpayers had relied upon the six-year state law statute of limitations, when the federal 10-year limitation is what should have applied in this case.

The taxpayers appealed that decision to the U.S. Supreme Court, which denied certiorari in an October order. After 28 years, the estate tax obligations of Anna Smith’s estate are finally resolved.

(December 2019) ©2019 M.A. Co. All rights reserved.

Recent Articles
How do I handle high inflation?
How do I handle high inflation?

How do I handle high inflation?

April 11, 2024 / Megan Brindle

How to spot IRS imposters
How to spot IRS imposters

How to spot IRS imposters

April 04, 2024 / Ray Wills

Stocks and bonds for beginners
Stocks and bonds for beginners

Stocks and bonds for beginners

March 21, 2024 / Warren Hurt

Planning how to pay for your bundle of joy
Planning how to pay for your bundle of joy

Planning how to pay for your bundle of joy

March 18, 2024 / Courtney Shauf

Important changes made to FAFSA
Important changes made to FAFSA

Important changes made to FAFSA

March 07, 2024 / Joel Huffer

Can I have my student loans forgiven?
Can I have my student loans forgiven?

Can I have my student loans forgiven?

March 04, 2024 / Joel Huffer

Tips for using peer-to-peer payment apps
Tips for using peer-to-peer payment apps

Tips for using peer-to-peer payment apps

February 21, 2024 / Matt Sheibley

Consider these things when filing your tax return
Consider these things when filing your tax return

Consider these things when filing your tax return

February 14, 2024 / Alyssa Proctor

Quishing attacks use QR codes to lure victims
Quishing attacks use QR codes to lure victims

Quishing attacks use QR codes to lure victims

February 08, 2024 / Ray Wills

Join our e-newsletter

Sign up for our e-newsletter to get new content each month.

NOTICE: YOU ARE LEAVING F&M TRUST!

You are now leaving the F&M Trust website. Links to third-party sites are provided for your convenience. Such sites are not within our control and may not follow the same privacy, security or accessibility standards as ours. F&M Trust neither endorses nor guarantees offerings of the third-party providers, nor is F&M Trust responsible for the security, content or availability of third-party sites, their partners or advertisers.