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Must use value assigned by Probate referee?

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Gandydancer

Junior Member
What is the name of your state (only U.S. law)? California

When my mother died in 2004 her estate consisted of a lot with an uninhabited and uninhabitable cottage that I tore down a couple years later. The estate being far too small for estate tax to be an issue I didn't pay much attention to its value, putting a value of $100k on the lot in my filing, which the probate referee doubled to $200k. Problem is I've finally sold the lot for about $280k which, given the trajectory of prices in the area, is probably a bit less than it was worth when I got it. But I'm looking at paying taxes on a fictional gain of $80k minus expenses unless I can use a more correct value for the value of the property than the referee's assessment. Am I stuck?
 


tecate

Member
The Probate Referee is just another appraiser. These are political appointments; some are good appraisers and good expert witnesses, some are superficial. Ask for the backup. Then find another appraiser who can disprove the referee and who would be willing and able to back it up in court. If so, you then have a leg to stand on if you get audited.
 

tranquility

Senior Member
While I agree the probate referee is just another appraiser, we have a potential tax problem if the IRS can accept a different appraisal. If the property went through probate in 2004 and a value assigned by the court (as recommended by the referee), are you saying that we can come back 5 years later to argue a different basis to the property? Really?

Would that reopen the estate even though it is past the SOL and we probably have a closing letter? If the interests of the government were harmed it seems like they'd have an estoppel argument of some sort just from the facts. While I don't know, they may actually have an issue preclusion if the court accepted the valuation and the estate/executor didn't challenge it. There is simply too much of a potential advantage to play with valuation here by battling appraisers. While in this case there isn't an estate tax issue, what if there was. Who would be responsible for the additional estate tax if the later appraisal came back higher?

At the very least, the appraisal as accepted by the court without objection would be presumptive. Overcoming that presumption for a federal tax bite of 12K is going to cost enough to make a person think twice before stepping into the breach.

Now, while a probate acceptance of a valuation is not the same issue as a tax court stipulation on valuation, when this was raised as a Res Judicata issue, the fifth circut said:
“Our decision that the
same cause of action is involved is consistent with the
decisions of the Eighth and Eleventh Circuits that a
transferee cannot relitigate the tax due after a prior
court had already determined the estate’s tax liability.”
U.S. v. Davenport, 06-40466 (5th Cir. 4-9-2007).
I accept we can distinguish, but, I'd be very sure to see a tax professional who will do some research before taking the position dueling appraisers will be the rule here.
 

tecate

Member
Tranquility, look at Reg 1014-3(b) and RIA para P-4022. It's my understanding that a court has never held that the estate tax valuation and income tax basis statutes are in pari materia, even though in some situations this is the IRS' formal position. And even the IRS does not say that if an appraisal was not used to fix a federal or state death tax, it could not be trumped later on by a more persuasive appraisal.

Here, the OP implies that he was not aware of the importance of the appraisal for income tax purposes. Unfortunately, he or she is in the awkward position of signing the inventory and appraisement then, and now challenging it. It is an uphill battle, and, as you say, it might be cheaper in the long run, given tax research and appraisal fees, and possible fees to survive an audit, to let the sleeping dog lie.
 

tranquility

Senior Member
I agree the law and the code regard "fair market value". I also accept we can distinguish. However, I also believe what the IRS position will be. It seems you agree. So, while I think, if I had a client and was searching for an argument, I can come to the conclusion we should try for a different valuation, it seems like a large leap. The IRS will clearly not agree as such a theory will result in a complex argument which will result in a substantial problem to the IRS as Davenport is a big-ol-damn-deal.

Party on dude. This is a hard core litigation issue without a clear answer. I'll take my side even without a person paying me to take it.

At the end of the day, when we actually have to take a positon, what is your prediction?

Also, would you prepare a return without a disclosure (please audit me) attached?
 

tecate

Member
My prediction depends on the OP's facts, and how good of a case the appraiser can make. I would want to read what the Eighth Circuit and Board of Tax Appeals said before signing the return. If consistent with my prior understanding that OP would have a leg to stand on with a good appraisal, I see no problem with doing so, and also see no need to flag the issue. So I guess we agree to disagree about whether IRS will clearly disagree.

Cite: Williams, David, (1929) 15 BTA 227 , affd(1930, CA8) 9 AFTR 386 , 44 F2d 467 .

BTW, just for fun I googled the appeals court cite after your last response and came up with this, in which the California State Board of Equalization didn't think the new appraisal was good enough. They did not dismiss the case out of hand, and instead considered the new appraisal as if it could convince them otherwise.

http://www.boe.ca.gov/legal/pdf/63-sbe-089.pdf
 

tranquility

Senior Member
Interesting cite on the BOE. They certainly seemed to allow a, what was the word, recapitulaiton argument. That wasn't the holding of course and has nothing to do with federal taxes, but wow, it is interesting. I'm not at the office and the only thing I can find on the older case is this thread so I'll have to wait and see on that.

However, Davenport is a bit more recent than either.
 

tranquility

Senior Member
My database does not go far enough back for the older case and I'm not going to the books. It's been a long time since I had to and I haven't found old cases there which have really solved a problem. When an old case is important, it seems like it is added to the database.

Rather than estoppel, let's now try doctrines of "quasi-estoppel" and "duty of consistency." From, Beltzer v. United States, KTC 1974-4 (8th Cir. 1974):


Quite naturally, on this state of facts, the Government has invoked the doctrines of "quasi-estoppel" and "duty of consistency." This doctrine, as suggested by Stearns v. Commissioner, 291 U.S. 54, and formally expounded in Alamo National Bank v. Commissioner, 95 F.2d 622 (5th Cir.), cert. denied, 304 U.S. 577 (1938), was summarized in the case of McMillan v. United States, 64-2 U.S.T.C. paragraph 9720 (S.D. W.Va. 1964), see also, Griffith v. United States, 71-1 U.S.T.C. paragraph 9280 (N.D. Tex., 1971), as placing a taxpayer under a duty of consistency when:

(1) the taxpayer has made a representation or reported an item for tax purposes in one year,

(2) the Commissioner has acquiesced in or relied on that fact for that year, and

(3) the taxpayer desires to change the representation, previously made, in a later year after the statute of limitations on assessments bars adjustments for the initial tax year.


Taxpayer attacks McMillan and Griffith as being unwarranted extensions of the upper court cases. We do not agree. A taxpayer in this situation, innocent or otherwise, who has already had the advantage of a past alleged misstatement -- such advantage now beyond recoupment -- may not change his posture and, by claiming he should have properly paid more tax before, avoid the present levy. As the Fifth Circuit stated in Alamo, supra:

In adjusting values, the Commissioner in effect represents the interest of all other taxpayers who must bear what the particular taxpayer unjustly escapes. It is no more right to allow a party to blow hot and cold as suits his interest in tax matters than in other relationships whether it be called estoppel, or a duty of consistency, or the fixing of fact by agreement, the fact fixed for one year ought to remain fixed in all its consequences, unless a more just general settlement is proposed and can be effected.
 

tecate

Member
At a lunch today, I found out about this in the "Green Book." While it doesn't speak to OP's issue, it does indicate that the IRS is not comfortable with the current state of the law.

REQUIRE CONSISTENCY IN VALUE FOR TRANSFER AND INCOME TAX PURPOSES
Current Law
Section 1014 provides that the basis of property acquired from a decedent generally is the fair market value of the property on decedent’s date of death. Similarly, property included in the decedent’s gross estate for estate tax purposes generally must be valued at its fair market value on date of death. Although the same valuation standard applies to both provisions, current law does not explicitly require that the recipient’s basis in that property be the same value at which that property was reported for estate tax purposes.
Section 1015 provides that the donee’s basis in property received by gift during the life of the donor generally is the donor’s adjusted basis in the property, increased by gift tax paid on the transfer. If, however, the donor’s basis exceeds the fair market value of the property on the date of the gift, the donee’s basis is limited to that fair market value for purposes of determining any subsequent loss.
Section 6034A imposes a consistency requirement – specifically, that the recipient of a distribution of income from a trust or estate must report on the recipient’s own income tax return the exact information included on the Schedule K-1 of the trust’s or estate’s income tax return – but this provision applies only for income tax purposes, and the Schedule K-1 does not include basis information.
Reasons for Change
Taxpayers should be required to take consistent positions in dealing with the Internal Revenue Service, whether or not principles of privity apply. If the logic underlying the new basis in property acquired on the death of the owner is that the new basis is the amount used to determine the decedent’s estate tax liability, then the law should require that the same value be used by the recipient, unless that value is in excess of the accurate value. In the case of property transferred on death or by gift during life, often the executor of the estate or the donor, respectively, will be in the best position to ensure that the recipient receives the necessary information that will determine that recipient’s basis in the transferred property.
Proposal
This proposal would require both consistency and a reporting requirement. The basis of property received by reason of death under section 1014 would have to equal the value of that property for estate tax purposes. The basis of property received by gift during the life of the donor would have to equal the donor’s basis determined under section 1015. This proposal would require that the basis of the property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). A reporting requirement would be imposed on the executor of the decedent’s estate and on the donor of a
lifetime gift to provide the necessary information to both the recipient and the IRS. A grant of regulatory authority would be included to provide details about the implementation and administration of these requirements, including rules for situations in which no estate tax return is required to be filed or gifts are excluded from gift tax under section 2503, for situations in which the surviving joint tenant or other recipient may have better information than the executor, and for the timing of the required reporting in the event of adjustments to the reported value subsequent to the filing of an estate or gift tax return.
The proposal would be effective as of the date of enactment.
 

tranquility

Senior Member
We both agree the law is "fair market value".

We both agree a probate referee is an appraiser and his appraisal is not determinative as to fair market value. We can bring in additional facts or have an additional appraisal. (Often used when we want a discount, such as when we have minority interest in a closely held business.)

While both of us have jobs and have not really researched the topic, I bet we've spent enough time to know the answer is not clear. Even in the cases I've cited, we can easily distinguish Davenport (Trust valuation as stipulated in court on that particular issue.) and Beltzer is not strictly controlling authority in CA and we don't have the fact that the OP made any "representations" to the IRS (As in an estate return.) so may not fullfill the elements anyway. Based on what I've seen so far, I would not sign a return with a position on this issue without further research as, to me, it does not seem "more likely than not" what the law is on the issue. Even with disclosure, this seems like a position which will keep me up some night in the future.

However, I'm not a fool. I am not certain enough in my thinking to argue with a person who reads the Green Book at lunch.
 

tecate

Member
Actually, it was from a speaker. I thought it would add to the debate.

Perhaps at another time we will debate the 6694 issues you raise. There is sure to be litigation over preparer penalty assertions for those signing returns with appraisals subsequently determined to be substandard.
 

robo94553

Junior Member
Referee value

You thought the property was worth 100k and the referee appraised it ia 200k. He was doing you a favor. He upped the value to 200k in 2004. So you now only have to pay capitol gains on 80k instead of 180k. The property is valued as of the date of death of the decedent. It would have been best if the referee appraised the property at 1 million bucks. That way you would not have to pay capitol gains taxes at all. Thanks to George Bush your tax rate is only 15% on capitol gains. Be happy that after five years you only had a tax gain of $80,000.
 

Gandydancer

Junior Member
Thanks

I hadn't seen this thread after the first few posts, but it turned into something much more impressive after that.

I think I'm going to slide past robo94553's advice and concentrate on what was quoted from the "Green Book" rationale: "...the law should require that the same value be used by the recipient, unless that value is in excess of the accurate value." Once it's admitted that the value accepted by the executor is not binding on the recipent when it is not accurate, then you're into questions of equity. No?

I did not, btw, file an Estate tax return, either with the IRS or the BOE. My understanding is that, no tax being due, it was not required.
 

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