In a memorandum decision filed June 20, 2012, the Tax Court found that 140 shares of preferred stock previously included in a decedent’s probate estate in St. Lucie County, Florida and on the estate tax return should be excluded from the decedent’s estate for tax purposes.
During their lives, the decedent, Alfred J. Richard, and his wife, Victoria Richard, were shareholders of A.J. Richard & Sons, a New York holding company (the “Company”). Mr. Richard owned 600 shares of Class A preferred stock and Mrs. Richard owned 140 shares of Class A preferred stock.
Mrs. Richard died in 1997 as a Florida resident. There was no probate of her estate, and no estate tax return was filed for her. There were also no shareholder meetings or votes which required a vote of Mrs. Richard’s 140 shares nor were any dividends paid on preferred stock between Mrs. Richard’s death in 1997 and Mr. Richard’s death in 2004. In fact, record title of the 140 shares remained in Mrs. Richard’s name on the preferred stock ledger of the Company until Mr. Richard’s death.
At the time of Mr. Richard’s death, counsel for Mr. Richard’s estate believed that Mrs. Richard’s 140 shares had passed to her husband at her death. Consequently, the personal representatives of Mr. Richard’s estate included a total of 740 shares of Class A preferred stock in the Company on Mr. Richard’s estate tax return. The estate tax return reported the total value for the shares as $740,000, based on a redemption value for each share of $1,000.
The IRS disagreed with this valuation, finding instead that the 740 shares were worth $142,203,000 as of Mr. Richard’s death. The IRS assessed a significant deficiency and, in addition, penalties to the tune of $27,160,896.
In 2010, while Mr. Richard’s estate was contesting the assessment of a deficiency, arguing that the initially reported value was correct, a will for Mrs. Richard was discovered and offered for probate. Mrs. Richard’s will created a credit shelter trust. The personal representatives of Mr. Richard’s estate then contended that the 140 shares owned by Mrs. Richard prior to her death, which all parties had previously believed to be owned by Mr. Richard at his death, actually passed to the credit shelter trust created under Mrs. Richard’s will.
As state law governs ownership of property, the Tax Court looked to Florida law. The Tax Court found that, despite the fact that everyone believed Mr. Richard owned the 140 shares, mere belief did not make it so. At the time of Mrs. Richard’s death, Section 732.514, Florida Statutes (1997), provided that the right to a devise automatically vests at a decedent’s death unless the will provides some other event must happen for vesting to occur. Accordingly, the 140 shares passed to the credit shelter trust created under Mrs. Richard’s will at her death in 1997.
The IRS argued that the Florida nonclaim statutes (Sections 733.702 and 733.710, Florida Statutes (2010)) prevented moving the 140 shares from Mr. Richard’s estate to Mrs. Richard’s estate. The Tax Court found persuasive the consistent holding in Florida appellate courts that the nonclaim statutes do not apply to claims and liabilities which arise after a decedent’s death. As no claim by Mrs. Richard’s estate arose during Mr. Richard’s lifetime, the Tax Court rejected the IRS’s argument.
Nor did the Tax Court find persuasive arguments that Mr. Richard had dominion and control over the 140 shares or that his estate was bound by the position taken on the estate tax return. The Tax Court found that mere belief that Mr. Richard owned the shares did not make him the owner of the shares when he had never taken any action in his life to indicate he was the owner of the shares. Additionally, although information in a filed tax return may be treated as an admission which cannot be disavowed without “cogent proof” that the information in the filed return is incorrect, the Tax Court found that there was no lack of “cogent proof” showing the shares to be owned by Mrs. Richard’s credit shelter trust in this case.
While Mr. Richard’s estate was successful in getting 140 shares out of his estate, the opinion does not address the valuation of the remaining shares, undoubtedly a point the IRS will be loathe to concede after this victory.
The Tax Court’s holding in this case is an important victory for taxpayers. In the aftermath of a loved one’s death, it is not uncommon for the surviving spouse to fail to take important and necessary steps, such as opening an estate and funding a credit shelter trust. As this case illustrates, even where no administration had been performed at all, the direction in the will was binding and the available credit of the first spouse to die was employed to save the heirs a great deal of estate taxes.