Sunday, February 19, 2017

Michael Jackson Estate Tax Case Moving Forward

Most estate tax practitioners will tell you estate tax it is all about valuation when assets are other than cash and marketable securities. The estate tax case of the Michael Jackson estate is an ideal demonstration. Tax Court proceedings are presently underway in that case.

The fiduciaries of Michael Jackson’s estate filed an estate tax return showing a value of $7 million. The IRS issued a notice of deficiency claiming a value of $1.32 billion, and demanded additional estate taxes of $505.1 million and $196.9 million in penalties and interest. Wow!

A large issue in the case, and one that is relevant to other celebrities, is the value at death of Jackson’s name and likeness. The estate reported the value at $2,105.00, claiming his reputation was tainted by child-abuse allegations and strange behavior. The IRS pegs that value at $434 million. At the time of his death, he was rehearsing for a comeback tour.

The valuation at death is not supposed to look at post-death events, but there is usually leakage on this issue that informs a court’s judgment. The question for any asset is what a willing buyer would pay for the asset from a willing seller on the date of death (or on a date that is 6 months later if alternate valuation is elected). That Jackson’s estate did a phenomenal job of exploiting his name and likeness after his death is not a favorable circumstance for it in this dispute. Nonetheless, allowing a substantial value for name and likeness can create significant difficulties for an estate since this is an intangible asset, and can result in a tax bill far in excess of available assets for payment if these assets cannot be sold. In large celebrity estates, the existence of this issue may prompt a quick sale of these assets to help establish value for estate tax purposes.

Note that a lot of the above information is from third party reporting on the estate and case, so don’t hold me to the accuracy of these figures.

Saturday, February 18, 2017

IRS is Getting More Info About Your Home Mortgage

Below is a copy of the 2017 Form 1098:


The items with the green arrows are new - previously, the IRS did not obtain this information from the mortgage lender. Key items now being disclosed include the principal balance at the beginning of the year, the origination date, and the address of the home securing the loan.

This information will allow the IRS computers and personnel to make some judgments on whether a mortgage interest deduction was properly taken on an income tax return. Without this information, the IRS would have had to audit or otherwise inquire to obtain relevant information about the mortgage. This information will help the IRS determine whether deducted mortgage interest is within the $1 million limit on home acquisition debt and $100,000 of home equity debt, and whether the mortgage is on a permitted residence of the taxpayer.

As an aside, this is a small demonstration of how the existence of an income tax entitles the government to broad information regarding its citizens - information for which there would otherwise be no compelling justification for it to demand.

Saturday, February 11, 2017

Birds-Eye View of New Gain Recognition Rules on Transfers of Appreciated Property to Partnerships with Related Foreign Partners

The IRS recently issued extensive regulations under the authority of Section 721(c) that denies nonrecognition treatment for transfer of appreciated property to a controlled partnership (domestic or foreign) by a U.S. person if there are related foreign partners.

I have a prepared a map diagram (viewable in any browser) that provides an overview of the new provisions. Its purpose is to generally familiarize you with the new rules - you will need to review the rules themselves for full detail (translation: do not rely on the diagram since it is an abbreviated summary only).

Here is the link to download the map diagram - again, open it with any browser program. When you have it open, click the ovals with numbers in them wherever you see them to fully expand each map section - they look like this:


Treasury Decision 9814