Lasalle Bank, N.A. v. Comm'r of Internal Revenue (In re Estate of Kahn)

• Decision Date: 17 November 2005
• Docket Number: No. 12551–04.,12551–04.
• Citation: 125 T.C. No. 11,125 T.C. 227,37 Employee Benefits Cas. 1396
• Parties: ESTATE OF Doris F. KAHN, Deceased, Lasalle Bank, N.A., Trustee and Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

125 T.C. 227

125 T.C. No. 11

37 Employee Benefits Cas. 1396

ESTATE OF Doris F. KAHN, Deceased, Lasalle Bank, N.A., Trustee and Executor, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 12551–04.

United States Tax Court.

Nov. 17, 2005.

The estate filed Form 706, U.S. Estate (and Generation–Skipping Transfer) Tax Return (“estate tax return”). R issued a notice of deficiency that inter alia asserted increases to the gross estate by disallowing a reduction in value of P's individual retirement accounts (IRAs) by the expected Federal income tax liability resulting from the distribution of the IRAs' assets to the beneficiaries under sec. 408(d)(1), I.R.C. (income tax liability). This matter is before us on P's motion for partial summary judgment under Rule 121(a), contesting R's disallowance of the reduction in the value of the IRAs. R filed a cross-motion for summary judgment in response to P's motion.

Held: In computing the gross estate value, the value of the assets held in the IRAs is not reduced by the anticipated income tax liability following the distribution of the IRAs. A hypothetical sale between a willing buyer and a willing seller would not trigger the tax liability of distributing the assets in the IRAs because the subject matter of a hypothetical sale would be the underlying assets of the IRAs (marketable securities), not the IRAs themselves. Further, sec. 691(c), I.R.C., addresses the potential double tax issue. Accordingly, the valuation of the IRAs should depend on their respective net aggregate asset values.

Held, further, a discount for lack of marketability is not warranted because the assets in the IRAs are publicly traded securities. Payment of the tax upon the distribution of the assets in the IRA is not a prerequisite to making the assets in the IRAs marketable. Thus, there is no basis for a discount.

Jonathan E. Strouse, for petitioner.

Jason W. Anderson and Laurie A. Nasky, for respondent.

OPINION

GOEKE, J.

This matter is before the Court on cross-motions for summary judgment under Rule 121(a).¹

Respondent issued a notice of deficiency in the Federal estate tax of the estate of decedent Doris F. Kahn (the estate), determining, among other adjustments, that the estate had undervalued two IRAs on the estate's Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return. The issue before us is whether the estate may reduce the value of the two IRAs included in the gross estate by the anticipated income tax liability that would be incurred by the designated beneficiary upon distribution of the IRAs. We hold that the estate may not reduce the value of the IRAs.

The following is a summary of the relevant facts that are not in dispute. They are stated solely for purposes of deciding the pending cross-motions for summary judgment and are not findings of fact for this case. See Lakewood Associates v. Commissioner, T.C. Memo.1995–552 (citing Fed.R.Civ.P. 52(a)).

Background

Doris F. Kahn (decedent) died testate on February 16, 2000 (the valuation date). At the time of death, decedent resided in Glencoe, Illinois. The trustee and executor of the decedent's estate, LaSalle Bank, N.A., had its office in Chicago, Illinois, at the time the petition was filed. At the time of her death, decedent owned two IRAs—a Harris Bank IRA and a Rothschild IRA. Both IRA trust agreements provide that the interests in the IRAs themselves are not transferable; however, both IRAs allow the underlying marketable securities to be sold.² The Harris IRA contained marketable securities with a net asset value (NAV) of $1,401,347, and the Rothschild IRA contained marketable securities with a NAV of $1,219,063. On the estate's original Form 706, the estate reduced the NAV of the Harris IRA by 21 percent to $1,102,842 to reflect the anticipated income tax liability from the distribution of its assets to the beneficiaries. The estate did not report the value of the Rothschild IRA on the original tax return. On the amended estate tax return, the estate reduced the value of the Rothschild IRA by 22.5 percent to $1,000,574 to reflect the income tax liability upon the distribution of its assets to the beneficiaries.

Respondent determined in the notice of deficiency an estate tax of $843,892.³ The estate's motion for partial summary judgment was filed on June 30, 2005, and on June 30, 2005, respondent's cross-motion for summary judgment was filed seeking summary adjudication on the following issues: (1) Whether the value of each IRA is less than the value of the NAVs, and (2) whether the estate properly deducted amounts not paid for estimated Federal income tax liabilities of decedent. The estate filed a reply in opposition to respondent's cross-motion for summary judgment; however, the estate did not address the second issue regarding the validity of the estate's deduction. We therefore consider this issue to be conceded by the estate. Respondent also submitted a reply memorandum in opposition to the estate's motion for partial summary judgment.

Discussion

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681, 1988 WL 31439 (1988). Either party may move for summary judgment upon all or any part of the legal issues in controversy. A decision may be rendered by way of summary judgment if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir.1994); Zaentz v. Commissioner, 90 T.C. 753, 754, 1988 WL 34876 (1988); Naftel v. Commissioner, 85 T.C. 527, 529, 1985 WL 15396 (1985). This case is ripe for summary judgment because both parties agree on all of the relevant facts and a decision may be rendered as a matter of law.

Section 2001 imposes a Federal tax “on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” A deceased taxpayer's gross estate includes the fair market value of any interest the decedent held in property. See secs.2031(a), 2033; sec. 20.2031–1(b), Estate Tax Regs.; United States v. Cartwright, 411 U.S. 546, 551, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973). Fair market value reflects the price that the property would “change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” United States v. Cartwright, supra at 551; sec. 20.2031–1(b), Estate Tax Regs. Fair market value is an objective test that relies on a hypothetical buyer and seller. See Estate of Bright v. United States, 658 F.2d 999, 1005–1006 (5th Cir.1981); Rothgery v. United States, 201 Ct.Cl. 183, 475 F.2d 591, 594 (1973); United States v. Simmons, 346 F.2d 213, 217 (5th Cir.1965); Estate of Andrews v. Commissioner, 79 T.C. 938, 956, 1982 WL 11197 (1982). The willing buyer and the willing seller are hypothetical persons, rather than specific individuals or entities, and the individual characteristics of these hypothetical persons are not necessarily the same as the individual characteristics of the actual seller or the actual buyer. Estate of Bright v. United States, supra at 1005–1006; Estate of Davis v. Commissioner, 110 T.C. 530, 1998 WL 345523 (1998) (citing Estate of Curry v. United States, 706 F.2d 1424, 1428, 1431 (7th Cir.1983)). The hypothetical willing buyer and willing seller are presumed to be dedicated to achieving the maximum economic advantage. Estate of Curry v. United States, supra at 1428; Estate of Newhouse v. Commissioner, 94 T.C. 193, 218, 1990 WL 17251, (1990).⁴

I. Estate Tax Consequences Applicable to IRAs

An IRA is a trust created for the “exclusive benefit of an individual or his beneficiaries.” Sec. 408(a) and (h). An IRA can hold various types of assets, including stocks, bonds, mutual funds, and certificates of deposit. IRA owners may withdraw the assets in their IRAs; however, there is a 10–percent additional tax on early withdrawals subject to statutory restrictions. See sec. 72(t).

IRAs are exempt from income taxation as long as they do not cease to exist as an IRA. Sec. 408(e)(1). Distributions from IRAs are included in the recipient gross income of the distributee. Sec. 408(d)(1). Hence, earnings from assets held in an IRA are not subject to taxation in the IRA when earned, but rather, are subject to taxation when distributions are made. This fact does not change when the IRA is inherited from the decedent. See sec. 408(e)(1). IRA owners can designate beneficiaries to inherit IRAs in the event that the owner dies before receiving distributions of the owner's entire interest in the IRA. Distributions to beneficiaries of a decedent are includable in the gross income of the beneficiaries. Secs. 408(d)(1), 691(a)(1)(B). The portion of a lump-sum distribution to a decedent's beneficiary from an IRA, is, in the beneficiary's hands, income in respect of a decedent (IRD) in an amount equal to the excess of the account balance at the date of death over any nondeductible contributions by the decedent to the account. Such amount is included in the beneficiary's gross income the year in which it is received. Sec. 691(a)(1). The portion of the lump-sum distribution to the beneficiary in excess of the entire balance (including unrealized appreciation, accrued income and nondeductible contributions) in the IRA at the owner's death is not income in respect of a decedent. Such amount is taxable to the beneficiary under sections 408(d) and 72, see Rev. Rul. 92–47, 1992–1 C.B. 198, in the taxable year the distribution is received. Section 691(a)(3) provides that the character of the income in the hands of either the estate or decedent's beneficiary...