Tax

September 03, 2013

[statement]“This is a perfect example of experience, tenacity and collaboration leading to a successful outcome. We instinctively knew the clients’ mother had to have a will. Our due diligence discovered it; then we worked together to prevail against the IRS on behalf of our clients.” – John J. Barnosky, Partner[/statement]

Our tenacious tax attorneys’ discovery of a will our clients never knew existed saved the heirs of a successful businessman an estimated $100 million in estate taxes, interest and penalties.

While the will had been executed by the businessman’s wife, who predeceased him 15 years earlier, its discovery was critical to the value of his estate, which included 780 voting preferred shares in the company – equal to 34% of the outstanding voting shares – valued in his estate tax return at $780,000. The IRS argued that under the N. Y. Business Corporation Law, this 34% interest gave the deceased the ability to block the sale of the business and should, therefore, be valued considerably higher, at $166 million.

Late in the audit process, it was discovered that 100 of these shares had been owned by his predeceased wife. The family had assumed that the wife had died without a will and the shares had passed to her husband, although they were never transferred on the books of the company.

“We instinctively and intuitively knew that this woman had to have a will, so we just kept looking until we found it,” explained John J. “Jack” Barnosky, partner in the Estate Litigation Group. After much diligence, the Farrell Fritz team discovered the will in the office of the successors-in-interest to a now-defunct New York City law firm.  The will left the stock not to the woman’s husband, but to a Credit Shelter Trust for the benefit of her husband and children.

Although this discovery, the attorneys argued, meant the decedent owned only 27% of the voting stock, the IRS was not persuaded and insisted that the decedent exercised “dominion and control” over the shares; and thus the wife’s shares should be included in his estate.

“The IRS fought us every step of the way. Our settlement negotiations went nowhere, and we finally tried the case before the United States Tax Court,” Jack noted.  The client prevailed. “We proved to the court that the decedent collected no dividends, never voted the shares and was not active in the management of the business at the time of his death.”