Estate Disputes IRS Valuation of Limited Partnership Interest and Reduction in Charitable Contribution Deduction

The estate asserts that at the date of Heekins death, on Sept. 5, 1997, the trust owned 9,899 limited partnership units, representing a 98.99 percent interest in Lewcom Ltd., L.P. The estate acknowledges that the trust assets were includible in the decedent's federal gross estate. However, the estate insists that the correct valuation of the total limited partnership interest in Lewcom Ltd. held by the trust was $15.6 million and not $24.3 million as determined by the IRS. The estate emphasizes that it retained an accredited senior appraiser to determine the fair market value of the partnership, which it insists was correct as reported.

The estate is also disputing the determination that the value of the estate passing to two charitable lead annuity trusts should be reduced by $6.8 million. The estate insists that it properly valued the charitable deduction to be $19.2 million. The estate is also contesting adjustments made to the reported amounts of federal and state income tax refunds and gift tax.

PETITION

Petitioners hereby petition for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in the Commissioner's notice of deficiency dated May 31, 2001, and as the basis for Petitioners' case allege as follows:

1. Petitioners are co-executors of the Estate of Charles L. Heekin (the "decedent") with mailing addresses now at Frost Brown Todd, LLC, 2200 PNC Center, Cincinnati, Ohio 45202 and with legal residences now at 3 Weebetook Lane, Cincinnati, Ohio 45208 (Albert E. Heekin, III) and 3557 Bayard Drive, Cincinnati, Ohio 45208 (Brian E. Heekin). Petitioners were appointed as co-executors of the decedent's estate on September 10, 1997.

The "decedent's" Social Security Number is [TIN omitted]. The employer identification number for the decedent's estate is [TIN omitted]. The Federal estate tax return here involved was filed with the Office of the Internal Revenue Service at Cincinnati, Ohio.

2. The notice of deficiency (a copy of which, including so much of the statement and schedules accompanying the notice as is material, is attached and marked Exhibit A) was mailed to Petitioners on May 31, 2001, and was issued by the Office of the Internal Revenue Service at Cincinnati, Ohio.

3. The deficiency as determined by the Commissioner is in Federal estate taxes in the amount of $10,774,020.00, all of which is in dispute. In addition Petitioners assert that they are entitled to a refund of Federal estate taxes (a) as a result of an erroneous inclusion in the Federal estate tax return of Federal and Ohio income tax refunds and (b) as a result of additional deductions for administrative costs which Petitioners are entitled to claim and which have not been deducted in the Federal estate tax return.

4. The determination of the tax set forth in the said notice of deficiency is based upon the following errors:

a. The Commissioner erred in his determination that the value of the decedent's gross estate reported on Schedule F of the Form 706 filed for the decedent's estate should be increased in the amount of $334,103 to reflect refunds of Federal and Ohio income taxes. Further, Petitioners assert that the Federal and Ohio income tax refunds originally reported in the Form 706 filed for the decedent's estate in the amount of $445,549 should be eliminated from the decedent's Federal gross estate and that the Tax Court should refund the Federal estate tax paid on such amounts.

b. The Commissioner erred in his determination that the value of the limited partnership interest held by the Charles L. Heekin Revocable Trust dated February 28, 1997 (the "Trust") in Lewcom Ltd., L.P. as determined by Petitioners' appraiser was incorrect and that the value of the interest to be reported on Schedule G of the Form 706 filed for the decedent's estate was $24,344,375.

c. The Commissioner erred in his determination that the Federal gift taxes paid by the decedent on gifts made within three years of death were $269,836 and that this amount should be reported on Schedule G of the Form 706 filed for the decedent's estate.

d. The Commissioner erred in limiting the additional deductions on Schedule J of the Form 706 filed for the decedent's estate to $9,407. As a result of the audit and the Tax Court proceedings, Petitioners anticipate that significant additional legal fees, expenses and other costs will be incurred and paid, thus increasing the Schedule J deductions.

e. The Commissioner erred in reducing the charitable contribution deduction claimed on Schedule O of the Form 706 filed for the decedent's estate for gifts to charitable lead annuity trusts by $6,757,658.

f. The Commissioner erred in not reducing the deficiency determined by the state death tax credit permitted under IRC Section 2011.

5. The facts upon which Petitioners rely, as the basis of Petitioners' case, are as follows:

a. The Commissioner erred with respect to his adjustment relating to the Federal and Ohio income tax refunds as reported in the decedent's Federal gross estate. In addition, Petitioners now assert that such refunds should not have been included in the decedent's Federal gross estate as interests in property owned by the decedent at his date of death.

(1) The Commissioner asserts that Petitioners did not report a refund of 1997 Ohio income taxes in the amount of $28,912 on the Form 706 filed for the decedent's estate. The Commissioner adds this amount as new Item 27 on Schedule F. This amount was in fact reported as Item 19 on Schedule F. Therefore, the Commissioner's adjustment is in error and should be eliminated.

(2) The Commissioner did not adjust Items 21, 23 and 25 on Schedule F of the Form 706 filed for the decedent's estate to reflect the reduced refunds calculated by the State of Ohio. Item 21 was a 1994 Ohio income tax refund in the amount of $56,779, Item 23 was a 1995 Ohio income tax refund in the amount of $59,281 and Item 25 was a 1996 Ohio income tax refund in the amount of $53,934. The State of Ohio redetermined the refund amounts and remitted a reduced amount of $28,274 for 1994, $33,453 for 1995 and $35,959 for 1996. Petitioners do not know if the refund amounts will be readjusted. Therefore, the Ohio tax refund amounts reported on Schedule F of the Form 706 filed for the decedent should be reduced accordingly.

(3) In any event, all of the refunds reported on Schedule F of the Form 706 filed for the decedent should be eliminated. These refunds were reported as items 18 through 25 on Schedule F and were the result of the release and deduction of suspended passive losses by reason of the decedent's death as provided under Internal Revenue Code ("IRC") Section 469(g)(2).

(a) The operation of IRC Section 469(g)(2), releasing the suspended passive losses, is triggered by the death of the decedent. Thus, the event of death created the refunds. The refunds were not an interest in property that the decedent owned at his death.

(b) IRC Section 2033 does not include within its reach property interests created at death. Until the decedent's death, no rights arose that could represent property of the decedent that should be included in the decedent's gross estate under IRC Section 2033.

(c) There is no other Federal gross estate inclusion provision that would otherwise require inclusion of the refunds resulting from the release of suspended losses under IRC Section 469(g)(2) in the decedent's Federal gross estate.

(d) Consequently, Petitioners hereby also petition the Tax Court to determine an overpayment of Federal estate tax based on the erroneous inclusion of the Federal and Ohio income tax refunds in the decedent's Federal gross estate.

b. The Commissioner erred with respect to his valuation of the limited partnership interest held by the Charles L. Heekin Revocable Trust dated February 28, 1997 (the "Trust") in Lewcom Ltd., L.P.:

(1) The decedent died on September 5, 1997.

(2) At the date of the decedent's death, the Trust owned 9,899 limited partnership units, representing a 98.99% interest in Lewcom Ltd., L.P.

(3) The Trust assets were includible in the decedent's Federal gross estate.

(4) Petitioners retained Willamette Management Associates to value the Trust's limited partnership interest in Lewcom Ltd., L.P. at the decedent's date of death.

(5) Curtis R. Kimball, CFA, ASA, a principal with Willimette Management Associates, prepared the appraisal. Mr. Kimball is an Accredited Senior Appraiser with the American Society of Appraisers.

(6) Willamette Management Associates determined that the fair market value of the Trust's limited partnership interest in Lewcom Ltd., L.P. at the decedent's date of death was "$158,203 per each one percent Limited Partnership Interest."

(7) Using this valuation the total limited partnership interest in Lewcom Ltd., L.P. held by the Trust would be $15,660,515.

(8) Petitioners reported $15,573,305 as the value of the Trust's limited partnership interest in Lewcom Ltd., L.P. on Schedule G of the Form 706 they filed for the decedent's estate.

(9) Petitioners concede that the value of the limited partnership interests in Lewcom Ltd., L.P. held by the Trust was underreported on the Schedule G of the Form 706 filed for the decedent's estate and that such value should be increased by $87,210.

(10) With the exception of the concession listed in Paragraph 9, Petitioners properly reported the fair market value of the Trust's limited partnership interest in Lewcom Ltd., L.P. on the Form 706 filed for the decedent's estate.

C. The Commissioner erred in his determination that gift taxes on gifts made within three years of death were $269,836.

(1) The decedent died on September 5, 1997.

(2) Between September 5, 1994 and September 5, 1997, the decedent made taxable gifts in the amount of $620,274.

(3) The amount of taxes payable on these taxable gifts was $268,756.

(4) The Commissioner determined that the amount of tax payable on these gifts was $269,836.

(5) The Commissioner's determination of the Federal gift taxes paid on gifts made within three years of death is $1,080 higher than the actual amount payable on such gifts.

(6) Therefore, the amount of adjusted taxable gifts on Schedule G of the Form 706 filed for the decedent should be $268,756 and not $269,836 as determined by the Commissioner.

d. The Commissioner erred with respect to his determination of additional deductions on Schedule J of the Form 706 filed for the decedent's estate.

(1) Petitioners anticipate that significant costs will be expended preparing this case for trial.

(2) Since there is a valuation issue present in this case, Petitioners will have to retain expert witnesses for trial of the case as well as expend additional legal fees.

(3) In addition there will be other costs and deductions associated with the trial of this case and administration of the estate assets as a result of the audit of the decedent's Form 706 and the trial of this case, including additional executors' fees and attorneys' fees.

e. The Commissioner erred with respect to his determination that the value of the estate passing to the charitable lead annuity trusts should be reduced.

(1) Sections 6 and 7 of the Agreement underlying the Trust created two charitable lead annuity trusts.

(2) If the initial residual beneficiaries of the Trust disclaimed their interests, the charitable lead annuity trusts were to be funded after the decedent's death.

(3) The initial residual beneficiaries of the Trust disclaimed their interests, and the charitable lead trusts were therefore to be funded.

(4) The charitable lead annuity trusts were to receive all of the assets of the Trust, whether held by the Trust at the decedent's death or paid to the Trust following the decedent's death, less amounts needed to pay specific bequests, expenses and debts of the estate and estate taxes due from the estate.

(5) The assets placed in the charitable lead annuity trusts were publicly traded securities and a limited partnership interest in Lewcom Ltd., L.P.

(6) The fair market value of the publicly traded securities was determined as the mean of the high and low selling prices on September 5, 1997, the decedent's date of death.

(7) The fair market value of the limited partnership interest in Lewcom Ltd., L.P. at the decedent's date of death was determined by an appraisal conducted by Willamette Management Associates.

(8) The charitable lead annuity trusts provide for the payment, annually, to qualified charitable organizations of 6% of the value of assets placed in trust, payable in quarter-annual installments, for 40 years after which the assets will pass to noncharitable beneficiaries.

(9) The portion of the interests passing to charity from the charitable lead annuity trusts was calculated as 76.83% of the total value of the assets placed in the charitable lead annuity trusts.

(10) Petitioners calculated the charitable deduction to be $19,240,412.

(11) This amount was reported as a charitable deduction on Schedule O of the Form 706 filed for the decedent's estate.

(12) The calculated deduction reflected the portion passing to charity of the fair market value of the assets passing to the charitable lead annuity trusts, as of the decedent's date of death, taking into account reductions including estate taxes.

(13) Petitioners properly calculated the value of the charitable deduction reported on Schedule O of the Form 706 filed for the decedent's estate, except to the extent that such amount is adjusted to reflect changes resulting from this proceeding.

f. The Commissioner erred in not reducing the deficiency determined by the state death tax credit.

(1) The decedent died domiciled in the State of Ohio.

(2) The State of Ohio imposes an estate tax on estates of decedents domiciled in the State of Ohio at death.

(3) IRC Section 2011 permits an estate to claim a credit for all or a portion of the estate tax actually paid to a state.

(4) Petitioners have paid an estate tax to the State of Ohio, and this amount, as adjusted in this proceeding, should permit a state death tax credit against the tax owed by the decedent's estate under IRC Section 2011.

WHEREFORE, Petitioners pray that the Court may try this case and determine that the Commissioner erred in the manner set forth in subparagraphs (a) through (e) of Paragraph 4, finding that there is no deficiency in the Federal estate tax for the decedent's estate, there is an overpayment of the Federal estate they may be taxes and granting Petitioners such other and further relief entitled.

Date: August 3, 2001

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2001-23948 (14 pages) [PDF].]