Settlement of gift tax dispute does not waive interest due on unpaid taxes.

Estate of Anthony La Sala v. Comm’r, T.C. Memo. 2016-42 

When he was 93, Anthony La Sala created ALS Family LLC to own and manage his wealth. He sold a 99% interest in the company to his daughter when he was 95 for a lifetime annuity of $913,986. In the exchange, the retained 1% was valued at $28,100, and the 99% at $2,781,900. The figures were arrived at by applying discounts to some of the fractional shares of closely held companies owned by ALSF. Anthony died after receiving one annuity payment.

On the estate tax return, the sale was treated as bona fide, so only the retained 1% was listed as an asset. The IRS felt that the discounts were too high, which meant that Anthony had overpaid for his annuity, and the Service also wanted to include the entire value of ALSF in the taxable estate under IRC §2036. The estate took the matter to the Tax Court, but a settlement was reached before trial began. The estate conceded that the discounts were too high, and the IRS conceded the legitimacy of the sale of the annuity. The excess value would be a taxable gift to the daughter. However, the stipulations did not identify the correct discounts or the amount of the taxable gift.

There was a change of personnel at the IRS, and negotiations resumed to finalize the numbers. Ultimately, the estate conceded a taxable gift of more than $1 million, triggering a gift tax of $235,207, and an estate tax obligation of $160,176. The executed decision document was silent on the matter of interest. Gift and estate tax returns were filed. On November 15 the estate sent the IRS a check for $230,838, covering the estate tax and interest. On November 18 a check was sent for the full amount of the gift tax, but without interest.

When the IRS processed the gift tax payment in January 2011, a late filing penalty of $52,922 was imposed; a late payment penalty of $58,802 was applied; and total interest due of $137,752 was calculated. A notice was sent to the executors, who no doubt thought that the IRS was reneging on their compromise. The estate asked for a hearing. The settlement officer abated the late filing and late payment penalties, and the interest on them, but refused to abate the interest on the gift tax itself.

The estate argued before the Tax Court that the amount of the gift tax was simply a “notational amount” that had been used in the settlement negotiations, and the gift tax return was filed at the request of the IRS to create an account to which the payment could be posted. As such, no interest should be required. The Tax Court was not convinced. By filing the gift tax return, the estate conceded that a taxable gift had taken place on a specific date, which created a due date for payment of the gift and the date for statutory interest to begin to run. The settlement officer did not abuse her discretion in making this determination.

© 2016 M.A. Co.  All rights reserved.

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