Category: Tax Court Cases

Bill Davidson’s $2.8 Billion Estate Tax Bill

Estate Tax Bill the Size of a Small Nation’s GDP

 

Estate Tax
Estate taxes tend to be a bit more

The estate of billionaire Bill Davidson is suing the IRS. Their beef: a $2.8 billion tax deficiency notice. That’s in the neighborhood of GDP for small nations like Greenland and the Cayman Islands! A private man, most would know Mr. Davidson for owning the Detroit Pistons sports franchise. He financed the purchase of his beloved Pistons through a personal fortune amassed running the family business of glass manufacturing, Guardian Industries. Forbes estimated his wealth at $3.5 billion when he passed in 2009.

The heart of this tax dispute focuses on tax planning strategies and accounting methods Mr. Davidson employed prior to his death. The sheer magnitude of the financial dispute is rare, but the techniques his estate used are not uncommon when managing wealth. The IRS’ laundry list of complaints include:

  • Transfers of wealth to family.  

Lawyers drafted several trusts on behalf of Mr. Davidson, months before his death, for his children and grand-children. Each trust is valued at tens of millions of dollars and are funded by Guardian Industries stock. The IRS claims, however, that accountants undervalued each stock by up to $1,500. Davidson’s lawyers counter that the IRS’ accounting does not consider a free fall in automotive and construction stocks occurring in late 2008 and 2009 when valuing the stocks.

  • Self-Cancelling Installment Loans (SCIN’s).

Mr. Davidson also transferred wealth to his heirs through a series of “self-cancelling installment notes” (SCIN’s). SCIN’s operate like a loan or mortgage. Mr. Davidson gave certain assets (e.g. homes, boats, cars) to his heirs. The heirs, in turn, had to make regular payments on the gifting of these assets. The big difference between typical loans and SCIN’s, however, kicked in when Mr. Davidson died. The debt his heirs owed owed on the gifted assets evaporated and they owned the assets free and clear. The IRS claims the payments on these SCIN’s should have been higher. These low payments, therefore, qualify the assets as “taxable gifts.” Morbidly, the IRS’ assertion that the payments were too low is because it believes a 5 year life expectancy for Mr. Davidson was too long when lawyers drafted the SCIN’s.

  • Transfers of wealth to his spouse.

Not to be left out of the fun, the IRS argues that Mr. Davidson made taxable gifts to his wife for tens of millions of dollars. His wife also used money from his fortune to build a home for her daughter and son-in-law. The IRS claims lawyers left these figures out when settling his estate.

The IRS ended up calculating Mr. Davidson’s taxable estate and gifts to be worth $4.6 billion. It arrived at the $2.8 billion tax deficiency by figuring $1.9 in estate tax and penalties, as well $900 million in other taxable gifts and back taxes. Outside groups, however, say the IRS is double-counting to come up with a $2.8 billion figure. This is likely true because the IRS cannot later add amounts it did not initially include in its deficiency notice. It would not be surprising to see a settlement or judgment that results in a figure far below the IRS’ stated deficiency.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.

Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.

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Tax Court Takes Aim At Leasebacks As Sufficient “Business Use”

A common way for aircraft owners to defray the costs of ownership and justify the business use of their planes is through “leaseback” agreements. A leaseback agreement is one in which the aircraft owner agrees to let a flight school – often the same facility or company that sold them the plane – use the plane for their students. The owner takes a small premium over the direct costs of the flight for each hour, which can generate some to modest revenue, depending on the type of plane and the market for flight lessons.

While aircraft owners must concern themselves whether the income this generates is “passive”, there is usually less dispute as to whether the leaseback arrangement is a bona fide business arrangement for purposes of taking business related deductions and allowances, like the Section 179 expensing allowance that produces considerable tax savings in the year in which the plane is placed in service.

The Tax Court, in a Memorandum opinion: Tax Practice Mgmt., Inc., et al. v. Commissioner, TC Memo 2010-266, took exception to the taxpayer’s expensing allowance for lack of a profit motive in its leaseback arrangement. The taxpayer was in the tax preparation business and had offices in multiple states. He testified at trial that his intention in purchasing the plane was to facilitate travel to and from his different offices and support his overall business operations. He stated that he never intended for the leaseback activity to produce more than a small amount of income to offset the plane’s costs.

The court looked to the facts and circumstances of this case in upholding Respondent’s argument that the taxpayer lacked the requisite intent. At the time of purchase, Respondent argued, the taxpayer was in the process of selling the business for which he claimed to have purchased the plane. The Court further noted that the taxpayer used the plane only once in the year in which it was placed in service (late in the year), for a test flight.

Most notable about this opinion was the court’s focus on whether the taxpayer intended to make a profit with the airplane rather than with his tax preparation business. This is an unfortunate decision in that many aircraft purchasers have considerable, bona fide business use for their planes as business tools, and not because they are looking to enter the aviation business per se. The court seemed to place undue emphasis on whether the lease to the flight school was sufficient in and of itself to show the requisite profit motive.

Lesson learned? Here’s a few suggestions: (i) If you’re hot to close on your aircraft purchase prior to the end of the year, stop. The court in the opinion above found the taxpayer’s minimal use of the plane in which the expensing allowance was taken persuasive in accepting Respondent’s argument that there was no “profit motive” in buying the plane. Take your deductions in years for which you can establish a track record of using your plane for business; (ii) Establish in advance, preferably in a written business plan, how the aircraft fits into the business’ overall profit motive. Highlight the differences between the larger business of which the plane is a part, versus the ownership and leasing of the plane as a business unto itself. This is a critical distinction that can save you from a result similar to what occurred in Tax Practice Mgmt.

Ari Good, Esq. practices in aviation tax law, including in defending aircraft businesses and owners in federal income tax and state sales and use tax audits. For more information visit our aviation and tax pages.