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