In Anthony La Sala v. Commissioner, T.C. Memo. 2016-42 (March 8, 2016), the Tax Court upheld the Internal Revenue Service’s determination that an estate was liable for unpaid interest on a federal gift tax liability. In sustaining the IRS’ notice of a federal tax lien (NFTL), the court held that the estate of Anthony La Sala was responsible for interest on a 2003 gift tax liability, despite a settlement with the IRS in 2010 of estate tax liability.
IN 2001, when Anthony was 93 years old, he formed ALS Family LLC (ALSF). Anthony contributed cash, marketable securities and fractional equity shares (a 25 percent share in La Sala Holding Co. and a 10 percent share in M.H. Partners) in exchange for a 100 percent ownership interest in ALSF. Two years later, Anthony sold 99 percent of his interest in ALSF to his daughter and two grandchildren, in exchange for an annuity.
The annuity would pay Anthony $913,986 per year for the rest of his life. The value of Anthony’s 99 percent interest that he transferred to his daughter and grandchildren was $2,781,900. The value of the 1 percent interest in ALSF that he retained was $28,100. To arrive at these valuations, Anthony applied a 50 percent discount and a 35 percent discount, respectively, to the values of the two equity shares ALSF held.
The Tax Returns
In 2004, Anthony passed away, having received only one annuity payment. The executor of Anthony’s estate timely filed a Form 706 return, which reported Anthony’s 1 percent interest in ALSF, valued at $28,100, in the assets of his estate. On Schedule I (Annuities) of Form 706, the estate reported Anthony’s sale of his 99 percent interest, thus excluding it from his estate. The estate claimed that Anthony’s life expectancy was more than one year on Jan. 1, 2003 and, therefore, under Treasury Regulations Section 1.7520-3(b)(3), the annuity transaction should be respected and not included in the gross estate.
The IRS determined that the estate used excessive discounts in valuing the two equity shares and the date-of-death value of ALSF’s assets was $4,368,534. It concluded that under Internal Revenue Code Section 2036, the full value of ALSF’s assets was includible in Anthony’s estate—not just his 1 percent interest. Accordingly, the IRS determined that there was a federal estate tax deficiency of $1,999,045.
The estate petitioned the court for review of the estate tax deficiency. The case was scheduled for trial at the end of 2009 but prior to the court date, the parties settled. The IRS conceded that as of Jan. 1, 2003, Anthony’s life expectancy was greater than one year. His estate conceded that its discounts of the fractional equity shares were excessive. Both parties agreed that to the extent the value of the transferred 99 percent interest was more than the value of the annuity Anthony received, that value constituted a taxable gift to Anthony’s daughter and grandchildren in 2003 under IRC Section 2503.
Counsel for the IRS filed with the court a stipulation of settled issues, but the stipulation didn’t explicitly state the terms of the settlement. The stipulation stated that ALSF’s fractional equity shares were understated by 35 percent and 50 percent; however, it didn’t state what discounts were appropriate. The stipulation also didn’t specify the amount of the taxable gift. The court gave the parties 60 days to file additional documents.
The original counsel for the IRS was replaced by new counsel, who questioned whether a settlement was in fact reached. In early June 2010, the estate filed a motion for entry of decision seeking to enforce the settlement. The estate represented that both parties agreed to apply a 25 percent discount to the fractional equity shares held by ALSF. Accordingly, the estate asked the court to enter a decision regarding an estate tax deficiency of $177,418 and gift tax due of $234,976. The proposed decision document stipulated that, “effective upon the entry of the decision by the Court, petitioner waives the restriction contained in I.R.C. §6213(a) prohibiting assessment and collection of the deficiency (plus statutory interest).”
Estate Tax and Gift Tax Deficiencies Recalculated
In late June 2010, IRS counsel notified the estate that the IRS conceded that a settlement was in fact reached; as a result, the estate withdrew its motion for entry of decision. The parties then computed the estate tax deficiency and gift tax liability under the settlement agreement. The parties applied a 25 percent discount to value the fractional interests and calculated a gift tax liability for 2003 of $235,207. Neither party calculated the interest on the gift tax, although that interest would have been a deductible expense on the estate tax return.
In September, IRS counsel requested that the estate file Form 706 reflecting the agreed gift tax liability. In October, the estate filed Form 709 reporting a taxable gift for 2003 of $1,025,343 and a gift tax liability of $235,207. The estate also included on the gift tax return the following notation: “The filing of this return is conditioned on the concurrent filing of a Decision with the U.S. Tax Court in Estate of Anthony La Sala, Docket No. 12409-08, reflecting an estate tax settlement reached by the Estate and the Internal Revenue Service.”
The parties calculated an estate tax deficiency of $160,176, which included deductions for additional attorney’s fees and treated the 2003 gift as a prior taxable gift. In October 2010, the Tax Court entered a stipulated decision; it didn’t mention the 2003 gift tax liability because the notice of deficiency in the settled case determined a deficiency in estate tax only. In November 2010, the estate remitted $230,838 to the IRS, representing estate tax due plus interest of $70,662, thus discharging the estate tax liability in full. That same month, the estate remitted $235,207, representing the 2003 gift tax liability; interest wasn’t included in that payment.
In January 2011, the IRS processed the Form 709 and assessed gift tax as reported, plus penalties for late filing and late payment. That same time, the IRS Cincinnati Service Center sent the estate a Notice CP161, Request for Payment—Federal Gift Tax, for an unpaid balance of $484,683 (representing gift tax of $235,207; late filing penalty of $52,922; late payment penalty of $58,802; and statutory interest, including interest on penalties, of $137,752). In February, the estate, by letter, notified the Cincinnati Service Center that gift tax liability had already been paid and that it objected to the imposition of interest and penalties. The estate received no response. In January 2012, the IRS sent the estate by certified mail a Notice of Federal Tax Lien Filing and Your Right to a Hearing.
The estate timely requested a hearing. In June 2012, a settlement officer (SO) from the IRS Appeals Office conducted a telephone hearing with the estate’s counsel. The estate argued that: gift tax liability had already been paid; no penalties were due because the gift tax was paid pursuant to a settlement; and no interest was due because the gift tax was a mere “notational amount” used in calculating the estate tax deficiency.
The SO verified that the 2003 gift tax was properly assessed, and the provisions of applicable law and administrative procedure had been followed. She confirmed that the estate’s gift tax payment was correctly posted to its account as of November 2010. She abated in full the late filing and late payment penalties, including interest attributable to the penalties.
The SO, however, determined that the estate was liable for statutory interest on the 2003 gift tax liability and didn’t abate that interest. In August 2013, the IRS issued to the estate a notice of determination sustaining the NFTL. The estate’s executor timely petitioned for review of the SO’s determination of liability.
Liability for Interest
IRC Section 2501(a) imposes a tax on the transfer of property by gift. IRC Section 6621 specifies the rate of interest on a federal gift tax liability, which accrues from the last date prescribed for payment until the date on which the tax is actually paid (IRC Section 6601(a). The court has no discretion to excuse a taxpayer from paying interest, unless a statutory exception applies.
When examining a settlement document, a court will enforce a settlement agreement, unless there’s a mutual mistake, an affirmative misrepresentation by one of the parties or other similar circumstances. In this instance, the estate asked the Tax Court to interpret the settlement agreement to include, as an implied term, that no interest would be due on the 2003 gift tax liability. The court refused to take such an approach.
Estate’s Argument Unpersuasive
The estate proffered several arguments. First, it claimed that no interest was due because under the settlement, there was no actual delinquent 2003 gift tax liability. It argued that that the $235,207 figure was a mere “notational amount” used to derive the estate tax deficiency and to generate an overall settlement of the estate tax case. It claimed that it filed Form 709 simply to create an account entry to which payment could be posted; it wasn’t filed as an acknowledgement of actual gift tax liability. To support its claim, the estate referred the Tax Court to the notation on Form 709 (that the filing was conditioned on the filing of a decision with the Tax Court, reflecting the settlement).
The Tax Court wasn’t persuaded. It pointed to the negotiations with the IRS that resulted in the annuity transaction to be respected; the concession that the estate undervalued the fractional equity shares, which thus constituted a taxable gift; and the establishment of an independent gift tax liability for 2003. The Tax Court stated, “if that is not what the estate intended, it should not have signed a stipulation conceding that Anthony had made, on January 1, 2003, ‘a taxable gift pursuant to I.R.C. § 2503.’” The Tax Court further noted that the estate voluntarily filed a Form 709 reporting a 2003 gift tax liability. As to the notation on the Form 709, the court stated that it “simply indicated correctly, that the estate’s reporting of a 2003 gift tax liability had as a quid pro quo the concessions the IRS made in the estate tax case.” And, said the court, the estate’s explicit concession that Anthony made a taxable gift established gift tax liability, even though no gift tax liability was determined in the notice of deficiency in the estate tax case.
The estate further argued that, assuming there was a delinquent gift tax liability, the settlement included an agreement that there would be no interest. The Tax Court disagreed: “There is nothing in the stipulation of settlement or the parties’ subsequent correspondence addressing interest on the gift tax liability, much less evidencing a mutual understanding that no interest would be due.”
In rejecting any implied waiver of interest, the court noted that IRS counsel testified at trial that he never had authority to waive interest and never would have gotten approval for a settlement that waived interest. The court further noted that the estate’s counsel testified that he didn’t know of any instance in which the IRS waived statutory interest in a settlement. “Under these circumstances,” the court concluded, “we cannot construe the stipulation of settlement to include as an implied term a waiver of interest on the 2003 gift tax liability.”
The Tax Court did note that the attorneys who represented the estate in 2009-2010 testified that their calculations in the settlement agreement didn’t include payment of interest on gift tax liability. The court found, however, that their evidence regarding their subjective understanding was ambiguous. “In any event,” said the court, “one party’s unilateral misunderstanding or misapprehension of the cost of a settlement does not justify reforming the settlement or setting it aside.”
Finally, the estate argued that liability for interest on the 2003 gift tax was inequitable, because it couldn’t now timely claim a deduction for that interest against the estate tax. Although the Tax Court was sympathetic, it held that the estate’s failure to claim a timely deduction for interest didn’t justify setting aside the statutory interest (relying on Carlson v. United States 126 F.3d 915, 920 (7th Cir. 1997).
SO Didn’t Abuse Discretion
In addition to concluding that the statutory interest accrued as a matter of law on the 2003 gift tax liability, the Tax Court also found that the SO didn’t abuse her discretion in upholding the NFTL. The court considered three issues under IRC Section 6330(c)(3): 1) did the SO properly verify that the requirements of applicable law and administrative procedure were met? 2) did she consider relevant issues raised by the estate? and 3) did she balance the efficient collection of taxes with the estate’s legitimate concern that the collection action be no more intrusive than necessary?
After reviewing the record, the Tax Court found that the SO performed a thorough review the of the estate’s account, correctly determined that the IRS properly assessed gift tax liability and verified that other requirements of applicable law and administrative procedure were followed. The SO made sure that the gift tax payment was correctly credited to the estate’s account; abated late filing and late payment penalties; and abated interested on those penalties. Thus, there wasn’t an abuse of discretion in refusing to abate interest on the gift tax liability because there wasn’t “error or . . . delay attributable to ‘erroneous or dilatory’ performance of a ministerial or managerial act by an officer or employee of the IRS” (IRC Section 6404(e)(1). And, because the estate didn’t request a collection alternative, the SO correctly upheld the NFTL as a means of collecting the unpaid interest on the 2003 gift tax liability.