The Internal Revenue Service and the estate of William Davidson, billionaire architect of Guardian Industries and former owner of the Detroit Pistons and Tampa Bay Lightning, recently stipulated to estate and generation-skipping transfer (GST) taxes of $321 million, bringing to a close one of the more high stakes estate tax conflicts in recent memory. Though it seems strange to categorize it as such, given the enormous tax bill and the fact that the estate was arguing they owed nothing further, this settlement is actually a victory for Davidson's estate, as the IRS initially demanded $2.8 billion in underpayment and penalties.
It’s important to note that the IRS often way overestimates its demands when issuing a deficiency notice, as it’s not allowed to increase the amount requested later in the process, so their settling for a far lower number than initially requested isn’t necessarily unusual. What makes this case interesting is the sheer size of the numbers involved. Since the two sides reached this compromise as part of a settlement, it’s unlikely we’ll receive any insight into how exactly they were able to reach the $321 million figure. Nonetheless, it could be instructive to take a look at the aspects of Davidson’s estate that spurred the IRS to make such an outrageous demand (not that they’ve really needed much prodding to do so in the past):
SCINs. Davidson made heavy use of self-cancelling installment notes (SCINs) to transfer assets to his heirs. For those unfamiliar with this particular technique, it’s a common estate-planning tool often used to transfer family businesses from one generation to the next. Basically, a SCIN is a debt obligation that cancels on the death of seller, extinguishing the debt. Such an arrangement achieves two estate-planning goals, it: 1) freezes the value of the property being transferred for estate tax purposes, and 2) removes a portion of the value (the future appreciation on the property) from the seller’s estate in the event that he dies before the note is paid off in full. The risk of the seller’s death cancelling the debt must be reflected either in an increased purchase price or inflated interest rate on the note itself. In this case, the IRS alleged that payments on the SCINs issued to Davidson’s heirs were way too low because they were incorrectly based on a life expectancy of five-years, which the IRS contends wasn’t “realistic.” Davidson’s estate argued that the estimation of his life expectancy was in good faith and based on statements from his Doctors maintaining that Davidson was in good health.
Stock in Trusts. Davidson’s children, stepchildren and grandchildren all had trusts which contained large amounts of shares of privately-held Guardian stock. The IRS argued that the estate undervalued the stock in these trusts by roughly $1,500 a share. Since each trust held a value in the tens of millions, these shortfalls really added up. Davidson’s attorneys argued that the IRS was way overvaluing these shares, as automotive and construction stocks were declining sharply in early 2009, when Davidson died, making a decline in Guardian sales and profits “foreseeable.”
Transfers to Wife/Gift to Daughter: Davidson also transferred tens of millions of dollars to his wife so that she could assist their daughter and her husband in building a house. The IRS claimed that these transfers were gifts.
There’s really nothing here that looks atypical or out of the ordinary in terms of estate planning. These are all fairly common tools used by estate planners to help their clients transfer assets and lessen any potential tax burden. The SCINs are probably the only part of the plan that could be considered even remotely controversial, as they’ve come under heavy IRS scrutiny in other cases, but they’ve also largely held up under that scrutiny. Indeed, this seems more like a case of the numbers involved simply being way too large for the IRS to stay away. Where a smaller estate (albeit one still large enough to require such planning in the first place) might escape government attention like this because there just isn’t enough meat on the proverbial tax bone to make the fight worth the IRS’ while, when this much money is involved, even the scraps are apparently worth fighting for.