LEVY v. U.S., Cite as 106 AFTR 2d 2010-7205, 12/01/2010
Sometime in the last millennium there was a TV situation comedy called Angie. It was about the early days of a marriage between a fellow from a very wealthy Philadelphia family and a waitress from a family of more modest circumstances. In one of the episodes the two families compete on the game show Family Feud. Family Feud is a wonderfully egalitarian contest. Unlike Jeopardy, which requires you to come up with the one correct answer (Expressed in the form of a question) the questions in Family Feud are matters of opinion. If you get one of the top five or ten answers (something like that) that were determined by a survey you get some points. The more common the answer you come up with the more points it is worth.
I forget how the Angie episode worked out in its entirety, but at least early on the husband's wealthy family (including the butler of course) was getting creamed. People in the survey did not have champagne and caviar for snacks or start the day by checking stock prices. At one point the host goes up and explains to them that the survey answers come from average people not the ultra wealthy. They don't get it. The lawyers for the Estate of Meyer Levy might have learned something from watching that episode, but they were probably studying hard in law school or taking polo lessons, the better to meet wealthy clients, while I was squandering my time learning life's lessons by watching television.
The case was a family limited partnership case. Family limited partnerships can be a good idea for a multitude of reasons. They are particularly attractive to people, who not, yet, having come up with a way to take it with them, want to control it all till they draw their final breath without having it all included in their taxable estate. There's also the asset protection and as they say on Seinfeld yada yada yada. The thing that people get excited about, though, is the discounts. That's what the IRS gets excited about too. Take a bunch of stuff and put it into a family limited partnership. Say its a million dollars worth of stuff. Now give 10% of the partnership to your kid. How much is the gift worth ? $100,000 ? Do you think I would pay $100,000 for it ? Of course not.. As a limited partner I don't get to vote. On top of that your kid doesn't even have the right to sell it to me. You have to hire a valuation expert to value the limited partnership interest (I sometimes think the estate tax is, in reality, a white collar jobs program). She'll tell you its worth something like $65,000, more or less, depending on well yada yada yada. The IRS doesn't like this and is constantly attacking it.
Until recently they focused on poor execution which I discussed at length in one of my early blog posts. Assets aren't really transferred to the partnerships. Personal bills are paid directly by the partnership. Distributions are not made in proportion to partnership ownership. Tax returns are not filed or not done correctly. In a more recent case, Fisher, discounts were not allowed for a single asset partnership, because it lacked business characteristics. There was no discussion of flawed execution.
No discount was allowed to the Estate of Meyer Levy for the sale of its Plano real estate that was in a partnership. The estate appealed the verdict alleging error on the part of the trial court.
The Estate argues that the trial court erred when it allowed the admission of
(1) evidence of the ongoing negotiations over the sale of the property, specifically the offers and proposals;
(2) evidence of the listing price of the property, and the ultimate sale price of the property;
(3) valuation testimony by the Government's expert based on flawed methodology; and
(4) opinion testimony by a lay witness and hearsay testimony.
Wow. In a valuation case they considered what people were offering for the property and what it actually sold for. That's pretty outrageous. You see the problem was it wasn't a judge that had to think about these things. It was a jury. Who ends up on a jury ? I'm not sure exactly. I suspect that they have more in common with the people Family Feud surveys for its answers than the people I run into at tax conferences.
The Estate contends that the jury arbitrarily disregarded unequivocal, uncontradicted, and unimpeached testimony of an expert witness, bearing on technical questions of causation beyond the competence of lay people. The Government counters that the jury had the partnership agreement in evidence from which it could have determined that there was no lack of control or marketability.
The record contains ample evidence to support the jury's verdict valuing the property at $25 million. The Estate listed the property, and eventually sold the property, for $25 million. It was immediately resold for $26.5 million. Sophisticated developers with no stake in the current litigation engaged in ongoing negotiations for the property for prices in the $20–25 million range. The Estate's expert testified that the market in Plano remained relatively flat during the period between Levy's death and the sale of the property. Also Jordan testified regarding the value of the property. Any of these provides sufficient support for the jury's verdict on the property.
The jury verdict regarding the discount also finds support in the record. The partnership agreement itself would be sufficient evidence. The jury could have rationally found that no discounts for lack of control or marketability were merited because the Estate controlled the general partner interest, which had nearly unfettered control over the Partnership's assets. The trial court did not abuse its discretion when it denied the Estate's motion for new trial.
I'm not a lawyer and I don't even play one on TV. I prepare and review tax returns and do tax planning. I also represent people who are being audited by the IRS, but there I'm generally dealing with accountants. If my clients end up in Tax Court and win I'll still think that I lost. I am fairly certain though, that it was the choice of the estate's lawyers to bring this matter to a jury. To have that privilege, they had to pay at least part of the tax in order to be able to sue for refund in district court. They could have instead gone to Tax Court where they would have had people who dealt with "technical questions beyond the competence of lay people" all the time and frequently allow discounts. Somehow though they thought they would do better with a jury.
Apparently though the government lawyers saw to it that the jury found out that the Estate got $25,000,000 and these simple minded people thought that might be indicative of whatever the estate had was worth. I suppose there was some sort of trial strategy that would keep this information undisclosed. In which case the jury would have had to weigh the government's yada, yada, yada against the Estate's yada, yada, yada. There might have been some logic to that. If I was playing Family Feud and the question was "Name a class of people that are very popular" I would venture neither multi-millionaires or IRS agents. If the question was "Name a class of people that are despised" I think I might score higher with "IRS agents". I mean no disrespect to IRS agents, their unpopularity is inherent in their jobs.
In a refund suit in district court either the government or the taxpayer can ask for a jury. I haven't been able to figure out which it was. I did find that the executor had been a potential candidate for mayor of Austin Texas and the late Mr. Levy had established a fairly well known charitable foundation. So there may have been a feeling that there was a home town advantage. There was also a sense in which the Estate was playing with the house's money if it was the one that gambled on a jury, as is noted in a footnote:
Although we have declined to set aside the jury's verdict of zero discount, we note that the actual discount applied in taxing the Estate was thirty percent. Given the valuation found by the jury, it would have had to find a discount of larger than thirty percent for the verdict to make a difference to the judgment in this case.
I don't know whether this case will have a chilling effect on family limited partnerships or not. My cumulative sense is that you should only do them if you think they are a good idea anyway. Oddly enough, that will make it more likely that you will succeed on the discount issue. I think the key planning point to take away from the case is the Court's comment that it would have been reasonable to find a zero discount because of the Estate's general partnership interest.