Attorney-at-Law

WHERE THERE’S A WILL

In Uncategorized on 06/20/2012 at 16:50

There’s a Lawsuit

So said Addison Mizner, and Judge Goeke is prepared to go even further, because there’s a lawsuit even though there wasn’t a will until thirteen years after the testatrix died; at least so far as anyone knew.

That’s the story behind Estate of Alfred J. Richard, Deceased, Gary H. Richard and Peter C. Richard, Co-Executors, 2012 T. C. Mem. 173, filed 6/20/12.

Alf was the father, Gary and Peter the sons, and Victoria was mom and Mrs. Alf. Victoria exits this life in 1997, holding 140 Class A preferred shares of the family’s holding corp, par value $1000 each, 8% non-cumulative, voting, convertible. Victoria also had a secret; she had made a will back in 1991, but nobody knew about it (they claim), there was never probate or a 706 filed, and as far as anyone knew Vicky never had a will.

Vicky’s will said her sons were execs, and should sell or redeem the shares and pay out to her sons and grandkids. The will had sat in a lawyer’s vault, and nobody tipped off the kids that there was a will, much less that they were named execs.

So since all Alf and Vicky’s other property was held as joint tenants with right of survivorship (last one standing takes all), when Alf buckets in 2004, his execs list 740 shares of Class A on the 706, when Alf really only had 600 shares.

There’s also a minor issue between the execs and IRS. The execs valued the stock at $1000 per share, or $740,000, but IRS claims “… the shares were worth $142,203,000 because the 740 preferred shares constituted over one-third of the voting shares in A.J. Richard & Sons, sufficient to block any major change from occurring to the corporation.” 2012 T. C. Mem. 173, at p. 6, footnote 8.

Oh yes, and IRS tacks on substantial undervaluation penalty, so we’re talking $68 million in tax and $27 million in penalty. So if Alf didn’t have the 140 shares, the bite would be about 19% less if the 600 shares he still had could stymie any major change, but  a lot less than that if they couldn’t.

IRS argues that Alf exercised dominion over the 140 shares as if they were his, but that doesn’t fly; there were no shareholder meetings so he never voted the shares, no dividends  were paid, Alf never tried to transfer the shares out of Vicky’s name (whether to himself or anybody else), and though IRS argues that no one would have stopped him if he did, that’s not enough. “Might have” doesn’t get it.

Under applicable State law (Florida, where else?), title vests per will at date of testatrix’s death,  even if no one knows about the will. And the local probate court admitted Vicky’s will as soon as the execs found it and filed it. That of course isn’t the end, as State court decisions don’t bind IRS even on State law until the State’s highest court has affirmed.

But even though Tax Court could look de novo, Alf did nothing contrary to Vicky’s title. IRS lambastes the execs for failing to include Vicky’s car and jewelry in her estate tax return, failing to redeem or sell the stock (although they claim they tried to redeem but the Corp said ‘no’), and for not holding shareholder meetings. But not including the car and jewels doesn’t negate the fact they did include the 140 shares as soon as they got Vicky’s will probated; as for failing to redeem, that may raise a claim for breach of fiduciary duty, but that’s for another court and another day. Finally, closely-held family corporations don’t have Warren Buffet style annual meetings, and Tax Court finds nothing nefarious in the fact that no meetings were held.

IRS claims that, under FL law, there’s a two-year statute of limitations on claims against a decedent’s estate, and that ran on Alf’s estate years ago. But this claim arose after Alf’s death, it was the execs and not Alf who included the 140 shares in Alf’s estate, so the FL statute doesn’t apply.

And the new will is cogent proof why the execs aren’t bound by the 706 they signed, including the 140 shares in Alf’s estate.

So Vicky’s estate has the 140 shares.

Takeaway- All preparers, please please please tell your clients who have wills to let some trusted person know where they are.

And lawyers, look in your vaults occasionally; you never know what you might find there.

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