Minnesota Twins Heirs Go to Bat against IRS in Tax Court

By Teresa Ambord
 
When a truly wealthy person dies  like Minnesota Twins owner Carl Pohlad  the IRS doesn't give up easily on the possibility of collecting more taxes. Pohlad died in January 2009 at the age of ninety-three. A few months later, Forbes magazine estimated the value of the Twins at $405 million (today its value is closer to $578 million). Pohlad himself made Forbes' list of the 400 richest Americans in September 2008 (for the twenty-fifth straight year), coming in at number 102. His estimated net worth then was $3.6 billion. 
 
Forbes estimated his value based on his stock positions in companies such as Wells Fargo, US Bancorp, and PepsiCo. He also "built large nonpublic holdings in everything from real estate to broadcasting," said Forbes
 
The IRS Challenge
Pohlad's heirs  sons William, Robert, and James  are now fending off the IRS, which wants more than the taxes already paid. The sons have filed suit in US Tax Court to fight the claim. The key issue seems to be a difference in the value assigned to Pohlad's stake in the team:
  • The heirs say, for tax purposes, their father's share of the Twins was worth $24 million, and they paid all of the taxes due on that basis.
  • The IRS says the Twins is worth more than twelve times that valuation, closer to $293 million. The way the tax agency sees it, this means the estate owes an additional $121 million in taxes, plus they're slapping on a penalty of $48 million for what they call a gross valuation misstatement. 
Pohlad's sons filed suit against the IRS, contesting all of the assessment as well as other adjustments the IRS made. 
 

Another Stab at Killing the Death Tax?

A recent Forbes article  "Rather Than Tackle Tough Tax Reform, Congress Focuses on the Death Tax"  says there are currently two bills being floated to once again repeal the federal estate tax: 
  • S.1183: Death Tax Repeal Act of 2013, introduced by Senator John Thune (R-SD) 
  • H.R. 2429: Death Tax Repeal Act of 2013, introduced by Mike McIntyre (D-NC) and Kevin Brady (R-TX) 
 
Both bills are seeking permanent repeal of the estate tax as well as keeping the step-up in basis for assets in an estate. 
 
Thune's reasoning is based on the fact "more than 70 percent of family businesses do not survive to the second generation, and 90 percent of family businesses do not survive to the third generation." 
 
The author of the Forbes article, Kelly Phillips Erb, says while Thune's statistics are accurate, there are "far more complex factors that go into business succession issues than the estate tax." Erb says the tax reform we need is much bigger and more complex than a focus on the death tax will address. 
 
The saying goes, the only things certain are death and taxes. And for many Americans  not just the wealthy  the two come together. Only time will tell if the death tax can be put to sleep or not.
 
Other Issues
Before Pohlad died, he appears to have transferred most of his holdings  other than ownership of the Twins  to his heirs. Forbes says this was done at a small tax cost. The IRS is now claiming those gifts made during Pohlad's lifetime were greatly undervalued. According to tax auditors, Pohlad made $446 million in taxable gifts in 2008, while his estate reports $129 million.
 
Gift and Estate Tax Paid
The estate already paid $95 million in gift taxes on those gifts, but the IRS was looking to collect another $163 million in gift taxes. However, the heirs say the gift tax issue has been settled for an additional $16 million (ten cents on the dollar of what the IRS was seeking). 
 
As for estate taxes, the IRS wants $207 million more than the $26 million it has received so far. How this plays out will depend on the ultimate value assigned to the Twins. According to Forbes' assessment of the tax situation, even if the heirs end up paying considerably more in estate taxes based on a higher asset value, they've already beaten back a "nice chunk of the IRS' extra estate tax bill." And the reason, says Forbes, is the gift taxes paid or owed in the three years before the owner's death are included as part of the taxable value of the estate. 
 
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