By Teresa Ambord
Anyone wealthy enough to own a major sports franchise is probably steeped deep in serious estate planning. William Davidson was no exception. In 2008, the year before he died, his net worth of $5.5 billion landed him a spot on Forbes magazine's richest people in the world, number sixty-two to be exact. He built Guardian Industries, based in Auburn Hills, Michigan, into a one of the premier makers of glass, automotive, and building products in the world. He owned the Detroit Pistons as well as the WNBA Detroit Shock, the NHL Tampa Bay Lightning, and others, and he was in the 2008 Basketball Hall of Fame.
Like most people in his wealth category, he was a strategic planner, with the help of his team of trusted advisers. He employed all the typical methods the very rich use to protect his estate, to pay the taxes due, and to preserve the bulk of his fortune. His heirs include his wife, Karen; Karen's daughter; Davidson's son and daughter from a previous marriage; and six grandchildren.
Then Came the Taxmen
More than four years after his death, you might think this issue was settled. But the IRS doesn't give up easily. When he died, Davidson's estate was estimated at $3 billion. After careful shepherding of his wealth, his estate attorneys say every dime of taxes owed was paid. Yet, the IRS isn't wearing a happy face and wants two-thirds of his estate – at least $1.9 billion. In May, the tax agency filed a 113-page court document explaining why it believes the money is owed.
In mid-June, Davidson's estate attorneys fired back with a petition in United States Tax Court in Washington, DC. They said the IRS filing wrongly claimed $2.8 billion in underpayments in estate taxes, gift taxes, penalties, and more.
Given the amount in question, it seems clear this isn't going to be over anytime soon. Observers of the case say this will be a protracted legal battle, not the kind you usually associate with individual wealth.
"It's huge", said Beth Kaufman, a trusts and estate lawyer at Caplin & Drysdale in Washington. Kaufman isn't involved in the case. "Just the sheer dollar amounts involved here are enormous."
Here are a few of the key issues the IRS is arguing:
- Davidson's kids and grandkids and stepdaughter all had trusts amounting to tens of millions of dollars each. The IRS says the shares of privately held Guardian stock in those trusts were undervalued by up to $1,500 per share. Davidson's attorneys say the IRS is severely overvaluing those stocks. They noted the automotive and construction stocks were in "freefall" in late 2008 and 2009, when Davidson passed away, so it was "foreseeable . . . Guardian sales and profits would decline substantially."
- Davidson used self-cancelling installment notes (SCINS) to transfer assets to his heirs. The IRS says the payments on those SCINS were too low, so some of the assets transferred should be viewed as gifts. They argue that Davidson transferred the assets in anticipation of five-year life expectancy, which, says the IRS, was longer than realistic. In response, his attorneys point to statements from Davidson's doctors indicating he was in good health.
- Tens of millions of dollars were transferred to his wife, which she used to help her daughter and son-in-law build a house. The IRS calls this a gift. The estate attorneys disagree.
So What Is the IRS Demanding?
In its filing in May, the IRS claimed the estate and the gifts Davidson made are worth about $4.6 billion, and they want $1.9 billion of that in estate tax and penalties. They also report finding deficiencies going back all the way to 2005 of over $900 million in gifts and other taxes the IRS says should have been paid.
Kaufman told reporters the IRS notice included a great deal of double counting and projects the tax bill will be reduced. But, she added, the IRS typically throws in everything it can when issuing a deficiency notice, because the agency won't be able to increase the amount later.
There's an administrative process for settling such a dispute, but considering the estate has already filed in tax court, it looks like neither side is willing to budge. According to several attorneys, this is the largest tax deficiency case in dispute in recent memory.
Ron Aucutt, the head of private wealth services at the law firm of McGuireWoods (northern Virginia office), said",Clearly when you see a number with that many digits in it you usually think big oil company or huge financial institution, not an individual." He added his opinion that although Davidson's tax planners were aggressive in their strategy, the methods they employed were not at all unusual.
"The transactions look like the kinds of things that estate planners often recommend for their clients, although this scale, of course, is rare."