Taxing Lessons Case Summaries

Case — Beneficial Ownership

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TL Case Summ

THE QUESTION

Did a decedent own an interest in family companies even though no stock certificates were issued?

THE DISPUTE

Taxpayer Says: There was no intent to own an interest in the companies, and no interest was ever actually owned.

Internal Revenue Service Says: The manner in which the companies operated indicate the taxpayer held either an uncertificated or beneficial ownership interest in them.

THE LAW

From Internal Revenue Code Section 2031(a): Provides that “the value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.”

From Internal Revenue Code Section 2033: Provides that “the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”

From Federal Tax Regulation 20.2033-1(a): Re the wording of IRC section 2033 – this includes “the value of all property, whether real or personal, tangible or intangible, and wherever situated, beneficially owned by the decedent at the time of his death.”

From Estate of Posner v. Commissioner, T.C. Memo. 2004-112: “State law, which creates legal interests and rights in property, including powers of appointment, determines the nature, scope, and validity of such legal interests and rights.”

From Pahl v. Commissioner, 150 F.3d 1124 (9th Cir. 1998), affg. T.C. Memo. 1996-176: For tax purposes, courts have held that an individual may be deemed to own stock in a corporation where he/she has a beneficial ownership in the corporation even if no stock certificate was issued. In determining whether an individual has beneficial ownership in a corporation, we look to the facts and surrounding circumstances to determine whether the putative shareholder exhibits an intent to become a shareholder and concomitantly whether the corporation exhibits an intent to make the putative shareholder an owner.

THE CAUSE OF THE DISPUTE

Your estate consists of everything you own (including debts) when you die.

Disputes arise because determining “ownership” is not always as straightforward as it seems. For instance, in various court cases, factors besides the legal transfer of stock title have been considered when determining stock “ownership”. These include contractual rights, the right to receive compensation, the power to control the company, the right to attend shareholder meetings, the ability to vote shares, access to corporate books, and open acts by the party involved that exhibit and lead to the belief of ownership. (See Dunne, T.C. Memo. 2008-63, for cites and a discussion of these and other factors.)

In this case, the decedent died in 2002 after a lifetime spent participating in the management and leadership of a family-owned group of warehouse companies. Employees reported to him, and he occasionally held himself out as an owner, though he never legally owned any shares of the companies. He received compensation for developing business strategies and the companies paid certain personal expenses.

The estate administrator says the decedent never owned or intended to own part of the companies, due to past criminal convictions and problems with creditors. The administrator believes the company stock is not part of the estate, and that it was properly left off the estate tax return.

While admitting the decedent never owned shares of company stock, the IRS says his demeanor, behavior and involvement in the family business, along with the benefits he received, indicate he was a beneficial owner. The IRS contends that ownership interest should have been included on the estate tax return.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 46KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
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For the taxpayer. Among other facts and circumstances pointing to non-ownership, the decedent had none of the financial burdens associated with equity ownership. He never made, nor was he ever asked to make, any contributions or loans to the companies or guaranteed any of their debts. He had no risk of loss. He had no capital at risk and, should the corporate veil ever be pierced, he would have no personal liability. On the totality of the record we find as the ultimate fact that decedent did not own a property interest in the warehouse companies at the time of his death.
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