Enrolled Agents have plenty of reasons for thoroughly understanding gift tax rules even if they don’t normally prepare IRS forms reporting taxable gifts. Advising individuals about gift tax matters can often arise when conducting other EA duties. By issuing warnings about potential taxable gifts, Enrolled Agent tax experts help individuals address situations that could eventually draw IRS scrutiny.
For example, when rendering aid to a family by preparing a simple final tax return for a deceased individual, an EA may discover some interesting revelations impacting the estate and gifting that transpired prior to death. One such instance is finding a K-1 that conveys income from a family limited partnership. Tax pros learn in their Enrolled Agent preparation studies that creators of family limited partnerships typically use the arrangements as mechanisms for gifting.
By gifting partnership interests to family members, the assets held by the partnership are effectively removed from the estate of the gift giver who formed the entity. Unfortunately, determining the values of such gifts is complicated. Family partners indirectly own parts of certain assets based upon their interests in the partnership holding those assets. These pieces of partnerships are not worth as much as direct ownership of a whole property. Enrolled Agent training doesn’t help tax practitioners know how to appraise gifted property, but an EA certainly understands that property values are discounted when conveyed via family limited partnerships.
This is precisely what happened for Carl Pohlad, who died in January 2009. Pohlad was a successful businessman who had purchased the Minnesota Twins baseball team later in life. His substantial holdings in Wells Fargo and PepsiCo were attained from selling a bank and bottling operation in exchange for stock. By living to age 93, he had enjoyed many years as a baseball team owner. The Twins franchise is probably worth over $500 million today. At the time of Pohlad’s death, a fair value might have been closer to $350 million. According to documents recently filed in Tax Court by Pohlad’s estate, his stake in the Twins was worth only $24 million upon his date of death. The IRS values the team ownership at $293 million. Facts about the nature of this discrepancy are a useful Enrolled Agent course illustration of gift tax.
By 2008, Pohlad had transferred almost all of his estate via gifting. Most of his assets consisted of partial ownership in a family holding company, partnerships, and trusts. He didn’t even own the Twins. Instead, he had a 53.3 percent non-voting interest in MT Sports, LLC. That entity owned a 99 percent non-voting equity interest in the Minnesota Twins. The owner of the 1 percent managing interest in the ball club is Twin Sports, Inc., of which Pohlad owned 95.5 percent of the equity but just 10 percent of the voting interest. His three sons held effective control of the Twins franchise.
The wealth transfer techniques deployed by Pohlad include family limited partnerships and various legal entities designed to divide ownership and control. That process theoretically reduces asset values. Minority positions with limited control have less value than ownership of the entirety with full operational power. Quantifying discounted valuations is a job for appraisers. The addition to Enrolled Agent education by Pohlad’s actions is the interaction of gift tax and estate tax. Apparently, Pohlad filed gift tax returns without paying the entire tax calculation. Rather, he used some of his lifetime exclusion. Consequently, his reduction in gift tax during his lifetime must offset the available amount of exemption from estate tax.
Pohlad’s estate tax return indicates that he made $129 million of gifts in 2008 alone. The IRS values these gifts at $446 million. Every Enrolled Agents should understand that this differential means that the IRS will claim additional tax on the estate. Escaping a greater amount of gift tax triggers more taxable estate. The exact figures claimed by the IRS and Pohlad’s estate are a little murky because the court filing is heavily redacted. However, the general tax considerations for the Pohlad heirs are the same as any family that uses gifting to reduce estate tax.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.