Valuation of IRAs for estate tax purposes.

• Author: Ransome, Justin P.
• Position: Individual retirement accounts

In Est. of Kahn, 125 TC No. 11 (2005), the Tax Court considered for the first time whether IRAs could be discounted for estate tax purposes. It determined that an IRA could not be discounted; rather, the underlying assets in the account must be valued on the date of the decedent's death.

Background

Under Sec. 408(e), an IRA is a tax-exempt vehicle. However, Sec. 408(d) provides that distributions to an account owner (or, in the event of the owner's death, to the IRA beneficiaries) are subject to the Sec. 72 rules for income taxation of distributions from an annuity. To the extent that amounts remain in an IRA on the account owner's death, the balance is includible in his or her estate for estate tax purposes under Sec. 2039. The owner's death, however, does not extinguish the income tax liability associated with IRA distributions; the distribution is income in respect of a decedent (IRD) for income tax purposes. Under Sec. 691, a recipient of an IRA distribution has to include it in gross income in the same manner as the account owner (who would have been required to include it in gross income).

Facts

In Kahn, the decedent died owning two IRAs that had not been distributed to her before her death. Both IRA agreements provided that the accounts were nontransferable, but the underlying assets (securities) could be sold and others purchased at her direction. The decedent's estate tax return listed the fair market value (FMV) of the IRAs at less than the FMV of the underlying securities. The IRS position was that the IRAs' FMVs for estate tax purposes were the values of the underlying marketable securities.

The parties agreed the IRAs were includible in the decedent's estate for estate tax purposes, and that use of the Regs. Sec. 20.2031-1(b) "willing buyer-willing seller test" was proper to determine an asset's FMV for estate tax purposes. Under this test, the FMV of an asset is the price at which it would "change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having knowledge of relevant facts." The courts have determined that the test is objective and relies on hypothetical parties rather than specific individuals; see, e.g., Est. of Bright, 658 F2d 999 (5th Cir. 1981). However, the parties disagreed on which assets should be subjected to the test.

Estate's Argument

The estate contended that the IRAs, not their underlying assets, were subject to valuation for estate tax...