In an interesting case, a person who had invested approximately $4.8 million in an investment account with Bernie Madoff died in 2006. At that time, the exemption for estate taxes was considerably less than the current exemption ($5.34 million). As required, the estate filed a timely tax return and also paid the estate tax on the assets held with Mr. Madoff’s company. When the Madoff Ponzi scheme was brought to life, the estate then filed a supplemental/amended federal estate tax return, then claiming a refund on the assets that possibly were not going to be returned as the estate claimed that they had a “zero” value.
As anticipated, the IRS filed a motion for summary judgment claiming that under the fair market value standard, at the time of death, the assets had a value based on the fair market value as of that date. They claimed that the standard to determine how assets are valued are what a “willing buyer pays a willing seller” and at that time, no one would have known that the assets were part of a Ponzi scheme that may not have had a lesser value than reported.
The IRS’s motion was denied, and at this time, this matter may go to trial. At the trial, it probably will be the requirement of the taxpayer to prove that the assets should not be valued as of the date of death value based on the investment account having too much money, but that the valuation would have had some value.
In this particular case, the estate had made some withdrawals, and therefore the decedent probably did have some value in the account. The bankruptcy court has allowed certain people to be declared as net winners and some as net losers based on whether they deposited more money than they got back or got less money back than deposited. There are also claims against many of the net winners by the trustee in bankruptcy, including this particular estate.
There is no question that in every case where there are assets that are not quite ascertainable as of date of death, at least the estate tax return should be filed timely, and then an amended return should also be filed timely, within the statute of limitations, in order to attempt to reduce the value, or in some cases, report an increase in the value if it is appropriate to do so.
These matters get quite complex, and is not as easy to merely speculate on what the value is, but when there is a matter that is not ascertainable, it is always best to err on the side of being careful and file the timely return, which is normally due nine (9) months from date of death, as well as having all taxes paid at that time.
Hyman G. Darling, Esq.
Image credit: 401(K) 2013, under Creative Commons license