With a September 29 voice vote, the Senate passed the USA Olympians and Paralympians Act (H.R. 5946). The bill has been sent to President Obama, who is expected to sign it next week.

The act in the Senate companion legislation was cosponsored by Sens. John Thune (R-SD) and Chuck Schumer (D-NY).

Many U.S. Olympic athletes were recently awarded medals in Rio de Janeiro. The U.S. Olympic Committee also awards prize money to the winners. Those with a gold medal received $25,000, the silver medalists $15,000 and bronze medalists were awarded $10,000.

Sen. Thune was very pleased and stated, “I cannot think of anything more unpatriotic than the federal government profiting off the success of Olympic athletes. Now that this tax on Olympic success will finally be a thing of the past, the medal-winning athletes who have returned home from the Rio games can continue to focus on what is most important – sharing their victory and celebrating with friends, families, and communities across the United States.”

Senate cosponsor Sen. Schumer also commented, “I am happy to announce that our Olympic and Paralympic athletes who competed in Rio will receive tax relief on their prize money and medals. Many countries subsidize their athletes who represent their country; the least we can do is make sure our athletes do not get hit with a tax bill for winning a medal.”

Estate May Deduct Madoff Theft Loss

In Estate of James Heller et al. v. Commissioner; 147 T.C. No. 11; No. 11390-12 (25 Sep 2016), the Tax Court permitted an estate to deduct a $5 million loss due to the decedent’s investment with convicted Ponzi scheme operator Bernie Madoff.

Decedent James Heller owned 99% of the James Heller Family, LLC (JHC). One hundred percent of JHC’s assets were invested with Bernard L. Madoff Investment Securities.

Heller died on January 31, 2008. Between March 4 and November 28 of 2008, his executors withdrew $11,385,000 from the Madoff account to cover estate costs and taxes. On December 11, 2008, Bernard Madoff was arrested and charged with operating a multibillion dollar Ponzi scheme. JHC lost the remaining funds in its investment account.

The estate filed IRS Form 706 on April 1, 2009. It reported a Sec. 2054 theft loss in the amount of $5,175,990. The IRS denied the deduction on the theory that under New York law, the loss applied to JHC rather than to the estate.

The Tax Court noted that the estate tax is levied on the fair market value transferred to family and other heirs. While the fraud was discovered after the demise of Heller, on his date of death there was no value to JHC. The tax laws should be interpreted by viewing the “overall statutory scheme.” Because the LLC had no value, the Sec. 2054 deduction was proper.

Limited Partnership Discount Denied

In Estate of Edward G. Beyer v. Commissioner; T.C. No. 2016-183; No. 10231-11 (8 Sep 2016), the Tax Court denied a discount for shares of public stock held in a family limited partnership.

Decedent Edward G. Beyer was CFO of Abbott Laboratories in Chicago, Illinois. In 1999, he created the Edward G. Beyer trust. Subsequently, he also created the Edward G. Beyer Limited Partnership (EGBLP).

EGBLP was funded with 800,000 shares of Abbott Laboratory stock and various other shares of public stock. The Beyer trust owned all 99% of the limited partnership interests in EGBLP.

After Beyer passed away on May 19, 2007, his executors obtained an appraisal and claimed a discount on the value of the assets in EGBLP. The IRS denied the discount and issued a $20 million deficiency for taxes, interest and penalties.

The Tax Court noted that Beyer had retained approximately $4 million in assets outside EGBLP. However, he made gifts of $1.25 million to two different nephews, leaving him a balance of $1.5 million.

Because his probable living costs and the estate tax costs were substantially in excess of this number, the Tax Court determined there was an implied agreement that he would have full access to the EGBLP assets. This implied agreement resulted in a transfer of $9,945,000 from EGBLP to the estate in order to pay estate taxes.

Because there was the implied agreement that Beyer would have full access to the assets, and there was a failure to follow appropriate business like practices with respects to the accounting and procedures for EGBLP, there was a Sec. 2036(a)(1) retained interest. With this retained interest by Beyer, the Abbott Laboratories stock and other assets were included in the estate at full fair market value.

Editor’s Note: This is another family limited partnership “bad facts” case for an estate. The decedent did not reserve sufficient assets to cover his obligations and the LLC did not follow careful business practices. The net result was a very large payment for taxes, interest and penalties.

Applicable Federal Rate of 1.6% for October—Rev. Rul. 2016-25; 2016-41 IRB 1 (11 October 2016)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2016. The AFR under Section 7520 for the month of October will be 1.6%. The rates for September of 1.4% or August of 1.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.