An Estate Tax Fantasy (on the Keller case) (9/28/12)

I write a fictional story inspired by a recent decision, Keller v. United States,, 697 F.3d 238 (5th Cir. 2012), here.  That decision gave the taxpayer a big estate tax victory for the uber rich.  I personally think the estate tax benefit achieved in the case was extravagant.  But I do not write on the substantive planning involved.  I write rather to address another feature of the case.  This issue I discuss is present whether the taxpayer wins or loses.  The attorney and other administrative costs paid by an estate in a large estate tax case substantially mitigated by the estate tax savings benefit they can achieve.  I just want students to understand the phenomenon.

The Keller case involved a very large estate.  The marginal estate tax rate was 55% at the time and that is the rate that should be assumed for the issues that I will discuss.  The substantive issue was the common estate planning technique whereby the older generation stuffs assets into a partnership to achieve minority discounts thus shifting real value to the objects of her beneficence without the consequent estate or gift tax cost.  This should be old hat for observers of estate tax schemes -- the minority discount just magically appears without diminution in value.  I would have thought the gambit might not work with highly liquid assets, but Keller tells us otherwise.  In Keller, the gambit just caused, for tax purposes, vast amounts of value to disappear from the tax base when, in fact, in terms of the wealth of the family, it did not disappear.  Never mind for present purposes the validity or invalidity, morality or immorality, of the substantive gambit.  I want to focus on the estate's claims for administrative expenses, including in part here pertinent fees related to the estate tax litigation.

As noted, the estate was a very large estate; not surprisingly, the administration expenses, also very large, would apparently achieve a 55% tax benefit under the rate in effect when the estate tax was due and would magnify that 55% tax benefit by the interim interest that would otherwise be due from the estate.  Among the administrative expenses claimed by the estate were various professional fees related to the litigation.  The one that caught my eye was a $9.5 MM "contingency fee" for the lawyers who handled the estate tax litigation.  Here is the district court's discussion resulting in the contingency fee being disallowed (Keller v. United States, 1010 U.S. Dist. LEXIS 96465 (S.D. TX 20110)).