Do you have a disagreement with the IRS over taxes due? Have you
inherited a difficult-to-value asset on which you owe an unreasonable
amount of estate tax? Were you audited and received a notice of
deficiency? Did you get caught in a tax trap and owe a huge debt
to the IRS you cannot possibly pay?
can help you:
Assess the true value of the asset in question
In many cases, lower your debt by identifying valuation discounts
File and advocate on your behalf in an IRS appeal
Petition the federal tax court, or
File an Offer In Compromise with the IRS
Mortensen is a Board Certified Tax Attorney who has been assisting
clients with complex tax problems in Southern California since 1996.
He also has a post-doctoral degree, LL.M., in tax law.
To learn about the current estate tax exemption amount,
To learn about difficult-to-value assets and valuation discounts,
To learn about IRS appeals, click here.
To learn about federal tax court petitions, click
To learn about offers in compromise, click
2006-2008 Federal Estate Tax Exemption
The federal estate tax is an excise tax imposed when you leave your
assets to someone other than
A surviving spouse
A qualified charity
A federal, state or local government
In other words, estate tax applies to any assets you leave to your children,
siblings, friends and even parents. Under current law, until 2008, everyone
receives a $2 million federal estate tax exemption. This means that
no estate tax is due on the first $2 million left regardless of recipient.
There are some caveats, however, that make the application of this exemption
more complicated than it sounds. For example, the $2 million includes
any death benefits on life insurance owned by the decedent or where
the decedent had any of several specific rights in connection with the
Law Office of Daniel R. Mortensen for further
Assets and Valuation Discounts
Tax controversies usually arise because of assets that are difficult
to value. The sums involved can be substantial, considering that the
federal estate tax is currently a flat 46 percent of the amount by which
the taxable estate exceeds $2 million. In other words, for every dollar
over $2 million, the tax is 46 cents on the dollar. Thats almost
half of the estate going to the government! Dont you want to make
sure your assets are correctly valued so that at least you dont
have to pay any more than is necessary?
Say, for example, that you inherited a manufacturing company that employs
120 people. Last year your sales were $3 million with a $400,000 profit;
sales the year before were $2.5 million with a $100,000 loss, and sales
this year were $11 million and a projected profit of $3 million. What
is your company worth for the purpose of imposing estate taxes? We can
help you nail down its precise worth and, in many cases, identify factors
which require valuation discounts, and thus decrease your taxes.
are valuation discounts?
The IRS bases its determination of estate tax due on an assets
fair market value. Fair market value is defined as the price at which
the asset would change hands between a willing buyer and a willing seller,
neither being under compulsion to buy or sell. Fair market value is
often a gray area, leaving the worth of the asset and the tax due open
to dispute. Valuation discounts may substantially decrease the value
of an asset and therefore lower the tax. Valuation discounts apply to
real estate and businesses.
To learn about valuation discounts in real estate, click
To learn about valuation discounts applying to businesses, click
Discounts in Real Estate
Say you inherited 20 percent of a piece of real estate worth $10 million
according to comparable sales. What is the value of your 20 percent
interest? The IRS may say that it is worth $2 million and assess estate
taxes accordingly. But if you try to sell that 20 percent interest in
the open market, you may not be able to find a buyer because buyers
rarely want to own something over which they have no control. For example,
if the buyer wants to sell or develop the property, the owners who hold
the remaining 80 percent may not be interested. Since you cannot find
a buyer, the marketplace presents you with substantially less than the
20 percent, pro-rata share of the valuation. So why should you pay taxes
on the full 20 percent?
Valuation discounts quantify the difference between the pro-rata share
of the asset (in this case 20 percent of $10 million) and the value
of the precise interest you own. Using our real estate example, you
might be able to find a buyer for your 20 percent interest who is willing
to pay $1 million. In that case, you would have a 50 percent valuation
discount over the underlying value of the pro-rata share of the asset.
If you have a difficult-to-value real estate asset or would like to
learn more about valuation discounts, please contact
Discounts Applying to Businesses
Two common types of valuation discounts applying to businesses are minority
interest valuation discounts and blockage discounts.
Minority interest valuation discounts apply when you own a minority
interest in a partnership, LLC, corporation or other business. A minority
interest is an interest that does not amount to any meaningful control.
If you own 20 percent of a business, for example, you may or may not
receive a distribution of profits; any distribution is at the whim of
the people who own the other 80 percent. And your 20 percent interest
in the company certainly would not give you any control over business
affairs. Therefore, your shares have substantially less value than 20
percent of the total value of the companys assets, due to your
lack of control. Your shares also lack marketability because potential
buyers want control. Valuation discounts apply.
Blockage discounts are valuation discounts that apply when you
own a large percentage of shares. Say you own 70 percent of the shares
of a publicly-traded company. Because of the laws of demand and supply,
you cannot sell your 70 percent of shares without bombarding the market
with supply. If you did, it would drive down the price per share dramatically.
You would realize substantially less than todays market price
of the shares if you were to liquidate them all at once tomorrow. Therefore,
in determining the value of your 70 percent of stock, you cannot simply
take the market price per share and multiply it by the number of shares
to arrive at a fair market value. A valuation discount applies.
There are many other types of valuation discounts. If the IRS has levied
a tax on an asset which you believe is worth less than the assessed
market value, please contact
us for further information on valuation discounts.
Were you audited by the IRS and told that you have a large tax debt,
even though your CPA defended his or her work? If you have a good case,
we can help by filing an IRS appeal. We have had a very strong record
of success in working through IRS appeals on our clients behalf,
in many cases achieving a settlement at a small fraction of the amount
demanded in the notice of deficiency.
After you receive your "notice of deficiency" from the IRS,
you have 30 days to appeal to IRS Appeals. IRS Appeals will examine
the determination made by the auditor. Appeals staff are very knowledgeable
professionals, often attorneys, who understand the risks of litigation.
If your case falls into a gray or questionable area, they may want to
settle it rather than risk costly, precedent-setting litigation.
If you believe you have a good case, please contact us for an evaluation.
If it makes sense for you to invest the time and resources to pursue
your case, we will prepare an appeals letter citing the facts and law
which we believe will speak in favor of a reduction or even elimination
of the tax debt.
Do you have a large tax liability that seems unfair? Have you gotten
caught in a tax trap, resulting in a huge debt that you can never pay?
Is there a tax lien on your property, preventing you from refinancing
or selling? If you were to open a bank account, would the IRS seize
In these and other situations, we can file an "offer in compromise"
with the state or federal government on your behalf to initiate an offer
in compromise procedure. It means that you offer the government a certain
lesser amount in exchange for canceling your entire tax liability. For
example, in 2005 we settled a tax liability of over $2 million for $140,000
for a client who was caught in a tax trap involving stock options.
We can pursue an offer in compromise procedure based on one of two lines
of reasoning. One is an offer for doubt as to liability. This means
that you doubt that the tax liability is just. The second type of offer
in compromise is based on doubt as to collectability. This means that
over the remaining statute of limitations on collection (for IRS liabilities,
ten years from the date the tax was assessed), you do not have, nor
will you be able to accumulate, sufficient assets to fully pay the tax.
You can offer the IRS a lesser amount and eliminate the tax liability.
If one of these two arguments is successful, your tax liens will be
lifted and there will be no wage garnishments or wage levies.
If you believe that offer in compromise may be a solution to your situation,
please contact us.
Tax Court Petitions
Did you go through IRS Appeals and fail to win satisfaction on your
case? Alternatively, were you unable to respond in time to pursue IRS
Appeals, and have now received a so-called "90-Day Letter"
stating that you must file a Petition in Federal Tax Court or the assessed
deficiency will become final?
It is generally to your advantage to file a Petition in the U.S. Tax
Court in Washington, DC. Established by Congress in 1924 under Article
I of the Constitution, the U.S. Tax Court decides controversies between
taxpayers and the Internal Revenue Service involving underpayment of
federal income, gift, and estate taxes. Its decisions may be appealed
to the federal courts of appeals and are subject to the review of the
U.S. Supreme Court on writs of certiorari. This court consists of 19
judges appointed by the President who handle all federal tax court cases
for the U.S. and its territories. In federal tax court litigation, the
judge determines whether the application of law to the facts of the
matter has resulted in the appropriate tax determination.
Protracted litigation in Tax Court can be very expensive and emotionally
draining, but fortunately most cases are settled prior to trial, often
by referral to IRS Appeals for further appeals consideration. Our approach
is to assess your case realistically based on what we believe the actual
tax owed should be under the Tax Code. We then advocate on your behalf
for an appropriate settlement with the IRS on that basis. We have had
very strong success in resolving cases favorably, especially in circumstances
where a failed audit resulted in large, unjustified disallowances that
can be substantiated through careful work and analysis of supporting
documentation. In a recent 2006 case, we were able to demonstrate that
a client who received a notice of deficiency for approximately $890,000
should in fact be assessed less than $6,000.
For further information about a federal tax court petition, please contact
Mortensen Law Office
Tax, Trust & Probate Attorneys, P.C.
22807 Lyons Avenue
Newhall, California 91321
Please click the links below to get information for your specific needs:
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