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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?

We 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

Daniel 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, click here.
To learn about difficult-to-value assets and valuation discounts, click here.
To learn about IRS appeals, click here.
To learn about federal tax court petitions, click here.
To learn about offers in compromise, click here.


The 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 policy.

Please contact Law Office of Daniel R. Mortensen for further information.


Difficult-to-Value 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 40 percent of the amount by which the taxable estate exceeds $2 million. In other words, for every dollar over $2 million, the tax is 40 cents on the dollar. That’s almost half of the estate going to the government! Don’t you want to make sure your assets are correctly valued so that at least you don’t 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.

What are valuation discounts?

The IRS bases its determination of estate tax due on an asset’s 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 here.

To learn about valuation discounts applying to businesses, click here.

Valuation 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 us.

Valuation 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 company’s 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 today’s 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.

IRS Appeals

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.


Offer In Compromise

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 your funds?

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.



Federal 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 us.


Mortensen Law Office
Tax, Trust & Probate Attorneys, P.C.
22807 Lyons Avenue
Newhall, California 91321
(661) 799-9225

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