The Bigger They Are . . . . . The Harder They Fall
The IRS has hit the estate of former Detroit Pistons owner, William Davidson, with a $2 Billion tax bill. Yes, that’s a “B”, not an “M” — $2 Billion.
William Morse “Bill” Davidson, who died in March 2009 at age 86, was President, Chairman and CEO of Guardian Industries, one of the world’s largest manufacturers of architectural and automotive glass. He was chairman of Palace Sports and Entertainment, and principal owner of the Detroit Pistons of the NBA, the Detroit Shock of the WNBA, co-owner of the Detroit Fury of the Arena Football League, and the former owner of the Tampa Bay Lightning of the NHL and Detroit Vipers of the IHL.
In 2008, the year before he died, Forbes ranked Davidson the 62nd-richest man in the U.S. with a net worth of $5.5 billion. (Where are those guys?)
According to the Detroit Free Press, in June 2013, the estate’s lawyers filed a petition in U.S. Tax Court in Washington, D.C. arguing that an IRS deficiency notice issued in May wrongly claimed $2.8 billion of underpayments in estate taxes, gift taxes, penalties and more. At issue in the Tax Court case are a series of financial transactions Davidson made in the months before he died to make transfers to his children and grandchildren. According to the Tax Court petition, which is 113 pages long, the IRS said Davidson’s accountants undervalued by as much as $1,500 per share the value of privately held Guardian stock placed in trusts for children and grandchildren. Davidson’s lawyers claim the IRS over-valued the stock.
The IRS claimed the estate and the gifts Davidson made are worth about $4.6 billion, and they want $1.9 billion of that in estate tax and penalties. They also report finding deficiencies going back all the way to 2005 of over $900 million in gifts and other taxes the IRS says should have been paid.
This is not the first lawsuit involving Davidson’s estate. Family members are feuding over who should control his charitable trust. Davidson’s widow, Karen Davidson (his fourth wife), and his son Ethan are pitted against Mary and Jonathan Aaron, Karen’s daughter from a prior marriage and her husband, who is president of the William Davidson Foundation in Southfield. According to the pleadings in the case, the foundation handed out $46 million in grants in 2012, with an additional $7.5 million earmarked for future giving. Davidson’s son-in-law, Jonathan Aaron, wants to break up the foundation into two parts saying that he, Karen Davidson (Bill’s widow), and two Davidson children cannot agree how to manage the foundation together.
Another area of disagreement involves self-cancelling installment notes, or SCINs. Davidson sold assets to intended beneficiaries who paid with promissory notes that were cancelled on Davidson’s death. The recipients had to make payments on those notes to Davidson while he lived, but the debt they owed was canceled – the assets became theirs outright – when Davidson died. The estate claims that no gift or estate tax is owned on these transfers.
The technique of using a SCIN is well known and legal, but the IRS claims the payments should have been higher; therefore, some of the assets qualified as gifts to be taxed. Part of the IRS’s argument centered on Davidson’s life expectancy, which the agency said wasn’t as long as the 5 years contemplated in the SCINs, even though Davidson’s doctors said he was “in good health commensurate with his age group” at the time.
Another point of contention is tens of millions of dollars Davidson transferred to his wife Karen, and money she used to help her daughter and son-in-law build a house. The IRS claims this is a gift. Davidson’s estate disagrees.
IRS lawyers filed an answer in Tax Court on August 14, 2013, defending the tax bill of more than $2 billion sent to the estate. They restated claims that Davidson did not properly account for huge gifts to family members and the value of stocks put in trust for his heirs. This could be the largest estate tax fight in history.
Davidson died in March of 2009. Too bad he couldn’t make it till 2010 like George Steinbrenner, the late owner of the New York Yankees, did. Steinbrenner died in July 2010 with an estimated net worth of $1.1 billion. In 2010, due to the infinite wisdom of our lawmakers, there was no estate tax! If Steinbrenner had died a few months earlier or later, his estate would have paid estate tax of somewhere between $500 million and $600 million. It’s not all rosy. As part of the no-estate tax deal, the heirs didn’t receive a basis step-up in inherited assets for income tax purposes.