The multi-talented American singer-songwriter Prince was born and raised in Minnesota and lived just outside Minneapolis when he died in 2016 at the age of 57. His estate created one of most complex probate court proceedings in Minnesota history. Among the resulting court actions was a case in United States Tax Court relating to the Internal Revenue Service’s claim that the tax return for the estate undervalued the estate assets by about $80 million, which significantly affected the estate tax owed. While the parties in the Tax Court action recently agreed to a settlement, the case illustrates the importance of proper asset valuation in a decedent’s estate.
When Prince passed away, estimates of the value of his estate ranged between $100 million and $300 million. He died without a Last Will and Testament. While he was not married and did not have children, he had a group of half-brothers and half-sisters who inherited his estate under the Minnesota laws of intestate succession.
Comerica Bank & Trust was appointed as the personal representative of the estate by the probate court in Carver County, where Prince resided when he died. The estate was required by law to go through the Minnesota probate process. Numerous legal claims were made against the estate in the process, some of which have been resolved.
Comerica filed a tax return for the estate in July 2017. The IRS responded with a notice of deficiency, asking for an additional $38.7 million in taxes and penalties from the estate. The IRS disputed the value of a wide array of assets and property in the estate, including real estate, image rights, and interests in companies. The IRS claimed that the taxable value of the estate was $163.2 million, not $82.3 million as reported on the tax return.
The U.S. Tax Court judge assigned to the case was the same judge that handled the tax dispute over Michael Jackson’s estate. That case also involved a valuation disagreement with the IRS. In both cases, the IRS based its disagreement on the valuations reached by its own experts. Comerica had used its own expert appraisers to reach the valuations on the tax return.
Judge Mark Holmes had scheduled the trial to begin on March 21, 2022. As is typical in litigation, the parties have been attempting to negotiate a settlement since the beginning of the dispute. According to a Tax Court order entered on November 30, 2021, the parties reached a settlement agreement on the valuation dispute. The settlement must be approved by the Minnesota state court as well, since the estate continues under supervision of the Carver County probate court.
Collecting and appraising assets is one of the most significant responsibilities of the personal representative of an estate. In a case like Prince’s estate, which included substantial assets of many different types, the process of creating an inventory and assigning valuations to all assets is a monumental task.
Comerica used experts to appraise the assets in the estate before filing the tax return for the estate. However, the IRS had other experts who disagreed with the valuations assigned by Comerica to many of the assets. This type of disagreement is common when the IRS audits the tax return for an estate of significant value. When numerous valuable assets with substantial value are part of an estate, an IRS audit of the estate’s tax return is not unusual.
There are several reasons why the value of assets in an estate must be ascertained. One important reason is that the total value of the property in an estate is what determines the federal estate taxes owed on an estate — and for smaller estates, whether federal estate taxes are even owed at all. Establishing federal estate tax liability is the reason that the IRS frequently reviews valuation of property in an estate with high value assets.
In addition, some inherited assets receive a new tax basis that affects the heir’s (or beneficiary’s) capital gains tax liability if the property is sold after inheritance. The new basis is the value on the date of death, which is another reason that the value of individual assets in the estate must be ascertained.
Valuation is also important for dividing the estate, since heirs often receive a percentage or fractional portion of the total value of the estate left after taxes, debts, and expenses are paid by the personal representative. That type of division will occur in Prince’s estate, since it will be divided under the state laws of intestate succession.
If you are the personal representative of an estate, fulfilling all your statutory fiduciary duties is essential. That includes the responsibility of properly valuing and appraising assets, which should be addressed by tax professionals. A myriad of problems can result if you fail in that duty, including the possibility of an estate tax dispute with the Internal Revenue Service. While the tax issues have been resolved for Prince’s estate, settlement occurred only after the legal dispute cost the estate a substantial amount of money in professional fees and expenses.
My practice at the Dave Burns Law Office includes all types of probate and estate litigation, including issues relating to both testate and intestate estates. I represent personal representatives, heirs, and others with an interest in an estate regarding potential court actions involving the estate. My practice does not include providing tax advice. I refer tax issues to tax professionals when appropriate.
If you would like to discuss potential litigation involving an estate, I invite you to contact me at (612) 677-8351 or by emailing firstname.lastname@example.org. I welcome inquiries from clients and referring attorneys throughout the State of Minnesota. I am available to meet with clients in both Minneapolis and St. Paul.
The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer