J. Kelly Kennedy, Attorney/CPA, PLLC

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Attorney and CPA

Sports team owners in tax dispute over transfer to new generation

When Florida residents set up a plan to pass on their assets to the next generation, they typically want their heirs to get as much as they possibly can, without losing large sums in taxes. There are many ways to reduce tax burdens, but all of them should be considered carefully.

The family that owns one Major League Baseball team has recently been involved in a major tax dispute with the IRS over how the business was transferred from one generation to the next. The sports franchise has been valued at $578 million, but after the owner and father died in 2009, his estate listed the value of the team for tax purposes at only $24 million. The IRS argues that was way too low and has demanded $121 million in taxes, plus a $48 million fine.

The man's children now control the team. They have filed suit against the IRS in what is sure to be an exceedingly complex case. Public filings in the case have been heavily redacted to keep information private, but the case appears to revolve around techniques the family used to transfer assets incurring gift or estate taxes.

When an estate transfers a large amount of money to heirs and beneficiaries, the transfer may be subject to estate taxes. To avoid these taxes, the former owner transferred much of his wealth before he died. There are taxes on this kind of transfer as well; they are known as gift taxes. To avoid or minimize gift taxes, he apparently transferred his ownership of the team to a partnership. He was still listed as owner of the team for income tax purposes, but the arrangement conveyed many tax advantages when it came time to transfer control of the partnership to the next generation.

The family's arrangement is unusually complicated and concerns an exceptional amount of money, but many of the issues involved are common, and relevant to people who aren't among the nation's super-wealthy.

Florida has no estate tax, and the federal estate tax now applies only to estates worth more than $5,250,000, but even families of modest means may find large parts of the assets eaten up by taxes or the expenses of probate court, if their estate plan does not have a way around those costs. Although the above situation has a number of outstanding issues, what is clear is that effective estate planning can seek to limit one's tax burdens while maximizing the value of inheritances. For people of all levels of wealth, such planning can be vital to ensuring that wealth is transferred in the most effective way possible.

Source: MinnPost, "Five More Questions: Law prof Donna Byrne explains Pohlad family's run-in with IRS," Brian Lambert, July 29, 2013