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    Another Ethics Question

    Yet another, "What do you do?" in terms of practitioner ethics.

    Facts: Client was the executor of his mother's estate. Mother died two years ago and owned 50 acres of land which sold in 2006 for $1.0 million. Mother and her husband bought the land in 1955 for $25,000 and made no improvements. Stepped-up basis at her time of death was appraised at $0.9 million. Money has already been distributed to beneficiaries and estate is closed.

    Client understands that capital gains of $100,000 will have to be split among four beneficiaries, and engages you to prepare the final estate tax return with K-1s to the four children for the capital gains and a small amount of interest income.

    An estate tax return was not filed since the estate in 2004 did not exceed the deduction threshold. However, your state has threshold of only $500,000 and it is incumbent upon the attorney (or someone) to file a state estate tax valuation regardless of whether the threshold is met or not. Your client's attorney filed this with the state.

    In an effort to avoid your state's estate tax, the attorney filed a valuation stating that the land was worth $450,000. This of course was countersigned by your client as executor.
    Nothing further has been done. Had the land been valued at $900,000, there would have been a state tax on $400,000 at 5% ($20,000).

    Nothing further has been done. The client wants the 1041 to reflect a basis of $900,000 even though he signed off on a value of $450,000 for your state.

    HERE ARE YOUR CHOICES, and thanks for reading this far. It is a long post, but most of you will be confronted with this if you haven't already.

    a) Since you were not engaged to file the death tax return for your state, go ahead and claim $900,000 as basis for the land on the 1041. You were not engaged so this is the attorney's problem and not yours.

    b) Tell the customer you cannot claim $900,000 since he has already sworn off on a value of $450,000. There will be $550,000 in capital gains to be split among the K-1s.

    c) Claim the $900,000 as basis, but notify the state that there was a gross understatement on the attorney's return.

    d) Preparer an amended state death tax return showing $900,000 as the real value, and a tax liability of $20,000 (before penalty and interest). Then claim $900,000 on the 1041. Prepare the amended state return for the customer to mail, and tell him it is his responsibility to file it.

    e) Claim the $900,000 as basis, but issue a letter to the client disclaiming the errant $450,000 valuation made by the attorney, along with a recommendation that the client have to attorney make the correction.

    I don't know how to set up a "poll." Maybe someone will do this. Please concentrate on answering the question and don't get hung up on whether the facts are correct, or why the client didn't do better tax planning, or why the attorney did what he did, etc.

    #2
    a charge like that

    >>concentrate on answering the question and don't get hung up on whether the facts are correct<<

    With a charge like that, how could I resist jumping right in? That's my favorite approach to this whole business!

    An appraisal, by definition, is simply one person's opinion of value. The client has already rejected that opinion and adopted another. Unless he changes his mind about the other one, he can't change his mind about the first one. I wouldn't get hung up on whether it is correct.

    Comment


      #3
      A good observation

      Yes, Jainen you make a good observation, in fact the attorney's valuation could be "alternate use valuation" as farmland or some other such.

      And the client signed off on it. Of course, he was given a stack of probably 40 documents that his attorney assured him should be executed...

      ...and you don't really answer the question...

      Comment


        #4
        drive it off the lot

        >>you don't really answer the question<<

        Do you see a question mark anywhere in Snag's post? Anyway, I don't see it as an ethics problem except for the admonition to ignore the facts.

        I like your idea that the attorney might have been correct all along. Value depends on a lot of things, including what the property can reasonably be used for as well as the context of the appraisal. Also, something that is going to be tied up in an estate for a couple of years isn't going to have the same market draw as the one that you can drive it off the lot today.

        Comment


          #5
          Oh, don't be so nitpickin' about everything.

          Originally posted by jainen
          >>you don't really answer the question<<

          Do you see a question mark anywhere in Snag's post? Anyway, I don't see it as an ethics problem except for the admonition to ignore the facts.
          Your clients surely cain't all be priests of noble intent and pure motives, descending from ivory towers to partake of your professional services. Surely you get a flawed human being for a client on occasion; maybe even one who hasn't done everything strictly 100% according to Hoyle and for whom you've bent a rule or two in the past (at least I guess you have).

          Can't you just do the decent thing and answer the question -- I know you know (and probably secretly do RALs too) -- if you'd just break down and spit it out? That WWJD slogan is "What Would Jesus Do?" and not "What Would Jainen Do?

          Comment


            #6
            $450,000

            >>do the decent thing and answer the question<<

            Awright, guess it's up to me, since nobody else wants to offer an opinion.

            I think it would not be ethical to use the $900,000 figure, even by asking the client to amend the old returns. The tax basis has been clearly established at $450,000.

            Comment


              #7
              Originally posted by Black Bart
              That WWJD slogan is "What Would Jesus Do?" and not "What Would Jainen Do?
              I like WWSD - "What Would Scooby Doo"

              Now back to Snags question, or as Jainen put it non-question.

              If there is an appraisal (your original does not say) that the value was $900,000 I would say E unless you also have the client engage you to do D.

              A is out because you already know of the misstatement.
              B is no good because you have a qualified appraisal of 900k (if, like I said earlier, there was one)
              C can't touch that, your client info is confidential, you cannot unilaterally notify the state.

              Those are my thoughts on it.
              I would put a favorite quote in here, but it would get me banned from the board.

              Comment


                #8
                Originally posted by jainen
                >>you don't really answer the question<<

                Do you see a question mark anywhere in Snag's post? Anyway, I don't see it as an ethics problem except for the admonition to ignore the facts.
                Yes, in his very first sentence.

                Comment


                  #9
                  WWND, or,

                  Originally posted by newbie
                  Yes, in his very first sentence.
                  What Would Newbie Do?

                  Thanks for your support Newbie, but we must give the learned devil -- strike that; I mean the "gentleman from California" -- his due. We are obliged to be properly and respectfully grateful for his sage input with polite disregard of the infidel non-neo-con source.

                  P.S. Advise you never to mention "ethics" in his presence as he immediately begins looking around for the nearest stump to climb and hold forth.
                  Last edited by Black Bart; 12-08-2006, 04:57 PM.

                  Comment


                    #10
                    I meant no disrespect, just answered his question.

                    I'm not sure what I would do. At first I thought B, because the client signed paper work with the valuation stating that the land was worth $450,000 which the attorney filed. If the client knew that this was an understatement he is now to suffer the consequences of his actions.

                    Comment


                      #11
                      The second paragraph in Snags scenario says “stepped-up basis at her time of death was appraised at $0.9 million."

                      For federal tax purposes, no estate return was filed. The reason given was a return was not needed because the value was under the filing requirement ($2 million for 2006).

                      All that has happened so far is nothing.

                      Now the attorney prepares a state tax return and files it with a valuation of $450,000.

                      Which is correct? A value of $900,000 or $450,000?

                      You don’t know because you are not an appraiser. The lack of filing a federal estate return could mean a number of things. You were not engaged to file a federal estate return, so the reason for filing or not filing is really not your concern.

                      However, if you prepare a 1041 as a paid preparer, you are obligated to make sure all of the numbers on the 1041 are correct to the best of your ability. Since the only official document that has been filed so far to date lists the value of the land at $450,000, and you know about this, you are obligated to use that number as the basis. The client would have to file an amended state return with a valuation of $900,000 before you could sign the 1041 that under the best of your knowledge the $900,000 amount is correct. Without amending the return, the best of your knowledge is the $450,000 amount, since that is what your client signed as the best of his knowledge.

                      The answer to Snags ethics question is b)

                      No question about it.
                      Last edited by Bees Knees; 12-08-2006, 07:26 PM.

                      Comment


                        #12
                        Just kidding, Newbie and

                        Originally posted by newbie
                        I meant no disrespect, just answered his question.
                        besides, you're way ahead of me with just your five posts 'cause I don't have a clue what the answer is. Anyway I'm certain that our (and now your) Tennessee colleague appreciates your input.

                        And don't worry about jainen taking offense. Although noted as a sensitive soul, that sensitivity is something on the order of...hmm...(what's apt here?)... oh, say in the sense that perhaps a commode seat might be offended.

                        Comment


                          #13
                          Newbie

                          Thanks for your input -- comments from others notwithstanding. Please visit us again.

                          Jainen is a real fountain of knowledge if you can get past the commode seat. His keen knowledge of taxes means that he is more of an upside than a downside. Pay no attention to our running war -- he is often critical and we often return the favor, and by now, people like Bart and myself are used to it.

                          We've got good folks here. Please come back and post again. I know of no better tax forum. After you've posted several times you can change your name - you won't be "new" anymore...

                          Comment


                            #14
                            Dilemma

                            Sharing,

                            In my experience in Calif, I have been contacted by attorneys or families , to prepare the form 706 or form 1041. The information is fed to us for the inventory and appraisals on an estate, either by the attorney in charge, a formal appraisal through the Probate Court, etc.

                            Then in preparing the 706 if needed, or subsequent form 1041 forms we use the above information regarding sale of estate assets to determine gain or loss.

                            Based on the original post, I see no other way but to use the figures that the Attorney provided for original valuation or an alternate valuation and then there is the fact that the client signed off on a valuation. Alternate, would be to have the Attorney amend the State return.

                            I think your clients are "Stuck" I don't think I as a preparer could use the $900K as a basis figure. The clients (beneficiaries) need to consult with the attorney that made the $450K decision and see if there is any remedy to the situation, before you place yourself in jeopardy filing the 1041 form.

                            So my vote without poll, would be "B" or possibly "D" however, I do not think I would want to sign my name to the amended State return under item #D. Actually I believe the Attorney should complete item #D.

                            Keep us posted!

                            Sandy

                            Comment


                              #15
                              Originally posted by Snaggletooth
                              Facts: Stepped-up basis at her time of death was appraised at $0.9 million.

                              a) Since you were not engaged to file the death tax return for your state, go ahead and claim $900,000 as basis for the land on the 1041. You were not engaged so this is the attorney's problem and not yours.
                              The post says there was an appraisal of $0.9 million at date of death. I am assuming this was a proper appraisal by a qualified appraiser and you have the document in hand. You should not be a party to the false filing with the state and if you use the attorneys number for the 1041, you will be. The attorneys number obviously is so far off fair market value (see sold price) that it was pulled out of the air to keep from paying state taxes.

                              You have no obligation to report anything to the state other than a state 1041 with the same number as the federal 1041. You should prepare the form 1041 using the proper stepped-up basis of $0.9 million on the sale. Therefore your choice is a no brainer, it is clearly item a).

                              Comment

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