Another Ethics Question

[Bees Knees]

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).

If you sign the tax return using $900,000, you are saying to the best of your knowledge that number is the correct number. Yet the only official document filed with an official government agency (the State) says the number is $450,000.

You are in essence making yourself out to be judge of whose appraisal is correct. If the IRS takes the position that $450,000 is correct because the taxpayer signed a sworn statement (the state return) saying it was $450,000, the IRS will impose accuracy related penalties against the taxpayer and you.

[Snaggletooth]

Good input

Guys, this is good feedback on a topic that most of us will be confronted with. I have to face this every year or two.

Looks like the only choice that has totally no support whatsoever is c).

The only real appraisal is the $900,000. Giving the attorney the benefit of using alternate use valuation is generous. I think his real motive was to bring the value underneath the state exemption level.

I've had this 2-3 times already, and I have responded by filing the larger amount and putting a letter in writing to encourage the client to contact the attorney and re-file the state return. I'm now thinking I haven't gone far enough.

Based on the feedback on this thread, I'm now torn between two choices:

1) Tell the client to have the attorney refile the State return and then file the higher appraised amount for the 1041, or
2) Prepare an amended State return for the client's signature, and have him acknowledge
receipt. Then it's up to him to send it in. Then used the higher appraised amount for the federal 1041.

[jainen]

agreeing with me

>>I've had this 2-3 times already, and I have responded by filing the larger amount<<

Wow, Snaggletooth, your clientele are a bunch of cheats, aren't they? Well, the ethical dilemna is whether to be an enabler. Besides my august self, Bees and Sandy are telling you not to do it. I think Black Bart also votes that way because he hasn't spoken against it--he just doesn't want to go on record as agreeing with me.

Even though I would do it differently, I am willing to support your decision by telling you how to make it. Since correcting the basis is a change in accounting method, you must file Form 3115 with user fee to get IRS permission. Maybe they will go on record as agreeing with me.

[OldJack]

You are in essence making yourself out to be judge of whose appraisal is correct.

And how would you justify that the $450,000 is a correct fair market value at date of death when the property has sold for $1 million. That is one hell of an increase in just 2 years..duh. It is obvious that the state return was filed falsely, ignoring the proper death appraisal, just to save state estate taxes. If you file using the $450,000 you are knowingly filing an inaccurate tax return 1041 and committing malpractice. As there are 4 beneficiaries, at least one is bound to sue you if you file using the false cost basis costing them thousands of dollars in income taxes.

[jainen]

You don't have to

>>And how would you justify that the $450,000 is a correct fair market value at date of death when the property has sold for $1 million<<

We don't have to "justify" this value. We are only being asked to report the sale, not determine the tax basis which the taxpayer has already done.

Besides, at least in my market, increases of 50% per year are not unbelievable, especially for a house that had not been prepared for sale and was tied up in probate.

[OldJack]

We don't have to "justify" this value. We are only being asked to report the sale, not determine the tax basis which the taxpayer has already done.

I would rather argue with the IRS over the cost basis than with a jury in my defense. In recording the sale we are being asked to report the inherited cost basis to the best of our knowledge. That should be from an independent qualified appraisal. Am I the only one that thinks the attorneys state tax return was incorrect and avoidance of estate taxes? If the taxpayer or attorney insists on reporting $450,000 as cost basis I would send them back to the attorney for him to prepare the return. In fact, you are probably not being paid enough to take the risk to prepare this tax return either way.

[Bees Knees]

Of course the attorney's appraisal to avoid state tax was wrong. But so is reporting $900,000 on the 1041 knowing it contracts the state return.

The best thing to do is refuse the engagement until the state return is corrected.

As to having the beneficiaries go after you for using the $450,000 amount, they are the ones that signed onto it by allowing their rep sign a state return using that amount. So being afraid of what the beneficiaries may do is a non-issue. They are the ones going to jail for tax evasion at the state level.

[Matt Sova]

900,000

You use $900,000. That is the ONLY appraised value that you have. The state return should be amended and whether it is by you or the attorney that is up to a discussion between you and the client. I would push for the attorney to clean up his own mess. An amount shown on a state return does not make it an appraised value.

[Bees Knees]

The issue is you signing the 1041. How can you sign a 1041 saying to the best of your knowledge the $900,000 amount is correct when you know the same taxpayer signed a state return under oath claiming $450,000 is the correct amount?

[jainen]

tax consequences

Suppose a new client came to you having sold a house which was fully depreciated as rental property. Oh no, they say. That was never a rental. It was just the family vacation home. Do you say, okay, we'll use the unadjusted basis but you have to promise to amend the last 27 and a half years' returns?

Or suppose they have an IRA distribution. They say, oh no, those were all non-deductible contributions, I just didn't report them that way. But from now on I'll use the correct basis.

Or suppose they have a van they want to deduct mileage for. You see that they already took the full amount as Section 179 last year. Oh, no, they say now. It was for my husband's little league team. I didn't start using it in my business until this year. Do you say, no problem. It wasn't supposed to be eligible for Section 179, but at least from now on we can report the mileage correctly?

Old Jack calls it "a no brainer," and he may be right. It doesn't take brains to just let the client change his story whenever he doesn't like the tax consequences.

[Unregistered-OldJack]

Ok, so you don't think its a no brainer Jainen and Bees. Would your position still be the same if the attorney had filed the state tax return with 100 million value. OK if not 100 million, just what price would you disagree with the attorney and not use his incorrect value?

OldJack's out of town on a guest computer.

[Bees Knees]

Ok, so you don't think its a no brainer Jainen and Bees. Would your position still be the same if the attorney had filed the state tax return with 100 million value. OK if not 100 million, just what price would you disagree with the attorney and not use his incorrect value?

OldJack's out of town on a guest computer.

100 million vs $900,000 is a little further away than $450,000 vs $900,000. Wouldn't you agree?

I also said I wouldn't file any return until the taxpayer first fixed the mess.

[S T]

Do we have enough Info

Actually Snags, as I have pondered this post, I am now wondering if there are enough facts presented here.

Would it not be true that regardless of whether or not the form 706 form had to be filed because of valuation limits, it would still have to be completed (just not filed) in order to complete the State form (which state we are referring to)?

Were there other assets of the estate besides the real estate posted? If so, using the 900K appraisal plus other assets would that have exceeded the 706 exemption for filing? (what year)

Did the attorney/preparer of the return see other possible taxes due and that is why the decrease in value to $450K? Have you inquired as to how the attorney/preparer arrived at the 450K valuation as opposed to the $900K appraisal? Could it be the 6 month Alternate valuation, that much of a fmv drop in 6 months? Who provided the appraisal and why didn't the attorney/preparer of the State return not use the appraisal?

Seems like you might need to delve deeper into the beginnings of the estate return before you can arrive at what figure to use on the sale of the property.

Once that is determined, then you could advise the client accordingly. The State return might need to be amended and tax and interest paid, so you can properly file the 1041 return. Wouldn't less taxes be paid if the State return were amended, if in fact you determine that the valuation was incorrect.

My mind just has a multitude of questions!

Sandy

[jainen]

his lawyer is a scumbag

>>Would your position still be the same if... <<

You may recall that in the original post Snag's question (if indeed there was any question) was specifically phrased to exclude the actual facts. It does not matter if it's a hundred thousand or a hundred million. The taxpayer has already determined the basis. Unless some specific action is taken to change that determination, it isn't changed.

Yes, my position would be the same. The client can't adopt a new basis simply because it saves money or he likes it better or his lawyer is a scumbag.

[S T]

That is not the direction

Agreed Jainen, $$ should not be changed without the appropriate facts and backup, that was not the direction of my last post.

I think Snags, needs to delve deeper into the filing on the estate return to establish the valuation. Either he should go with the $450K return basis to the State, or someone needs to delve deeper and find the answers and see why the disparity in the $450K amount to the $900K amount.

I kept thinking about the mechanics of the reporting, and I can not come to a reasonable conclusion as to why the attorney/preparer would have used a 50% less value. Question: Would that attorney/preprarer put themselves in that kind of jeopardy for possibly both Federal and State reportings? Possibly we all see it from time to time.

Question: Could it be that there was an alternate valuation $$ used, and no one has the facts, circumstances and backup? Possibly, and maybe the executor doesn't have all of the paperwork, that won't be the first time.

Question: Could it be that the executor is providing a figure of $900K, thinking that the "current" person to prepare the current return is not looking at the past information and won't catch that in reality it really was only $450K

I still stand by my earlier post, in that I do not think the $900K should be used, unless the original State return is amended, and Snags should not necessarily amend it unless he has the appropriate paperwork and an engagement letter, etc from the executor.

But I do think that someone whether it be Snags or the Executor needs to obtain additional information as to why the $450K was used, when there was an appraisal of $900K.

Only posing questions. I know this is beyond the scope of Snags original question which is only ethics.

Sandy