In 'Cavallaro' fictitious value transfer costs taxpayers dearly

Cavallaro v. Commissioner, 2014 Tax Ct. Memo LEXIS 189 (Sept. 17, 2014)

An estate plan terribly gone wrong. Hardworking taxpayers turned to estate planning professionals for advice on how to transfer the value in their successful company to their children via another family business in a way that minimized tax liability. The advisors, big-firm accountants and an attorney with a respected law firm, structured a merger that was based on a fictitious earlier value transfer between the entities. Some fifteen years later, the IRS scrutinized the transaction and claimed the taxpayers were liable for tax on a $46 million gift to their offspring. They had accepted an unduly low interest in the merged company and their sons had received an unduly high interest, the government said.

The dispute ended in Tax Court, which pronounced the taxpayers’ company valuations meaningless. Although the court lambasted the pros, the taxpayers bore the consequences of the court’s harsh ruling.

Find out more about the case here.