Academic journal article Journal of Accountancy

All in the Family?

Academic journal article Journal of Accountancy

All in the Family?

Article excerpt

The Tax Court recently held that a note does not constitute a qualified family-owned business interest (QFOBI) for purposes of IRC [section] 2057, which allows an estate to deduct up to $675,000 from its value for estate tax purposes. To qualify for the deduction, the value of the QFOBI at the time of death must exceed half the value of the adjusted gross estate. This 50% liquidity test, found in section 2057(b)(1)(C), was at issue in Estates of Duane and Lois Farnam v. Commissioner.

The Farnams, of Minnesota, operated a family business of automobile parts sales as Farnam Genuine Parts Inc. To fund the company's operation, the couple loaned it money over several years in return for unsecured promissory notes. Duane Farnam died in 2001 and Lois Farnam in 2003. Both their estate tax returns claimed deductions for QFOBIs, which the IRS disallowed in 2005.

The issue before the court was whether the notes constituted interests for purposes of the 50% liquidity test. Section 2057(e)(3) defines family ownership in the case of a corporation in terms of the amount of stock held by family members or, in the case of a partnership, capital interest. …

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