Madoff account value must be determined at trial

The IRS is denied summary judgment on an estate’s valuation of its account in an infamous Ponzi scheme.

Whether an account managed by Madoff Investments or its claimed holdings are considered property included in a gross estate and whether a willing buyer or seller of the account could reasonably know or foresee before its collapse that the account was part of a Ponzi scheme are disputed material facts that should be determined at trial, the Tax Court held. Accordingly, the court refused to grant summary judgment to the IRS concerning the inclusion and valuation of the account in a decedent’s gross estate.

Facts: Bernard Kessel was the sole participant in his wholly owned corporation’s defined benefit pension plan, which held an account in Madoff Investments. Kessel died on July 16, 2006, and, using an appraisal based on a list of securities provided by Madoff Investments, the estate’s executrix valued the account at $4.8 million on Kessel’s estate tax return. After Bernard Madoff’s arrest in 2008, the estate filed an amended estate tax return, valuing the account at zero and requesting a $1.9 million refund. The IRS denied the request and, determining the value of Kessel’s estate had been underreported, issued a notice of deficiency in estate tax. The estate petitioned the Tax Court for relief. The estate and IRS agreed to stipulate to issues other than the refund claim relating to the fair market value of the Madoff account on the date of death, for which the IRS filed a motion for partial summary judgment.

Issues: The Tax Court may grant a motion for summary judgment only if it is shown that there is no genuine dispute as to any material fact and its decision therefore is a matter of law. The IRS argued that the Madoff account, rather than its claimed holdings, was the property subject to estate tax and argued its valuation was unaffected by the later collapse of the scheme because a willing buyer or seller of such an account could not reasonably know or foresee that it was part of a Ponzi scheme until its collapse, which occurred after Kessel’s death.

Holding: The Tax Court denied the IRS’s request for summary judgment because the two arguments made by the IRS, although potentially correct, were based on genuinely disputed material facts that needed to be determined at trial. First, it held that, although the pension plan’s customer agreement with Madoff Investments had what appeared to be property-like rights, it was unclear whether the agreement was a property interest separate from the supposed assets in the account. Secondly, because some people had viewed the pre-collapse returns of Madoff Investments as too good to be true, it is possible that information might have been considered by a willing buyer and seller when determining the fair market value of the account, according to the court.

– Estate of Kessel, T.C. Memo. 2014-97

By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.