By: Sid Peddinti, Esq.

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MYTH 11
THE STEINBERG CASE

AN IMPROPERLY STRUCTURED LLC CAN STILL GO THROUGH PROBATE

Key Concept: Business ownership and probate
Sub-Concept: LLC membership interests held personally must pass through probate
IRS or Law Link: Uniform Probate Code Section 2-101
https://www.uniformlaws.org/committees/community-home?CommunityKey=1c4637d1-b0db-4d7e-8d68-d6b3303a2411
Case Study: Steinberg Probate Case

Summary:

LLC ownership held in your personal name is a probate asset.
Probate court must authorize the transfer before heirs can act.
Business operations can be frozen for weeks or months.

Key Takeaway and Action Steps:
Hold LLC interests inside a trust. Name successor managers. Keep the operating agreement updated. Probate delays can stop business operations instantly.

Hypothetical:
A family restaurant cannot access its business account for 45 days because the deceased owner’s LLC interest is stuck in probate.

Tags: #ProbateLaw #BusinessSuccession

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MYTH 12
THE DORN CASE

PHANTOM EQUITY DOES NOT FOOL THE IRS

Key Concept: Retained control
Sub-Concept: Economic benefit triggers estate inclusion
IRS or Law Link: IRC Sections 2036 and 2038
https://www.law.cornell.edu/uscode/text/26/2036
Case Study: Dorn Case

Summary:

IRS ignored phantom equity because control never changed.
Founder still controlled distributions.
IRS included the full business value in the estate.

Key Takeaway and Action Steps:
Transfer real control. Update voting rights. Amend operating agreements so economic benefit actually shifts.

Hypothetical:
A founder gives children “profit points” but still approves every distribution. IRS treats the entire company as still owned by the founder.

Tags: #EstateTax #IRC2036

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MYTH 13
THE ROBINSON CASE

DELAYING A BUSINESS VALUATION CAN COST MILLIONS

Key Concept: Estate valuation
Sub-Concept: Missing or late valuation reports
IRS or Law Link: IRC Sections 2031 and 2032
https://www.law.cornell.edu/uscode/text/26/2031
Case Study: Robinson Case

Summary:

Estate failed to obtain a valuation.
IRS imposed a much higher number.
The difference added millions to the estate tax bill.

Key Takeaway and Action Steps:
Order business valuations every two to three years. Keep clean financial statements. Update buy-sell agreements.

Hypothetical:
An internal estimate valued a consulting company at 4 million. The IRS valued it at 7 million because no appraisal existed.

Tags: #Valuation #EstatePlanning

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MYTH 14
CHURCH v UNITED STATES

GIFTING PROPERTY WITHOUT FORM 709 CREATES TAX PENALTIES

Key Concept: Gift tax rules
Sub-Concept: Non-cash gifts require reporting
IRS or Law Link: IRC Section 2511
https://www.law.cornell.edu/uscode/text/26/2511
Case Study: Church v United States (2000)

Summary:

Gifts of real estate, LLC interests, or stock require Form 709.
Failure to file results in penalties.
IRS treated unreported gifts as incomplete.

Key Takeaway and Action Steps:
File Form 709 for all property transfers. Keep appraisals. Document intent.

Hypothetical:
Parents gift a rental property worth 900,000 but never file Form 709. IRS audits the estate years later and charges penalties.

Tags: #GiftTax #Form709

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MYTH 15
LITTICK v COMMISSIONER

INTERNAL PRICE AGREEMENTS DO NOT PROTECT YOU

Key Concept: Valuation
Sub-Concept: Buy-sell agreements must reflect real value
IRS or Law Link: IRC Section 2703
https://www.law.cornell.edu/uscode/text/26/2703
Case Study: Littick v Commissioner

Summary:

IRS ignored an artificially low valuation.
Estate was taxed based on market value.
Buy-sell agreements have strict requirements.

Key Takeaway and Action Steps:
Use market-based formulas. Update agreements. Keep valuation reports with corporate records.

Hypothetical:
A family fixes a 2 million dollar share price in their buy-sell agreement. IRS values the company at 6 million.

Tags: #BuySellAgreement #IRC2703

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MYTH 16
THE KLAUSS CASE

THE IRS CAN THROW OUT YOUR VALUATION IF IT IS NOT CREDIBLE

Key Concept: IRS valuation authority
Sub-Concept: Unsupported or low-quality appraisals are ignored
IRS or Law Link: IRC Section 2031
https://www.law.cornell.edu/uscode/text/26/2031
Case Study: Klauss Case

Summary:

The estate submitted an appraisal with weak documentation.
IRS experts replaced it with their own valuation.
The revised number increased tax liability dramatically.

Key Takeaway and Action Steps:
Use credentialed appraisers. Support every assumption. Include full schedules and comparables. Avoid quick or template-based valuation letters.

Hypothetical:
A business is valued at 3 million using a one-page summary. IRS recalculates the value at 5.8 million with a 40-page report.

Tags: #IRSValuation #EstateTax

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MYTH 17
TRUE v COMMISSIONER

OUTDATED DOCUMENTS DO NOT HOLD UP IN AN AUDIT

Key Concept: Outdated agreements
Sub-Concept: Valuation must reflect current business conditions
IRS or Law Link: IRC Section 2703
https://www.law.cornell.edu/uscode/text/26/2703
Case Study: True v Commissioner (2001)

Summary:

A buy-sell agreement was decades old.
IRS ignored the outdated document and recalculated value.
Old valuation formulas were no longer relevant.

Key Takeaway and Action Steps:
Review agreements every two years. Update valuation formulas and pricing mechanisms. Keep business purpose and financial assumptions current.

Hypothetical:
A buy-sell from 1998 is used in 2025. IRS rejects it because business revenues, industry conditions, and asset values have changed.

Tags: #BusinessSuccession #TaxLaw

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MYTH 18
THE MAXINE ROBINSON CASE

A MISSING DEATH CLAUSE CAN CAUSE A VALUATION WAR

Key Concept: Operating agreement flaws
Sub-Concept: Missing or unclear death clause triggers probate
IRS or Law Link: Uniform Probate Code Section 2-101
https://www.uniformlaws.org/committees/community-home?CommunityKey=1c4637d1-b0db-4d7e-8d68-d6b3303a2411
Case Study: Maxine Robinson v Commissioner

Summary:

LLC agreement lacked an explicit death clause.
Probate judge took control of the ownership transfer.
IRS gained leverage in setting a higher valuation.

Key Takeaway and Action Steps:
Add a clear death provision. Transfer ownership to a trust. Assign successor members now, not later. Avoid probate involvement.

Hypothetical:
An LLC member dies with no death clause. Remaining members argue for months while IRS increases the estate value.

Tags: #LLCPlanning #ProbateRisk

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MYTH 19
THE S CORPORATION CASE

A WILL CAN ACCIDENTALLY TERMINATE YOUR S CORPORATION STATUS

Key Concept: S corporation eligibility rules
Sub-Concept: Only certain shareholders and trusts qualify
IRS or Law Link: IRC Section 1361(b)(1)(B)
https://www.law.cornell.edu/uscode/text/26/1361
Case Study: S Corporation Eligibility Dispute

Summary:

A will transferred shares to an ineligible trust.
S corporation status terminated automatically.
The business became taxable at the corporate level.

Key Takeaway and Action Steps:
Use QSST or ESBT trusts. Do not rely on a will to transfer S corporation shares. Pre-approve successor shareholders.

Hypothetical:
During probate, S corporation stock moves into an ineligible trust, triggering immediate termination of pass-through taxation.

Tags: #SCorpRules #SmallBusinessTax

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MYTH 20
THOMPSON v COMMISSIONER

REGISTERING IP IN AN LLC DOES NOT REMOVE ESTATE TAX RISK

Key Concept: Intellectual property ownership
Sub-Concept: Retained control equals estate inclusion
IRS or Law Link: IRC Section 2038
https://www.law.cornell.edu/uscode/text/26/2038
Case Study: Thompson v Commissioner

Summary:

IP held in an LLC was still included in the taxable estate.
IRS found that the owner retained control and economic benefit.
Legal form did not match economic substance.

Key Takeaway and Action Steps:
Transfer IP to a trust or independent entity where control is genuinely separated. Remove voting rights and substitution powers.

Hypothetical:
A creator places patents inside an LLC but controls all licensing decisions. IRS taxes the entire IP value in the estate.

Tags: #IntellectualProperty #EstateTax