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trust, Nancy and Robert were the only Reflections substantially all of its liabilities and
real beneficiaries of the trust. The Tax In Morrisette I, the Tax Court held, obligations to Memphis Basketball. As
Court, looking at the provisions of with regard to split-dollar life insur- part of the sale, Memphis Basketball
the insurance trust, found that Nancy ance arrangements similar to Levine’s, assumed liabilities and obligations under
and Robert could not extinguish their that for gift tax valuation purposes, the certain binding agreements, which in-
children’s interest in the trust in favor of split-dollar life insurance arrangements cluded NBA Uniform Player Contracts
themselves, and extinguishment could at issue were governed by the economic for Zach Randolph and Michael Conley.
only take place by will at the death of benefit regime set forth in Regs. Sec. At the time of the sale, under these con-
the beneficiary doing the extinguishing. 1.61-22(a)(1). However, the court, tracts, Randolph and Conley were owed
Thus, the grandchildren would remain before delving into its decision of the deferred compensation with an accrued
beneficiaries of the insurance trust valuation of Levine’s split-dollar receiv- value of $12.64 million. Consequently, as
during the lifetime of Nancy and Robert able, held that Regs. Sec. 1.61-22(a)(1) a result of the sale, Hoops was relieved
and, because surrendering the policies did not apply in determining the estate of the obligation to pay Randolph and
would not benefit the grandchildren, tax consequences of Levine’s split-dollar Conley the deferred compensation.
Larson would breach his fiduciary duties arrangements, stating in its opinion that Using a 3% discount rate, Hoops
by doing so. Regs. Sec. 1.61-22(a)(1) “seems not to LLP determined that the present value
cover the estate-tax consequences of of the deferred compensation liability
Sec. 2703 split-dollar arrangements at all.” was $10.6 million. On its original tax
The IRS, in the alternative, contended Estate of Levine, 158 T.C. No. 2 return for 2012, Hoops included the
that the Sec. 2703 special valuation rules deferred compensation liability in the
applied to Levine’s split-dollar arrange- amount realized on the sale of the
ments. The Service argued that Levine, Expenses & Deductions Grizzlies and did not take a deduction
through her attorneys-in-fact, placed for it. However, the partnership later
a restriction on her right to control Deferred compensation not filed an amended return on which it
the $6.5 million in cash and the life deductible in year basketball took a deduction for the deferred com-
insurance policies by entering into the franchise sold pensation amount, stating that it was
split-dollar arrangements and that this A partnership that owned the Memphis claiming the additional deduction be-
restriction should be disregarded when Grizzlies NBA franchise was not cause it had not claimed a deduction on
determining the value of the property allowed a deduction in the year the part- its original 2012 tax return under Regs.
under Sec. 2703(a)(2). nership sold the franchise for deferred Sec. 1.461-4(d)(5) to reduce the partner-
The estate in turn argued that Sec. compensation owed to two players. ship’s deferred compensation liability
2703 applied only to the property owned included in the amount realized on the
by Levine at the time of her death, not Background sale of the Grizzlies.
to property she had disposed of before, On March 30, 2000, Hoops LP was The IRS disagreed with this position
or property like the insurance policies established as a Delaware limited and issued Hoops a final partnership
that she had never owned. The Tax partnership for the purpose of acquir- administrative adjustment (FPAA),
Court agreed with the estate, stating, ing, owning, operating, and conducting disallowing the additional deduction
“Our caselaw confirms the plain mean- a sports franchise within the rules, for the deferred compensation. Hoops
ing of the Code, and tells us to confine guidelines, and other requirements petitioned the Tax Court to review the
section 2703’s valuation rule to property established by the National Basketball IRS’s decision.
held by a decedent at the time of her Association (NBA). On May 11, 2000,
death.” Hoops acquired the Vancouver Grizzlies, The Tax Court’s decision
The only property in Levine’s estate a member of the NBA. In 2001, the The Tax Court held that under
was the split-dollar receivable she held Vancouver Grizzlies moved to Memphis, Sec. 404(a)(5), Hoops was not entitled
at the time of her death, and, as the Tenn., and the name of the franchise to a deduction for the deferred compen-
Tax Court noted, there were no restric- was changed to the Memphis Grizzlies. sation liability.
tions on that property. Accordingly, the Hoops owned and operated the Grizz- As the Tax Court explained,
court concluded that Sec. 2703 did not lies until it sold the team in 2012 to Sec. 162(a) ordinarily allows a deduc-
apply to the valuation of the receivable Memphis Basketball LLC. tion for all ordinary and necessary
because Levine had unrestricted control In the sale, Hoops sold substan- expenses paid or incurred during a tax
of it. tially all of its assets and transferred year in carrying on any trade or business,

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