New York Times October 31, 1999 A Gift or an Estate? That Is the Multimillion-Dollar Question By DAVID CAY JOHNSTON All that stands between Paula Kennedy and the man she loves is a $12 million tax lien from the Internal Revenue Service. She inherited $150,000 and one undeveloped lot on Lake Winnipesaukee, N.H., from her mother, who died 13 years ago, but the IRS says she and her brothers owe millions in gift and estate taxes. Elizabeth and Donald Boyer, pictured below in 1958 with their children Paula, left, Tom and Bill, once ran Camp DeWitt in New Hampshire. That land is now the subject of a prolonged tax battle that has kept Paula, above, from marrying Joseph S. Kennedy. Until the case is settled, she fears that if she marries Joseph S. Kennedy, his assets will be drawn into the case. To keep up appearances, because they live together in Scotch Plains, N.J., she has legally changed her name. Ms. Kennedy, 43, has good reason to be afraid. Even though she and her brothers, Bill and Tom Boyer, 54 and 50, have cooperated with the IRS, the agency has turned their lives into a nightmare, going after them with a powerful tool Congress created for dealing with major tax criminals. Without notice, the agency seized their bank accounts, their paychecks and Ms. Kennedy's $7,500 bonus three years ago, using a cudgel known as a jeopardy assessment. And while the IRS has vowed lately to treat taxpayers as customers, the Boyers remain trapped in a case left over from the old culture, in which all taxpayers were viewed with suspicion and getting a case closed could take years. Ms. Kennedy and her brothers may well be in the wrong, and may be victims of bad legal advice -- a review of court filings shows that the rights and wrongs are anything but clear-cut. But they have no money to pay any taxes, especially after incurring more than $1 million in legal fees fighting the IRS. Yet the IRS will not let them go because they have one potentially valuable asset: a malpractice claim against the lawyers who originally handled the estate. In effect, the IRS has become a speculative investor, hoping to profit from that litigation -- and has refused all settlement offers. The agency, as its resources shrink, pursues fewer and fewer cases, but when it does take on a case it rarely lets go. The story of the IRS versus the Estate of Elizabeth Boyer raises questions about how carefully it picks those targets, considering that by pursuing this case, it has inevitably been forced to pass up numerous more lucrative ones. The case also raises questions about the competence of government lawyers, who twice had the opportunity to collect all or most of the taxes the IRS claims are due, but let both chances slip away. Tax litigators across the country, in interviews, were uniformly critical of the IRS for using the jeopardy assessment in this case, and most said the case illustrates how the IRS fails to close cases that no longer have much chance of generating money. "Once a case is started, they are all Javerts," said Julian Block, a tax lawyer in Scarsdale, N.Y., and a former IRS criminal investigator, referring to the detective in "Les Miserables" who pursued a man for decades over a stolen loaf of bread. "There is no one to tell them to stop." And David Aughtry, an estate tax litigator with Chamberlain Hrdlicka White Williams & Martin in Atlanta, said: "With the IRS you are dealing with a sleeping giant. The giant awakens and gets excited on an individual case and its reaction is disproportionate to both the circumstances of that case and the normal reaction of other taxpayers." The toll from the case, which has spawned eight separate court actions, includes the failure of Tom's and Paula's first marriages and the delay of her second. Bill and his wife, Mary Jo, say their marriage has become strained. The roots of the saga go back to World War II, when Donald Boyer married Elizabeth Skivington. They became teachers at a private school, buying her parents' modest row house in Philadelphia, where they lived until they died. They worked summers at Camp DeWitt on Lake Winnipesaukee, where many campers were recruited by Boyer. Over the years, his children say, his skill with boys won the favor of several wealthy Philadelphians, who, in turn, helped the Boyers buy a growing stake in the camp's 90 wooded acres and 5,000 feet of lakefront. In 1981, when he was 65, Boyer retired from teaching to run Camp DeWitt full time, but suddenly died. His widow stayed on and with their second son, Tom, kept the camp going. She bought the last half of Camp DeWitt in January 1984 for $430,000, with the sellers holding the mortgage. The family lawyer, Albert Ciardi Jr. of Philadelphia, drew up a plan in 1985 for Mrs. Boyer to transfer ownership of the camp to a partnership in which she and her three children would each have a quarter share. Even while his mother was alive, Tom Boyer envisioned dividing half the camp into lots for second homes, using the profits to start a new camp in Maine, then developing the other half. But Bill and Paula had other interests and wanted nothing to do with those risky plans. In the summer of 1986, Elizabeth Boyer, who was 71, grew ill, hiding the gravity of her sickness from everyone until the last boy left camp. She then asked Paula to drive her to the hospital, where doctors said she was near death from cancer. On hearing that, Tom said, his grief was mixed with panic: in his desk were the unsigned papers to carry out the plan for the partnership. Tom took the papers to the hospital, where his mother, delirious from painkillers, signed them moments before she lapsed into a coma. She died 10 days later. Then Tom took the papers to a New Hampshire real estate lawyer, Rod Dyer, to file at the courthouse. Dyer said he told Tom he needed to check with Ciardi on whether, for tax reasons, it would be wise to file the papers or to let the property remain in his mother's estate. Tom has testified that the worst thing he could imagine would be for his mother to die without executing that plan. Tom then called Ciardi, who was not in, and spoke to a junior lawyer, Paul J. Winterhalter, who, Tom recounted, said that he knew nothing of the matter but that if Ciardi had said to proceed, he should proceed. Dyer, his warnings overruled, filed the papers giving three-fourths of Camp DeWitt to the Boyer siblings. Whether the camp was a gift or in the estate had enormous tax implications. When a gift is made, the recipients inherit the price originally paid, or "cost basis," and when the property is sold owe taxes on the entire capital gain. But when property passes through an estate, the basis is the value at the time of death. In dealing with the IRS, the siblings proceeded as if the property were in the estate, but in trying to develop the property they acted as if their mother had completed the gift. The family says this was all done on Ciardi's advice. In court papers, Ciardi said he had simply done what the Boyers wanted, and was not responsible for their many mistakes. Estate tax experts said the gift could have been undone by Ciardi in the months after the papers were filed, which might have gone a long way to ease the fight with the IRS. Repeated attempts to interview Ciardi on that point were unsuccessful. The Boyers said Ciardi told them he was taking care of everything and not to worry, and they trusted his judgment. In the first three years after their mother died, Paula and Bill largely left Tom to work with Ciardi. Paula said she had heard there were problems, but nothing unusual. Paula and Bill kept their distance from the risky development project, which they say Ciardi urged on Tom. To get out of the estate, each agreed to accept a waterfront lot, $150,000 and a promise of $500,000 later if the development went well. Tom, who never reopened the camp, then took out a $2.5 million mortgage at First N.H. White Mountain Bank, paying Paula and Bill out of the proceeds. Court records show that the bank required none of the usual documentation and took Tom's cash-flow projections from lot sales and rewrote them to make the loan look like a great deal for the bank. Nine months after Mrs. Boyer died, her estate tax return was due. Ciardi, in letters, proposed setting the camp's value at double the price paid for the last half, or $860,000. Tom Boyer said that at Ciardi's urging, he got an appraisal that substantiated the $860,000 valuation. Although Ciardi had settled Donald Boyer's estate, he was not an estate or tax specialist, so he sought advice from another lawyer, Byron Prusky of Philadelphia, a former IRS agent who in letters generally approved the plan, provided the $860,000 appraisal was valid. Ciardi prepared Elizabeth Boyer's estate tax return using that value, ignoring a requirement that an appraisal be based on using the land in the most lucrative way possible. In 1989, the IRS came up with its own valuation of $4.9 million, its estimate of the retail value of all the potential lots. This valuation ignored the speculative nature and cost of development. Tom Boyer sent his siblings a note that began: "Bad news, the estate owes IRS some $3.9 million!" -- $1.4 million in taxes and the rest interest and penalties. Estate tax specialists said that with good planning any estate tax could have been avoided, noting that the Boyers never could have realized $4.9 million because of the costs of preparing the site for sale. In one court case, a judge valued the estate at $2.7 million, a figure that two experts, in interviews, said was more than twice the number that might have passed muster with the IRS given careful planning. Other experts pointed to another issue: each sibling held a minority share of an illiquid asset. "These lawyers never heard of 'undivided minority interest'?" asked Shannon Pratt, publisher of Shannon Pratt's Business Valuation Update, a newsletter widely read by estate lawyers. The IRS routinely grants discounts of up to 40 percent for such interests. Tom Boyer's note about the IRS's demand for $3.9 million came just as the Northeast real estate market slumped. The lots did not sell quickly enough to cover the mortgage payments, and the project headed toward foreclosure. Paula and her first husband, a lawyer, who lived outside Philadelphia, decided the family needed a new lawyer, and in 1993, six years after Elizabeth Boyer died, she and her brothers settled on Thomas W. Ostrander at Duane, Morris & Heckscher in Philadelphia. Ostrander wrote the IRS that from the sale of the two waterfront lots owned by Paula and Bill and other assets of the estate he could raise $765,000. He calculated that if the IRS appraisal were adjusted to reflect what the Boyers might have netted -- he proposed $2.7 million, matching the figure the judge set three years later -- the estate tax would come to $750,000. He said the penalties were sure to be canceled because the Boyers relied on legal counsel at all times. Ostrander also made an observation that proved remarkably prescient. If his offer was rejected, he wrote, protracted litigation was sure to ensue and the $765,000 would be paid to him as fees, which would "very substantially reduce (and perhaps eliminate) the funds available" to pay taxes. The IRS rejected the offer, and within a few years Ostrander did in fact collect all of the $765,000. He has since billed the Boyers for several hundred thousand dollars more, which they have been unable to pay. The IRS is barred from discussing an individual case. Charles O. Rossotti, the commissioner of Internal Revenue, and other IRS officials listened to a reporter's recounting of the case, but none would comment, even on questions about how the IRS uses its litigation resources. "By law, we can't talk about it and we won't," said Don Roberts, an IRS spokesman. Meanwhile, litigation was under way over the mortgage. Under tax law, if the camp was a gift the bank was entitled to be paid before the IRS, but if the land was in the estate the IRS claim took precedence. The government might have collected more than $1 million from the sale of lots had it taken a firm position that Mrs. Boyer had not made the gift before she died. The government has still not decided whether it is due tax on a gift or an estate, but a federal judge ruled that the land was a gift, at least in her courtroom. So again the government got nothing. Ostrander, the family's new lawyer, kept trying to settle for six years while also filing the Boyers' malpractice claim against Ciardi, Winterhalter and Prusky. The malpractice claim is not for the taxes owed, but for any interest and penalties, for advice that led to the fight with the IRS and for advice on a "doomed project" to develop the property, wiping out most of each sibling's inheritance. All three lawyers deny any liability. Prusky said in court papers that his advice was limited by what Ciardi had told him and that he had nothing to do with setting the value at $860,000. Winterhalter said he acted properly and had only peripheral involvement. In an added twist, the malpractice case was to go to trial months ago, but has been delayed at least until December because the company that insured all three lawyers is itself in financial trouble and operating under the supervision of regulators. If and when that case goes to trial, years of appeals may follow, and the IRS has shown no sign that it plans to settle with the Boyers until those appeals are complete. Tom Boyer, who like his father is a football coach at a private school, lives alone now in a tiny ground-floor apartment in Basking Ridge, N.J. As he was recounting the last 13 years in an interview he broke into tears -- sobbing at how his chance at getting rich was gone but more, he said, over the failure of his marriage. "I made a mistake because I didn't understand," he said, "and the IRS just keeps punishing me and punishing me and it seems like this will go on until I die." Ms. Kennedy says Tom "is a broken man," adding, "Bill has not done much better." Ms. Kennedy has struggled to make lemonade. She studied taxes and investing and became a personal financial planner. The IRS has seized none of her money since 1996, but if she puts any away, the agency could seize it later as part of any settlement. "I live this bizarre life," she said, telling people "to be thrifty and invest for their retirement. But because any assets I acquire will be taken by the government, I own nothing but my clothes and furniture. I can't save for retirement. I can, and do, buy nice clothes, go out to dinner in restaurants and have even gone on great vacations, the very things I tell clients to postpone." Before the case began, she said, "I was just another Main Line housewife with sweaters and wool skirts and pearls doing nothing of consequence. This case has made me a better person. I just wish I didn't have to go through this. I just wish it was over."