A matter recently litigated in the United States Tax Court, in Estate of Badgett v. Commissioner, clarifies the situation which most people don't even think about when they prepare a 706 for a US decedent. At the time of his death this decedent had not yet filed a 1040 for the year in which he died. Subsequent to his death, a 1040 was filed resulting in a refund to the estate in excess of $400,000.
The estate, on the 706, opined that the $400,000 refund was not an asset of the estate and did not include it in the estate. The IRS took umbrage at this position. The IRS's position, supported by section 2031, indicates that all property, real, personal, tangible or intangible wherever situated is includable in the decedent's gross estate.
The estate, in the tax court case, took the position that in order to be included in the decedent's estate, the refund must already have been in existence at the date of death, not merely a possibility or expectation. Clearly this flies in the face of a number of cases in which the decedent was to have been a beneficiary of a contract or a shows in action. Although the receipt of the money is merely a possibility or an expectation, it is still includable in the decedent's estate. In the case of a tax refund, the amount is finite. In the case of a shows in action or contractual obligation, one could argue, depending on the facts and circumstances, that the amount to be included in the gross estate was less than 100% of the value listed on the contractual obligation since a possibility of litigation exists, the right of which may well diminish the contractual obligation from the amount listed on the contract.
The estate's final argument, one which fell on deaf ears, was that there was no guarantee that the IRS would refund the full amount of the refund. Clearly this is a misunderstanding of tax refunds. In the case that the IRS has no outstanding liens or assessments against a taxpayer, the amount of the refund is 100% of the amount listed on the tax return (barring mathematical error). It is true however, that if there is an outstanding lien or obligation to the IRS, the amount of the obligation will be netted against the refund. In this particular case, the decedent had no outstanding obligations to the IRS so the full amount of the refund is includable in the decedent's estate.
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Robert S. Blumenfeld -
Estate Tax Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.
Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.
While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.