Estate tax issues add to practice and procedure developments.

• Author: Rea, Robert C.

Tax practice and procedure developments evolve from various types of tax controversies. Recent developments originated in matters involving the calculation or payment of Federal estate taxes but have broad application beyond the estate tax area. In one instance, the IRS National Office issued technical advice that an estate's refund claim was limited to the installments of estate tax actually paid within two years of its filing. In another case, the Tax Court held that, for penalty computation purposes, an estate tax deficiency is based on all deductible expenses, not just those reported on the estate tax return.

Refund Limited to Estate Tax Actually Paid Within Last Two Years

In Letter Ruling (TAM) 9828002, the IRS National Office advised that estate tax paid in installments pursuant to a Sec. 6166 election was not deemed paid for refund claim purposes when the final installment was remitted. Rather, because the estate failed to follow Rev. Proc. 81-27, Sec. 6511 (b)(2)(B) limited the amount of refund to the portion of estate tax actually paid within two years before the filing of the refund claim.

In late 1978, the decedent's estate timely filed an estate tax return. The estate elected to defer payment of a portion of the estate tax attributable to an interest in a closely held business, pursuant to Sec. 6166. The estate made interest-only payments for the first four years; for the next 10 years, the estate made tax payments plus interest. The final installment was made in late 1993.

In 1995, the estate filed a claim for refund of the interest paid between 1982 and 1993 and of estate tax paid beginning in 1986. The Service agreed that the estate had overpaid its estate tax and interest; however, because the estate had not filed supplemental Forms 706 or protective refund claims pursuant to Rev. Proc. 81-27, the National Office observed that the IRS was limited to refunding only those overpayments actually made in the last two years of the installment period. Rev. Proc. 81-27 offered procedures for estates to follow to avoid potential statute of limitations problems when paying estate tax and interest in installments. The estate's failure to follow these procedures in filing either supplemental estate tax returns or protective refund claims limited its ability to obtain a refund of overpayments of tax and interest remitted more than two years earlier.

Fraud Penalty Is Based on All Deductible Expenses, Not Just Those Reported on the Estate...