Sec. 1341(a) income tax benefit is includible in the gross estate.

• Author: Barton, Peter C.
• Position: Internal Revenue Code section 1341(a

In Smith, 108 TC No. 20 (1997), the Tax Court ruled, in a case of first impression, that a Sec. 1341 (a) income tax benefit was includible in a decedent's gross estate, even though the Sec. 1341 (a) benefit was contingent rather than certain on the date of death. A Sec. 1341 (a) benefit results from an income tax deduction or credit based on the repayment of an amount included in gross income in a prior year. The Tax Court also reaffirmed prior case law in ruling that post-death events are relevant in determining the amount of a liability deductible from the gross estate under Sec. 2053(a)(3) if the deductible liability is the amount (if any) actually paid.

Sec. 1341(a) provides income tax relief for taxpayers required to repay an amount previously included in income under a claim of right. The reduction in tax liability is the greater of the following two calculations. The taxpayer either deducts the amount repaid or claims a credit equal to the reduction in tax that would have occurred had the amount repaid been excluded from income in:the earlier year.

Sec. 2033,.includes in the gross estate "all property to the extent of the interest therein of the decedent at the time of his death." Sec.2053(a)(3) allows a deduction from the gross estate for claims against the estate. The amount allowed as a deduction must be determined as of the date of death if the claim is valid and fully enforceable on the date of the decedent's death (Ithaca Trust Co., 279 US 151 (1929)). Therefore, post-death events are not relevant for the valuation of such claims. Instead, approaches Such as annuity tables and expert testimony must be used to determine the date of death value. On the other hand, if the decedent's creditor has only a potential, unmatured, contingent or contested claim that requires further action before it becomes a fixed obligation of the estate, post-death events are relevant (Est. of Van Horne, 78 TC 728, aff'd, 720 F2d 1114 (9th Cir. 1983)). The deduction for these claims is any amount actually paid.

In Est. of Smith, Algerine Smith had leased land to Exxon, while retaining a royalty interest in oil and gas production. In 1978, the US. Department of Energy (DOE) sued Exxon for misclassifying certain crude oil, resulting in overcharges. In 1983, the district court ruled that Exxon owed the DOE $895 million, plus interest, which Exxon paid in 1986. In 1988, Exxon sued Smith and the other royalty interest owners for reimbursement of their...