The IRS has released detailed guidance to taxpayers on how to file and administer protective refund claims for amounts that are not currently deductible under Code Section 2053 when the Form 706 is filed (such as contested or uncertain claims and expenses that have not yet been paid). As part of its guidance, the IRS announced that it will create a Schedule PC to be attached to the Form 706 to assist taxpayers in filing these protective claims at the time of filing of the Form 706.
Final regulations under Code Section 2053 were published on October 20, 2009 to provide guidance in determining the deductible amount of a claim against a decedent's estate, particularly in regard to contested or uncertain claims and expenses. The final regulations provide, with certain exceptions, that the amount deductible for a Code Section 2053 claim or expense is limited to the amount actually paid in settlement or satisfaction of that claim or expense. For amounts not paid or otherwise deductible by the time the Form 706 is filed, the Regulations allow a protective refund claim to be filed. This allows for a refund to be sought later if amounts are paid or become deductible after the expiration of the estate tax statute of limitations. Rev.Proc. 2011-48 provides details on how to file and administer protective refund claim.
TIMING. The protective refund claim must be filed before the expiration of the Code Section 6511(a) statute of limitations. This is 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.
CONTENT OF PROTECTIVE CLAIM. The protective claim must be a written declaration that is executed under penalties of perjury, listing each ground upon which a refund is claimed and facts sufficient to apprise the Commissioner of the exact basis of the claim. Required information includes:
a. An explanation of the reasons and contingencies delaying the actual payment to be made in satisfaction of the claim or expense.
b. Information on whether other protective claims for refund are being filed or were previously filed and the approximate date on which each was filed.
c. If the claim is being contested, specified information about the contested matter and the potential liability of the estate.
EVIDENCE OF AUTHORITY. The protective claim must be accompanied by documentary evidence, including certified copies of the letters testamentary, letters of administration, or other similar evidence, to establish the legal authority of a fiduciary or other person to file and pursue a protective claim for refund on behalf of the estate of a decedent. However, if the protective claim is filed by same person that submitted the Form 706, the only thing needed is a statement affirming that the fiduciary or other person filing the protective claim for refund also filed the Form 706 and that such fiduciary or other person is still acting in a representative capacity.
WHICH FORM TO USE. For decedents dying after October 19, 2009, and before January 1, 2012, the claim is filed using Form 843. For decedents dying on or after January 1, 2012, the claim can be filed on a Form 843, or on a Schedule PC filed with Form 706. This Schedule does not yet exist, but should simplify the process for making a protective claim if made at the time of the Form 706 filing.
SEPARATE CLAIM REQUIREMENT. A separate claim filing is required for each claim or expense for which a deduction may be sought. Multiple Schedules PC should be used, if making the claims with the Form 706 filing.
Related and ancillary expenses relating to resolving, defending, or satisfying the identified claim or expense as well as certain expenses relating to pursuing the claim for refund for the identified claim or expense are not considered separate claims for this purpose, but are included in the separate claim to which they relate.
REJECTION PROCEDURES. If a protective claim filing is rejected by the IRS, a corrected (and signed) protective claim for refund can be refiled before the expiration of the period of limitation or within 45 days after the date of the Service's notice of the defect, whichever occurs later. Thus, a defective election filed shortly before the expiration of the statute of limitations should have an opportunity to cure even though the statute runs out before receiving the Service’s rejection.
FOLLOW-UP REQUIREMENTS. The IRS will generally accept or reject filed protective claims, and notify the taxpayer. The taxpayer should contact the IRS if no IRS acknowledgment of the protective claim filing is received within 180 days of filing a Schedule PC or 60 days of filing a Form 843. If such taxpayer contact is not made within 30 days of the applicable deadline, an estate will lose the ability to correct a defective claim if the statute of limitations has expired (even if the estate has proof of mailing the protective claim to the IRS).
NOTIFICATION OF RESOLUTION OF CONTINGENCIES. To obtain a refund, the taxpayer must notify the IRS when the claim is ready for consideration (that is, once deductibility is permitted by reason of payment or otherwise meets the regulatory requirements for deduction). The notification generally should describe the relevant facts that support, and provide evidence to substantiate, a deduction under Section 2053 and should claim a refund of the overpayment of tax based on the deduction under Section 2053 and the resulting recomputation of the estate tax liability.
This notification must be submitted within a "reasonable period" after the item becomes deductible. There is a 90 day safe harbor that will meet the “reasonable period” requirement. If filed later, a reasonable cause explanation must be submitted. Special rules apply for multiple or recurring payments.
The Revenue Procedure provides specific information on what must be included in the notification, and whether the notification must be made on a Supplemental Form 706 or a Form 843.
MISC. The existence of a protective claim will not affect Form 706 audits. The new rules are applicable with respect to protective claims for refund filed on behalf of estates of decedents dying on or after October 20, 2009.
The drafters of the Revenue Procedure should be commended for providing detailed and precise rules to address most of the basic protective claim filing issues.
The ability to make a protective claim on a Schedule PC on the Form 706 is especially welcomed. This will make it easier for taxpayers to comply with the requirements. Also, it will help taxpayers avoid inadvertently missing the statute of limitations deadline for submitting the protective claim. Presently, many estates will defer filing a protective refund claim, instead adopting a wait-and-see attitude to see if claim and expense issues resolve themselves before the statute of limitations expires and hopefully avoiding the bother of a Form 843 filing. By easing the process for filing the protective claim, more taxpayers should take advantage of the procedure at the time the estate tax return is filed and thus avoid missing the deadline later. Indeed, the existence of the Schedule PC will likely educate some preparers that might not be knowledgeable of the protective claim procedure of its availability.
Note that some claims are deductible, even if not paid when the Form 706 is filed. These include executor and attorney fees (Treas. Regs. §20.2053-1(d)(4)), claims against the estate relating to property or claims included in the gross estate (Treas. Regs. §20.2053-4(b)), and claims not totaling more than $500,000 (Treas. Regs. §20.2053-4(c)). Taxpayers may still want to file a protective claim for additional amounts not reported on the Form 706 or that do not meet the foregoing statutory requirements. There is a trap, here, since the Revenue Procedure requires that such protective claims, in addition to meeting the regular protective claim requirements, the taxpayer must also disclose the amount of the deduction already claimed on the Form 706 for the subject claim or expense and must reference the regulatory provision under which the deduction was claimed. See §4.05(4) of the Revenue Procedure.
For more information regarding when uncertain or contested claims and expenses can be deducted under the Code Section 2053 regulations, I refer readers to my article on the subject in the March 2010 Journal of Taxation.
Rev. Proc. 2011-48
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