blogger visitor

Monday, June 23, 2014

NO REFUND OF EXTENSION OVERPAYMENT FOLLOWED BY A CODE §6166 ELECTION

If an estate files to extend the due date of its Form 706 estate tax return, it can elect to defer the portion of the estimated estate tax that will be deferred pursuant to its Code §6166 election. It does not make the election itself until it files the Form 706 (prior to the expiration of the extended due date period).

Essentially, the estate is divided into two parts – the deferred portion and the nondeferred portion. Like any estate that is required to pay estimated estate taxes by the original 9 month due date for the Form 706, the taxes attributable to the nondeferred portion are due with the Form 4768 extension and the deferred taxes are not yet due. What happens if the taxes payable with the extension that are estimated and paid for the nondeferred portion are in excess of the taxes actually attributable to the nondeferred portion, as determined later upon the preparation and filing of the Form 706? Can the estate get a refund of that overpayment when it files the Form 706, or will the excess be applied toward the taxes attributable to the deferred portion and thus not be refundable?

This was the issue before the District Court in the recent case of Estate of Donald McNeely. Interestingly, when the extension payment was made, the taxpayer attempted to specifically allocate the payment solely to the nonexempt portion via an accompanying letter. It sought a refund of the excess of the extension payment over the tax attributable to the nondeferred portion on the Form 706.

The District Court held that the excess taxes on the nondeferred portion of $1.979 million need not be refunded by the IRS to the estate, but could instead be applied to the taxes that were otherwise eligible for deferral under Code §6166 as the installment payments became due. The court based its decision on Code §6402 which reads:

In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c), (d), (e), and (f) refund any balance to such person.

The court also noted that even if Code §6402 did not apply on the theory that there was no “overpayment” (a disputed issue in the case), then Code §6403 would allow for a similar result. Code §6403 provides:

In the case of a tax payable in installments, if the taxpayer has paid as an installment of the tax more than the amount determined to be the correct amount of such installment, the overpayment shall be credited against the unpaid installments, if any. If the amount already paid, whether or not on the basis of installments, exceeds the amount determined to be the correct amount of the tax, the overpayment shall be credited or refunded as provided in section 6402.

The estate made three interesting arguments to support its claim for refund:  (1) that its designation of the estimated payment as payment for the nondeferred portion of its estate tax liability, and the IRS's acceptance of that payment, bound the IRS to that designation and required the IRS to refund the excess amount, (2) that §6403 does not apply because the estate paid prior to making the § 6166 election, and (3) that § 6402 requires a refund of the overpayment, rather than a credit, in recognition of the Estate's special rights to defer payment under § 6166. None of those arguments was able to persuade the court to allow the refund.

Estate of Donald McNeely, (DC MN 06/12/2014) 113 AFTR 2d ¶ 2014-930

No comments: