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Friday, December 11, 2015

Are Income Tax Refunds Due to a Decedent Subject to Estate Taxes?

I've always thought so, but apparently at least one estate thought not, and took the issue to the Tax Court.

A decedent died before filing his income tax return for the prior calendar tax year. Once the return was prepared after death, it showed the decedent was due a refund of $429,315. A smaller refund was also later determined to be due for the short year of the decedent's death.

The decedent's estate did not include the refund amounts on the estate tax return. The estate argued that the overpayment as of the date of death was not a property interest of the decedent – it was only a mere possibility or expectancy which would not be a property interest under applicable state law. It argued that there is no property interest until the refund has been declared by the Government.
 
The Tax Court determined that there were other cases acknowledging that tax refunds are part of the gross estate. Further, it noted that the IRS by law "shall" refund any balance due to the taxpayer – this mandatory obligation was clearly relevant. Thus, it included the refunds in the gross estate.
 
The Tax Court did note that if the refund could be subject to offset by the IRS for other tax liabilities of the decedent, then case law would permit excluding the refund. That was not the case here, however.
 
Estate of Russell Badgett, Jr. v. Comm., T.C. Memo 2015-226 (November 24, 2015)
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