A TAXPAYER FALLS THROUGH THE CRACKS

Taxpayers generally have a fixed period of time to amend a tax return and claim a refund - usually they must file for the refund no later than 2 years from when they paid the tax or 3 years after the due date of the applicable return. In a recent case, an estate filed an income tax return regarding the sale of property owned by a decedent, reporting the gain from the sale by the estate. Based on basis rules, the amount of the gain on the sale was based on the estate tax value of the property that was sold.

Due to estate tax litigation, the value of the property that was sold was not finally determined by a court until after the income tax statute of limitations expired. Since the value of the property was increased in the estate tax litigation, the estate desired to amend its earlier return for the sale and report a higher tax basis, which would have substantially reduced the gain(and thus the income tax) from the sale. However, since the income tax refund statute of limitations had expired, no refund was allowable under normal rules.

In situations such as these, the "mitigation" provisions of the Internal Revenue Code can often allow a refund even if the applicable statute of limitations has expired. However, in Malm v. U.S. (DC ND 20050, and notwithstanding a contrary decision in the Fourth Circuit Court of Appeals, the District Court found that the mitigation provisions were not applicable, and thus the taxpayer ended up paying more tax than was legally required. The unfortunate taxpayer fell through the cracks in the tax system and could not get the excess tax back.

Some commentators believe that a taxpayer in this kind of situation may be able to obtain relief under the equitable recoupment doctrine. This doctrine allows a party litigating a tax claim in a timely proceeding to recoup in that same proceeding a related and inconsistent, but time-barred, tax claim arising from the same transaction.

HOMESTEAD PROTECTION AND THE REVOCABLE TRUST [FLORIDA]

One legal concept relating to payment of expenses and claims of a decedent’s estate is that a Florida homestead is protected against claims of creditors of a decedent, when the homestead will pass to the heirs of the decedent. This is based on Florida’s Constitution. Another legal concept is that assets held in a revocable trust of a decedent must generally be used to pay expenses and claims against a decedent’s estate, to the extent that a probate estate has insufficient assets. This is based on Florida statutory provisions.

What happens if the homestead (which will pass under the trust to heirs of the decedent) is held in a revocable trust - can the probate estate require that the homestead be used to pay probate estate expenses? One would expect that the homestead protection, which is under the Constitution, will trump the merely statutory provision requiring the use of revocable trust assets for probate expenses.

Okay, but what happens if the revocable trust has an explicit provision in it that generally provides for the use of revocable trust assets to pay expenses of and claims against the probate estate - has the constitutional protection been waived or lost? This is a provision found in many revocable trust agreements.

No, the constitutional protection also trumps such an explicit clause in the trust, according to the 4th District Court of Appeals in Engelke v. Engelke (4th DCA 2006). In that case, the 4th DCA provided that the general payment of expenses and claims clause will not act to override the constitutional homestead protections.

PROTECTION OF PROCEEDS OF SALE OF HOMESTEAD FROM A CREDITOR

Florida generally allows for the protection of an individual’s homestead from the claims of his or her creditors (although bankrutpcy law requires residence in Florida for an extended period of time to avail oneself of the full protection). A recent case illustrates what happens when someone sells their homestead with the intent of reinvesting the proceeds in a new homestead.

In Rossano v. Britesmile, Inc., 3rd DCA (December 28, 2005), a judgment creditor learned that a debtor planned to sell her homestead and to purchase a less expensive residence. The creditor served a writ of garnishment on the closing agent at the sale, and the trial court allowed the entire amount to be garnished.

On review, the appeals court noted that under Florida law, the proceeds of a voluntary sale of a homestead are exempt from creditor claims just as the homestead is, if the seller can show an abiding good faith intention prior to and at the time of the sale to reinvest the proceeds in another homestead within a reasonable time. However, any surplus of the funds from the sale that are not reinvested in another homestead lose their exemption.

Since it was presently unknown how much of the sale proceeds would be reinvested, the appellate court directed that the trial court should await the closing on the new home and then order payment to the creditor only of that amount which was not used in good faith for the new residence.