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Hollow Victory for Taxpayer as IRS Acquiesces in Estate Tax Refund Suit but Declines to Actually Issue Refund.

On Behalf of | Apr 23, 2012 | Estate Planning, IRS |

In an Action On Decision (AOD), the IRS announced that it will acquiesce, in the result only of a decision in which the U.S. District Court held that a decedent’s estate was entitled to a refund of deficiency assessed on contingent bequests. An AOD is a formal memorandum prepared by the IRS Office of Chief Counsel that announces the future litigation position the IRS will take with regard to the court decision addressed by the AOD.

In Alan Baer Revocable Trust v. United States, decedent, at the time of death, owned shares of non-publicly-traded stock. These securities were held in a revocable trust, which provided that if the trustee sold the stock for more than the decedent’s cost basis during the surviving spouse’s lifetime, the trustee should distribute a specified amount to the named beneficiaries. When the decedent passed away, his personal representative transferred the securities to a marital trust and then made the qualified terminable interest property (QTIP) election under section 2056(b)(7). This election qualifies a fractional portion or all of the assets held in a QTIP trust for the estate tax marital deduction. The IRS denied the marital deduction for the full value of the contingent bequests and determined a tax deficiency.

The estate reappraised the securities and filed a refund claim, arguing that as of the decedent’s death there was no likelihood that the trust could have sold the securities for an amount greater than the decedent’s cost basis. In the resulting refund suit, the district court determined that based on the date-of-death value of the securities, the contingent bequests were “effectively extinguished” and that the possibility of a transfer to the contingent beneficiaries was “so remote that it is negligible.” The court held that the decedent’s estate was entitled to a refund of the deficiency assessed on the contingent bequests.

In its AOD, the IRS wrote that the district court erred as a matter of law because the contingent requests rendered the value of the securities ineligible for QTIP treatment under section 2056(b)(7)(B)(ii)(II). The IRS determined that the standard used by the district court doesn’t apply to the bright-line test of the statute. Further, the IRS concluded that the district court’s finding that the securities had negligible value rendered its legal error irrelevant to the extent it didn’t materially affect the amount of the refund.

To read the Action on Decision click here.


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