1999 Tax Ct. Memo LEXIS 91 | Tax Ct. | 1999
1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="1" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*91 Decision will be entered under Rule 155.
MEMORANDUM OPINION
[1] COHEN, CHIEF JUDGE: Respondent determined a deficiency in the Federal 1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="2" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*92 estate tax of the estate of Evelyn M. McMorris (the estate) in the amount of $ 232,035. By amendment to the answer, respondent asserts an increased deficiency in the amount of $ 2,383,056.
[2] After concessions, the issue for decision is whether the estate is entitled to deductions for (1) the portion of a Federal income tax liability to be refunded due to a reduction in reported income and (2) the corresponding portion of a State income tax liability for which a refund has yet to be requested.
[3] This case was submitted fully stipulated under Rule 122. Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. The stipulated facts are incorporated herein by this reference.
BACKGROUND
[4] Evelyn M. McMorris (decedent) died on March 4, 1991, a resident of Colorado. The personal representative, decedent's son Jerry D. McMorris (Jerry McMorris), was a resident of Colorado at the time the petition was filed in this case.
[5] Donn D. McMorris, decedent's husband (Mr. McMorris), died on April 10, 1990. On June 11, 1990, decedent was declared1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="3" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*93 incompetent due to irreversible advanced Alzheimer's disease, and Jerry McMorris was appointed as conservator for her estate. In partial distribution of decedent's interest in her husband's estate, 13.409091 shares of stock in N.W. Transport Services, Inc. (NW), were distributed to the estate of Evelyn M. McMorris, Protected Person. On September 19, 1990, decedent, through Jerry McMorris as her conservator, entered into an agreement with NW, through Jerry McMorris as president, to redeem the 13.409091 shares of NW stock in exchange for $ 29,500,000, payable over 120 months with interest at 10 percent.
[6] The Federal estate tax return (the estate tax return) for decedent's estate was filed on December 4, 1991. The estate tax return reflected deductions for decedent's 1991 Federal and Colorado income tax liabilities of $ 3,960,525 and $ 641,222, respectively. Decedent's Federal income tax return for 1991 (the 1991 Federal income tax return) was filed timely on or before April 15, 1992. The 1991 Federal income tax return reflected an income tax liability of $ 3,681,703, which amount was paid with the return. Decedent's Colroado income tax return for 1981 also was filed timely on or 1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="4" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*94 before April 15, 1992, and reflected an income tax liability of $ 639,826, which was paid with the return.
[7] A large part of the income reported on decedent's 1991 income tax returns resulted from gains on the redemptions of NW stock that were passed through to decedent's 1991 income tax returns from the fiduciary income tax return for Mr. McMorris's estate for the fiscal year ended March 31, 1991. The NW stock had been included on Mr. McMorris' estate tax return at an appraised value of $ 1,726,562.50 per share. Accordingly, decedent's basis in the NW stock was determined using the value of $ 1,726,562.50 per share, and substantial gain resulted. After examination of decedent's estate tax return, respondent determined that the amounts allowable as deductions for decedent's Federal and Colorado income tax liabilities were $ 3,680,038 and $ 639,826, respectively. Respondent issued a notice of deficiency on November 8, 1994. Petitioner does not contest these adjustments, having conceded all issues raised in the notice of deficiency.
[8] In January 1996, the parties in the case of Estate of Donn D. McMorris v. Commissioner, docket No. 5952-94, reached a basis for settlement that provided1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="5" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*95 for an increase in the value of the NW stock included in Mr. McMorris' estate to $ 2,500,000 per share. The increase in the value of the NW stock created a deficiency in the estate taxes for Mr. McMorris' estate. The increase in value of the NW stock also increased decedent's basis in the NW stock, thereby eliminating the income attributable to the redemptions of the NW stock.
[9] A protective claim for refund relating to the fiduciary income tax return of Mr. McMorris' estate for the fiscal year ended March 31, 1991, had been filed on September 12, 1994. On or about January 30, 1996, an amended fiduciary income tax return was filed. On January 30, 1996, an amended 1991 Federal income tax return was filed for decedent, claiming a refund of $ 3,332,443. In settling the case of
[10] Based on the above-described adjustments in
[11] Respondent's amended answer requests an increased deficiency in estate tax based on a reduction of the amounts claimed as debts of decedent for 1991 Federal and Colorado income taxes.
DISCUSSION
[12]
1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="7" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*97 The amounts that may be deducted as claims against a decedent's
estate are such only as represent personal obligations of the
decedent existing at the time of his death, whether or not then
matured, and interest thereon which had accrued at the time of
death. * * * Only claims enforceable against the decedent's
estate may be deducted. * * * [Sec. 20.2053-4, Estate Tax Regs.]
[13] Unpaid income taxes, whether or not determined as of the date of death, are deductible if they are on income properly includable in an income tax return of the decedent for a period before his or her death. See
DEDUCTION FOR FEDERAL INCOME TAX LIABILITY
[14] Respondent's position is that the estate tax deduction for petitioner's 1991 Federal income tax liability should be limited to the amount ultimately determined to be due. Petitioner's position is that the reported income tax liability, except as modified by respondent's determination in the 1994 notice of deficiency, should be allowed in full, unreduced by the refund approved in 1997. The decision in this case1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="8" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*98 turns on whether we should consider the postdeath adjustment in petitioner's income tax liability due to the change in valuation of the NW stock.
[15] The Supreme Court in
[16] We have held that a claim that is valid and enforceable at the date of a decedent's death must remain1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="9" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*99 enforceable in order for the estate to deduct the claim. Technical claims that disappear in the light of subsequent circumstances should not be allowed. Thus, postdeath events must be taken into consideration in determining the enforceability of a claim that a creditor fails to make and preserve within the time allowed by local law. See
[17] Petitioner argues that the income tax liability that was timely paid was a valid and enforceable claim on the date of decedent's death, and, therefore, postdeath events are not to be considered. Petitioner cites
[18] Petitioner also cites
[19] This case is unlike
[20] In the instant case, petitioner filed an amended Federal income tax return requesting a refund. The request stemmed from the agreement of the parties as to the increased value of the NW stock included in Mr. McMorris' estate, which value became the basis of the NW stock redeemed from decedent. Because the amount of income tax was challenged in that fashion, it is appropriate that we consider postdeath events when determining the deduction for estate tax purposes.
[21] Respondent has approved petitioner's refund request. That portion of the Federal income tax liability that is to be refunded is no longer a valid and enforceable claim against the estate. Accordingly, we hold that the amount of the deduction for petitioner's Federal income tax liability is reduced by the amount of the refund. Cf.
DEDUCTION FOR COLORADO INCOME TAX LIABILITY
[22] An individual's liability for Colorado income tax is based on Federal taxable income with certain adjustments. See
[23] The same analysis and result apply to the Colorado income tax claim as apply to the Federal tax liability. Colorado statutes provide for assessment of deficiencies and for claims for refunds. Where either the Federal or Colorado income tax return is challenged, the Colorado income tax may be subject to change. See
[24] Under the applicable period of limitations, a refund of Colorado income tax is available or would have been available to petitioner after the correct Federal tax liability was determined. As of December 16, 1997, the closing of the record in this case, petitioner had not filed a protective claim with the State of Colorado or an amended Colorado income tax return.
the taxpayer must file any claim for refund or credit for any
year not later than one year after the expiration of the time
provided for filing a claim for refund of federal income tax,
including any extensions of the period1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="15" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*105 by agreement between the
taxpayer and the federal taxing authorities; but nothing in this
subsection (1) shall be construed to shorten the period for
filing claims provided by
[25] The claim for refund of Federal income tax must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. See
[26] Petitioner filed1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="16" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*106 decedent's original 1991 Federal income tax return and her Colorado return on or before April 15, 1992. The taxes were paid with the returns. Although the parties' arguments focus on the period of assessing a deficiency, the record contains no evidence of agreements or other actions that would have extended the period of assessment. The period for filing a refund claim for Federal income tax and that for assessing a deficiency in Federal income tax both expire 3 years after the date decedent's Federal income tax return was filed. Thus, the period in which a claim for refund of decedent's Colorado income taxes could have been filed ran at least until April 15, 1996, 1 year later. So far as the record reflects, only petitioner's failure to file a claim for refund of Colorado taxes prevented or prevents receipt of the refund. (Moreover, it is not clear that the refund of Colorado taxes will never be paid or credited to petitioner.)
[27] Petitioner filed the amended Federal income tax return on January 30, 1996, once the parties in Estate of Donn D. McMorris v. Commissioner, docket No. 5952-94, had reached the basis of settlement. At that time, the period in which to file a claim for 1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="17" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*107 refund of Colorado income taxes was still open. We recognize that, in spite of the settlement agreement, respondent did not approve petitioner's refund request until late in 1997. However, nothing in the Colorado tax statutes prevented petitioner from filing a claim for refund of Colorado income taxes in advance of that approval. Indeed, had petitioner filed such a refund claim, petitioner would have preserved the right to sue for a refund pursuant to
No suit for refund may be commenced before the expiration of six
months after the date of filing the claim for refund required
under this section unless the executive director of the
department of revenue renders a decision thereon within that
time, nor after the expiration of two years after the date of
mailing * * * of a notice of disallowance of the part of the
claim to which the suit relates. * * *
Thus, under the Colorado statutes of limitations, petitioner could have filed a timely claim for refund of that portion of Colorado income tax related to the reduction in Federal taxable income. The calculation of Colorado1999 Tax Ct. Memo LEXIS 91" label="1999 Tax Ct. Memo LEXIS 91" no-link"="" number="18" pagescheme="<span class=">1999 Tax Ct. Memo LEXIS 91">*108 income tax is dependent upon the amount of Federal taxable income, and decedent's Colorado income tax would be reduced proportionately. Petitioner's unexplained failure to seek a refund of Colorado income tax does not prevent the correct determination of the amount of the claim. We hold that the deduction for decedent's Colorado income tax liability should be reduced to reflect the amount of Colorado income tax calculated using the decreased Federal taxable income.
[28] To reflect petitioner's concessions, the above holdings, and additional administrative expenses,
[29] Decision will be entered under Rule 155.