The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Kathleen Ford Bay, Esq.
Richards Rodriguez & Skeith LLP, Austin, TX
Barzin Est. v. U.S. 1 involved a refund of over $10,000,000 that was sent to the French executor of a decedent, Mrs. Barzin, who died owning property in France, Switzerland and the United States. There were three co-executors of Mrs. Barzin's estate, two in the United States and one outside the United States, in France. On August 24, 2007, the U.S. executors filed Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes) with the IRS and paid $17,500,000 in taxes. The U.S. executors and French executor then filed separate estate tax returns. The French executor filed first, on February 19, 2008, claiming a refund of approximately $10 million. The U.S. executors filed second, on February 27, 2008, claiming an approximately $5 million refund. The IRS issued a refund check for approximately $10 million and sent it to the French executor, who negotiated it (and though the opinion does not say, one can only assume that the French executor did not share the proceeds with the U.S. executors).
On February 20, 2009, the U.S. executors filed a complaint against the United States in the U.S. Court of Federal Claims alleging that the check had been wrongly issued to the French executor and requesting that the IRS issue a replacement check. In response, the U.S. government argued that the executors "had failed to identify any statutory basis to award a replacement for a check that was issued to and deposited on behalf of Barzin's estate."2 The U.S. executors argued "that jurisdiction exists under the general claim submission statute, 31 U.S.C. §3702, and the Check Forgery Insurance Fund statute, 31 U.S.C. §3343, and also because the claim is based on the alleged breach of an implied-in-fact contract." To bolster their position, they argued that "the IRS collected money to pay the estate taxes and `had no right to send the money to an adverse party without … [their] approval.'"
In the 2010 opinion, the court held that 31 USC §3702 is not a "money-mandating statute" and so cannot confer jurisdiction for any substantive right enforceable against the United States for money.3 The Tucker Act provides that the U.S. Court of Federal Claims has jurisdiction over claims against the United States founded upon the Constitution, any Act of Congress, any regulation of an executive department, upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.4 There must be "substantive law" that can be interpreted as mandating compensation by the United States for the damages sustained. The burden of establishing jurisdiction is on the executors.5 Section 3702 of 31 USC does not provide an independent cause of action; it is a general claim submission statute and only establishes procedure and authority for settling claims.
The executors tried during the proceedings to invoke 31 USC §3343, the Check Insurance Forgery Fund statute, but they did not do so in the original claim. In its 2010 opinion, the court held that, even if it allowed the executors to amend their complaint, they:could not plausibly allege all of the necessary elements … [being] (1) the check is lost or stolen without the fault of the payee or a holder that is a special endorsee and whose endorsement is necessary for further negotiation, (2) the check is negotiated and paid by the Treasurer on a forged endorsement … and (3) the payee or special endorsee has not participated directly or indirectly in the proceeds of such negotiation or payment.
The executors also tried during the proceedings to introduce a breach of implied-in-fact contract theory; again that theory was not pled in the initial complaint. The court, however, in the 2010 opinion, noted that an implied-in-fact contract would not confer jurisdiction because only non-taxpayers may make such a claim. In Kirkendall v. U.S.,6 the IRS had wrongfully acquired the property of one taxpayer to pay the tax liability of another. As the plaintiff there could not file a refund claim because the IRS had not assessed taxes against him and he had not paid any taxes, he was allowed to seek recovery under the implied-in-fact contract theory. Because the U.S. executors, in Barzinwere taxpayers, the implied-in-fact contract theory was not available to them.
In the 2010 opinion, the court granted the U.S. government's motion for partial judgment on the pleadings and dismissed the claim for a replacement check, noting that the U.S. executors' relief was in seeking a refund. In the January 10, 2012 decision, the U.S. Court of Federal Claims dismissed the executors' entire suit because the court lost subject-matter jurisdictiion over the refund claim (the only claim remaining) when they (alone with the French executor) filed suit in the U.S. Tax Court challenging the IRS's notice of deficiency.7
Query: If the U.S. executors seek a refund from the IRS, will they succeed? Because the IRS has already paid the refund and takes the position it did so properly, it is doubtful that the IRS will allow a refund.
Per the instructions to IRS Form 706 "all listed executors are responsible for the return. However, it is sufficient for only one of the co-executors to sign the return … [I]f they are unable to join in making one complete return, each is required to file a return disclosing all the information the person has about the estate." The instructions also provide that all executors are responsible for the return as filed and liable for penalties for erroneous or false returns.8
To the extent an executor has possession of the estate's property, that executor is personally liable to the IRS if he or she distributes the property without paying the IRS. Regs. §20.2002-1 provides:Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid … [T]he word `debt' includes a beneficiary's distributative share of an estate.
Is there a possibility that, if the refund in Barzinwas overpaid by about $5 million, the U.S. executors are personally liable for that amount to the extent they ever had estate property under their control and distributed it? Will the IRS require them to repay the monies and leave the U.S. executors with only the remedy of suing the French executor? If there are beneficiaries who are injured by the French executor keeping not only the refund, but monies that were erroneously paid by the IRS, are the beneficiaries going to seek to be made whole from the two U.S. executors? It is interesting to consider whether the attorneys may be considered to have represented all three of the executors or just those in the United States. One hopes that the terms of the engagement were stated clearly in writing.
Moral: If you or a client is appointed co-executor with someone he or she does not really know, especially if it is a person outside the United States, consider carefully whether or not to accept that appointment. If accepted, consider what steps can be taken to avoid the types of problems that arose in Barzin. Is it possible to get a bond for the non-resident executor to insure compliance with fiduciary duties? If accepted and it becomes clear that the non-resident executor is not going to cooperate, consider resigning. The same considerations apply to any situation where more than one executor is named, but the international elements of Mrs. Barzin's estate administration added additional interest and complexity.
This commentary also will appear in the March 2012 issue of the Tax Management Estates, Gifts and Trusts Journal. For more information, in the Tax Management Portfolios, see Streng, 800 T.M., Estate Planning, and in Tax Practice Series, see ¶6180, Introduction - The Estate and Gift Taxation System.
1 No. 09-109T (Fed. Cl. 1/10/12).
2 See Barzin Est. v. U.S., 91 Fed. Cl. 682 (2010).
3 See U.S. v. Testan, 434 U.S. 392, 398 (1976), and McNeil v. U.S., 78 Fed. Cl. 211, 228 (2007).
4 28 USC §1491(a)(1).
5 See U.S. v. White Mountain Apache Tribe, 537 U.S. 465, 473 (2003).
6 31 F. Supp. 766, 769 (Ct. Cl. 1940).
7 See §7422(e).
8 See §§2203 and 2004 (regarding the personal liability of executors for estate taxes).
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