The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...
By Trisha J. English, Esq.
Winstead PC , Houston, TX
In Estate of Adell v. Commissioner , T.C. Memo 2014-89, the Tax Court reiterated the rule that when a tax is payable in installments, an overpayment of an installment must first be applied to any unpaid installments before it may be credited against another tax liability.
In Adell , a few months prior to his death, the decedent paid a $6.67 million legal judgment entered against decedent's son. An estate tax return was filed timely and reported the amount of the judgment as a loan receivable by the estate and thus an asset of the gross estate. The estate also owned three closely held businesses. The estate tax return reported $15.3 million total estate tax due, and made an election under §6161 to defer payment of a portion of the estate tax for five years and to pay the tax in installments. The estate paid the $8.1 million portion of the estate tax that could not be deferred, leaving $7.2 million to be paid in installments.
One year later, the estate filed an amended estate tax return in which the judgment was reclassified as a taxable gift. The estate also filed a gift tax return reporting the judgment as a taxable gift and $2.89 million of gift tax due. Incidentally, the estate tax return was amended one additional time to amend the value of one of the business interests owned by the estate. The IRS responded by assessing (in addition to the $2.89 million in gift tax) a late-filing penalty in the amount of $650,000, a late-payment penalty in the amount of $607,000, and interest in the amount of $743,000.
The estate's reporting and the IRS's assessment of the gift tax created a situation where the judgment was included in both the estate tax assessment and the gift tax assessment. The parties eventually stipulated that the judgment was indeed a taxable gift, rather than an asset of the estate. The estate then argued that the $8.1 million payment that the estate initially made should be applied against the gift tax liability. The IRS denied this request.
The estate's first argument was that it is allowed to designate its $8.1 million payment of tax towards the estate's gift tax liability rather than estate tax liability. The court noted that a taxpayer is allowed to designate the application of a voluntary tax payment if (1) the IRS has assessed one or more tax liabilities against the taxpayer when he or she submits the payment, and (2) the taxpayer provides specific, contemporaneous written directions for application of the payment. SeeAmos v. Commissioner , 47 T.C. 65, 69 (1966); see also Rev. Proc. 2002-26, 2002-1 C.B. 746. Here the estate remitted the $8.1 million payment with the estate tax return, which was one year prior to the estate filing a gift tax return, and almost three years prior to the IRS's assessment of gift tax. Thus, the court held that the estate could only designate the $8.1 million payment towards estate tax liability because that was the only assessed tax liability at the time of the payment.
The estate's second argument was that it made an overpayment of estate tax (due to the re-classification of the judgment as a gift rather than an asset of the estate), and that such overpayment should have been credited against the gift tax liability. The court acknowledged the general rule that the IRS is authorized to credit a taxpayer's overpayment against any internal revenue tax liability of the taxpayer. However, for a tax that is payable in installments, any overpayment of an installment must be applied first to any unpaid installments, and only if the overpayment exceeds the full amount of the tax due may the overpayment be credited or refunded. §6403; see alsoEstate of Bell v. Commissioner , 92 T.C. 714, 724 (1989), aff'd , 928 F.2d 901 (9th Cir. 1991).
Here, even though the estate made an overpayment of estate tax, the overpayment did not exceed the estate's total estate tax liability. Thus, any overpayment would first be credited against the deferred estate tax liability rather than the gift tax liability.
For these reasons, the court upheld the IRS's notice of determination to proceed with the collection of gift tax.
Note: This is one of three cases involving this estate. Previously, the court upheld the IRS's termination of the estate's §6166 election after the estate failed to pay the installments as they came due. There is also a case pending regarding the calculation of the adjusted gross estate (specifically the value of one of the estate's closely held businesses), and the calculation of the estate tax.
For more information, in the Tax Management Portfolios, see Bekerman, 832 T.M. , Estate Tax Payments and Liabilities: Sections 6161 and 6166, Peebles, 844 T.M. , Estate Tax Credits and Computations, and in Tax Practice Series, see ¶6300, Credits, Deferred Tax Payments, and Tax Liabilities, ¶3840, Interest on Underpayments and Overpayments.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)