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Pending Federal Income Tax Refunds Are Includible in Gross Estate.

(Parker Tax Publishing December 15, 2015)

A decedent had property interests in the values of his 2011 and 2012 federal income tax refunds that remained unpaid at the time of his death. Consequently, the refunds are includible in the decedent's gross estate for federal estate tax purposes. Est. of Badgett, Jr. v. Comm'r, T.C. Memo. 2015-226.


Russell Badgett, Jr. died on March 8, 2012. The decedent's 2011 Form 1040 was filed a couple months later and reflected total tax of $495,096, total payments of $924,411, and an overpayment of $429,315. The return further reflected that $25,000 of the overpayment was to be applied to the decedent's 2012 estimated tax and $404,315 was to be refunded. The IRS applied the $25,000 estimated tax payment to the decedent's 2012 federal income tax on April 15, 2012, and refunded the rest on May 28, 2012.

On December 13, 2012, the estate filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The decedent's 2011 federal income tax refund was not included in the value of the gross estate. The decedent's 2012 Form 1040 was filed on April 15, 2013. It reflected a total tax of $10,874, total payments of $25,000, and an overpayment of $14,126. A month later, the IRS issued a refund of $14,126 to the estate. The $14,126 refund for 2012 was not included in the value of decedent's gross estate as reflected on the Form 706.

Code Sec. 2031(a) provides that the value of a decedent's gross estate is generally determined by including the value of all of the decedent's property, real or personal, tangible or intangible, wherever situated, as of the date of death. Code Sec. 2033 provides that the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death.

The IRS assessed a deficiency in the estate tax as a result of the estate not including the amounts of the 2011 and 2012 federal income tax refunds in the value of the decedent's gross estate. The estate argued that, under Kentucky law, property must be in existence on the tax assessment date to be subject to tax and cannot be a mere possibility or expectancy. While the estate acknowledged that the decedent overpaid his 2011 and 2012 income tax, it contended that an "overpayment" does not create a right to an income tax refund. According to the estate, there was no property interest until the refund was declared by the government and even if the decedent had an expectancy to receive the income tax refunds, Kentucky law provides that a mere expectancy is not the same as an interest in property.


The Tax Court held that the decedent's federal tax refunds were includible in his gross estate. The court examined several cases involving tax refunds and their inclusion or exclusion in a decedent's gross estate. The court noted that in Est. of Bender v. Comm'r, 827 F.2d 884 (3d Cir. 1987), the decedent had unpaid federal tax liabilities for some years and tax overpayments in other years. The Third Circuit concluded that the decedent did not have a property interest in the tax overpayments for purposes of calculating his gross estate. According to the court, the IRS's discretionary power to offset the decedent's tax overpayments against his unpaid liabilities meant that the estate could not compel the IRS to issue a tax refund for the years for which the decedent overpaid his taxes; therefore, the tax overpayments never attained the status of independent assets for estate tax purposes.

However, the Tax Court noted, a different conclusion was reached in Est. of Chisolm v. Comm'r, 26 T.C. 253 (1956), a case where a deceased taxpayer had no tax liabilities to which a tax overpayment could be offset. In that case, the Tax Court concluded that the full value of the deceased taxpayer's viable but unasserted income tax refund claim was an asset of his estate. The Tax Court noted that, if no offsetting liability exists, Code Sec. 6402(a) is clear: The IRS must refund any balance to the taxpayer.

In the instant case, the court said, the decedent was not subject to any liability or obligation against which the IRS could offset his overpayments. Thus, the status of the decedent's tax refund was more than a mere expectancy; the estate had the right to compel the IRS to issue a refund for the years for which decedent overpaid his tax. As a result, the Tax Court concluded that the overpayments in question attained the status of independent assets for estate tax purposes and they constituted property of the decedent for estate tax purposes.

For a discussion of items includible in a decedent's gross estate, see Parker Tax ¶224,510. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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