Three Steps to File a Protective Claim

Revenue Procedure 2011-48 instructs estates on how to collect federal estate tax refunds

We all know that trust and estate litigation can take years and be very expensive. One issue has been what to do about potential estate tax refunds for these expenses. Until now, the best way for practitioners to address this issue was uncertain, but with the issuance of Revenue Procedure 2011-48, the Internal Revenue Service has given probate attorneys a new item to place on their post-mortem administration checklists: protective claims for federal estate tax refund. Rev. Proc. 2011-48 provides detailed instructions for filing and pursuing protective refund claims. This is good news for taxable estates facing contingent liability or protracted administration. However, the instructions impose numerous additional deadlines for fiduciaries and their advisors to remember and anticipate.

The revenue procedure provides a much needed solution to the problem of trying to preserve a federal estate tax deduction for an estate liability or expense that’s uncertain or unpaid beyond the deadline for filing a claim for refund. However, it involves a multi-step process and requires separate filings for each potential deduction.

The Problem
Internal Revenue Code Section 2053 allows an estate to take a federal estate tax deduction for funeral expenses, administration expenses, claims against the estate, mortgages and certain other debt secured by estate assets. Most expenses and claims are deductible only if they’ve actually been paid at the time they’re claimed as deductions. Therefore, when the estate must tender the federal estate tax nine months after the decedent’s death, it must pay the tax calculated without the benefit of deductions for most expenses and claims that haven’t yet been paid. Later, after additional estate expenses and claims are paid, the estate may recalculate its federal estate tax liability, taking deductions for these additional claims and expenses and then file a claim for refund if it previously overpaid. Under IRC Section 6511, however, a claim for refund must be made within three years after the return was filed or two years after the tax was paid, whichever is later.
These rules created a problem for estates that anticipated paying additional deductible expenses or claims after the filing deadline for refund claims. For example, estates that were engaged in protracted litigation might incur attorneys’ fees and have to make payment on a final judgment well after the filing deadline for refund claims. In the past, the safest way to address the problem seemed to be to file a refund claim in advance of the filing deadline, based on the estate’s best estimate of expenses and claims it would eventually pay, and then ask the IRS not to act on the refund claim until the estate “got back in touch.” It was a dicey process and relied mainly on the trust and patience of the IRS personnel involved.

A Formal Solution
The IRS has now addressed the problem by providing a formal procedure for filing a protective claim for refund of federal estate taxes. This procedure is set forth in Rev. Proc. 2011-48, which was issued on Oct. 14, 2011 and flows from final regulations the IRS issued under IRC Section 2053 on Oct. 20, 2009. The new procedure prescribes forms, imposes requirements about content and creates a number of new deadlines for communicating with the IRS about protective refund claims.
Here’s a summary of the three steps the new procedure requires the estate to take:
Step 1: The estate must file a separate protective claim for refund for each potential estate claim or expense before the IRC Section 6511 filing deadline (described above). The protective claim may be filed on Schedule PC of the federal estate tax return (expected to debut on the 2012 Form 706) or on a separate Form 843 (Claim for Refund and Request for Abatement). Each filing must satisfy numerous requirements regarding content set forth in the revenue procedure, including a written statement, under penalty of perjury, of each ground upon which a refund is claimed; an explanation of why payment of the underlying claim or expense is delayed; reference to other related deductions already taken and other protective claims previously made; and evidence of the claimant’s authority to act on behalf of the estate or the decedent.
Step 2: The estate should make sure that the IRS receives and accepts the protective claim. Initially, the IRS may (but will not always) immediately reject a claim that’s defective in form or substance. Otherwise, the IRS will notify the estate in writing that the protective claim has been received. The revenue procedure advises the estate to contact the IRS if the estate hasn’t received notice of receipt from the IRS within 60 to 180 days (depending on the form of the filing).
Step 3: Within 90 days after the underlying claim or expense is actually paid or the amount at issue becomes certain and no longer subject to contingency (whichever is later), the estate must notify the IRS that it wants a particular claim for refund to be considered and ruled upon. The revenue procedure provides requirements for content similar to those for the initial filing. The refund ultimately arising from each claim will be determined by taking into account the effect of the claim on the marital and charitable deductions.

Administrative Challenge
These procedures and deadlines must be satisfied separately for each underlying claim or expense, so they might pose an administrative challenge to estate fiduciaries and their advisors. But, at least the revenue procedure imposes a measure of certainty on the process. Finally, note that the procedure for making protective refund claims for federal estate taxes doesn’t control the state estate tax reporting and refund procedures.

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