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LITIGATION INVOLVING FEDERAL ESTATE AND GIFT TAXES

Litigation involving federal estate and gift taxes requires knowledge of the detailed procedural statutes set forth in the Internal Revenue Code of 1986, as amended, as well as the applicable court rules. Civil tax litigation involving federal estate and gift taxes may be heard in one of three forums: the United States Tax Court (the "Tax Court"), the United States Court of Federal Claims, or the United States district courts.

The Tax Court is the only forum which solely hears tax cases and which does not require payment of the tax as a prerequisite to filing suit. The Tax Court’s jurisdiction includes, but is not limited to, income, estate, and gift taxes.

The United States district courts are the general trial courts of the federal judicial system. For purposes of federal taxation, the United States district courts and the United States Court of Federal Claims hear only tax refund suits, regardless of the type of tax at issue.

Although the Tax Court and the United States Court of Federal Claims are located in Washington, D.C., the judges from both courts travel to certain designated cities across the United States to conduct trials.

TAX REFUND SUITS V. DEFICIENCY SUITS

A tax refund suit involves the taxpayer claiming that a refund is owed due to the overpayment of taxes by the taxpayer. In order to properly bring a tax refund suit before the United States district courts or the United States Court of Federal Claims, a taxpayer must take several steps, including making full payment of the tax, filing a proper and timely claim for a refund, waiting six months (or until the claim for refund is rejected by the Internal Revenue Service), and filing a proper and timely complaint in the proper forum.

For federal estate tax purposes, the requirement that the taxpayer make full payment means that the entire federal estate tax due must be paid prior to filing a tax refund suit. However, for gift tax purposes, only payment of the tax assessed with regard to the single year at issue is required (even though the amount of gift tax due may have been determined from the lifetime gifting history of the taxpayer).

A taxpayer may bring a claim in the Tax Court for review of a tax deficiency asserted by the Internal Revenue Service against the taxpayer once the Internal Revenue Service has issued notification regarding such deficiency to the taxpayer. The notification is referred to as a notice of deficiency if the person liable for the tax is the taxpayer. The notification is referred to as a notice of liability if the person liable for the tax is the successor in interest of an allegedly delinquent taxpayer.

PARTIES FILING SUITS INVOLVING FEDERAL ESTATE AND GIFT TAXES

A suit involving federal estate or gift taxes must be brought by the person against whom the Commissioner of Internal Revenue determined a deficiency, or by a fiduciary entitled to institute a suit on behalf of the person against whom the Commissioner of Internal Revenue determined a deficiency.

With regard to litigation involving the federal estate tax, the personal representative, executor, or administrator of the estate generally files such litigation. If a deficiency notice has been sent to the estate directly, then no further action needs to be taken by the personal representative, executor, or administrator of the estate in order to be a proper party. However, if a notice of deficiency is directed to the deceased taxpayer, then the personal representative, executor, or administrator may petition for suit only if the Commissioner of Internal Revenue has received notice of the fiduciary's status.

ISSUES OFTEN LITIGATED IN CONNECTION WITH THE FEDERAL ESTATE TAX

Issues which are often litigated in connection with the federal estate tax include whether property was properly included in the gross estate and whether deductions were properly taken by the personal representative, executor, or administrator for purposes of determining the taxable estate. In addition to the issue of determining the assets to be included in the gross estate of a decedent, issues may also arise with regard to the value of such assets. Asset values will necessarily impact the total federal estate tax due, which only adds to the difficulty associated with the valuation of assets for which there are subjective factors that must be considered, such as an interest of the decedent in a closely-held business.

The gross estate of a decedent is a broad concept which may include more than just property titled in the individual name of the decedent at the time of death. For example, one-half of the value of real property which the decedent owned jointly with right of survivorship with his or her spouse is includible in the gross estate of the decedent. In addition, the decedent may have attempted to transfer property to his or her heirs and beneficiaries outside of his or her estate by means of a trust, closely-held business, or through lifetime gifting. As an example, if the decedent retained the requisite control over such property, then the property may be included in the gross estate of the decedent at death.

One of the primary deductions available for the federal estate tax is the marital deduction. The marital deduction is available for certain property which is includible in the gross estate of the decedent and which passes to, or for the benefit of, the decedent’s surviving spouse. However, the marital deduction will only be allowed in cases where the taxpayer has strictly complied with the requirements set forth in the Internal Revenue Code of 1986, as amended.

ISSUES OFTEN LITIGATED IN CONNECTION WITH THE FEDERAL GIFT TAX

Issues which are often litigated in connection with the federal gift tax include whether the donor made a complete gift of the property to the donee and whether the gift was properly valued. Whether the donor made a complete gift is generally a question involving whether the donor retained control over the interest gifted. Valuation issues are common for gifts made by donors of interests in closely-held businesses, especially when the donor claims a minority or marketability discount for purposes of such valuation.

© 2011 GANDERSON LAW, P.C.