Tax Type
Estate Tax
Description
Refund request
Topic
Returns/Payments/Records
Date Issued
03-18-1994
March 18, 1994
Re: §58.1-1821 Application; Estate Tax
Dear***********
This will reply to your letters of April 2 and December 7, 1993, in which you protest the department's denial of a refund of Virginia estate tax on behalf of the***********(the "Taxpayer"). I have treated your letters as an application for correction of estate taxes, filed in accordance with Va. Code §58.1-1821.
FACTS
The Taxpayer, an estate, elected under §6166 of the Internal Revenue Code (I.R.C.) to pay the federal estate tax applicable to an interest in a closely held business in installments, over a ten year period. After each federal installment payment, the Internal Revenue Service (IRS) calculates interest accrued on the outstanding balance of unpaid tax. Because I.R.C. §6503(d) suspends the federal statute of limitations for assessing the estate tax where an I.R.C. §6166 election has been made, each accrual of interest results in a decrease in the federal gross estate. Each decrease in the gross estate reduces the federal estate tax due. The decreases in the federal estate tax are treated by the IRS as reductions in the remaining future installments of unpaid tax; refunds are generally not issued. The Taxpayer's installment payments are due in October of each year.
On March 31, 1992 the IRS notified the Taxpayer that its gross estate and federal estate tax had been decreased as a result of the installment payment made on October 19, 1991. On October 2, 1992 the Taxpayer applied to the department for a refund based on such federal change. The department denied the refund, citing the statute of limitations.
DETERMINATION
Virginia's estate tax is based on the credit allowed against the federal estate tax for state death taxes. Accordingly, a change in the federal estate tax generally changes the amount of Virginia estate tax owed.
Chapter 9 of Title 58.1 of the Code of Virginia is silent with respect to refunds of overpaid Virginia estate tax. However, VR 630-3-906, copy attached, provides that Va. Code §58.1-1823 and the regulations thereunder govern amended returns for refunds of estate tax.
Va. Code §58.1-1823 provides in pertinent part:
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- "Any person filing a tax return required for any tax administered by the Department of Taxation may file an amended return with the Department (i) within three years from the last day prescribed by law for the timely filing of the return; (ii) within ninety days from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, whichever is later, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such federal change or correction..." (Emphasis added.)
Generally, an estate is required to file a federal estate tax return within nine months of the date of death. The date of death in the instant case was January 19, 1986, and the Virginia estate tax return was filed on September 29, 1987. The I.R.C. §6166 election does not extend the statutory period for filing the federal estate tax return; it extends the period of time during which payment will be made. Therefore, the amended returns in question were filed more than three years after the last day prescribed by law for filing the Virginia return.
Accordingly, the amended return is timely filed only if it was filed within 90 days from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based.
In accordance with IRS Rev. Proc. 81-27, 1981-2 CB, an executor of an estate is permitted to file supplemental information with respect to annual interest installments which decrease the gross estate. The Rev. Proc. specifically provides that "the supplemental Form 706 will not be considered a claim for refund or abatement." No are allowed until such time as all remaining installment payments are made.
The information provided by the Taxpayer indicates the IRS accepted the "revised" federal gross estate as of March 31, 1992. The letter from the IRS indicates:
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- "[T]his letter is evidence that the Federal tax return for the estate has been accepted as filed. This is not a formal closing agreement under section 7121 of the Internal Revenue Code. We will not reopen this case, however, unless Revenue Procedure 85-13 applies."
It is clear that a closing agreement pursuant to I.R.C. §7121 has not been entered into with the IRS as a result of the supplemental information filed with respect to the interest installment payment. Also, because an amended return has not been filed, neither a payment nor a refund of any federal estate tax has occurred. This is an unusual occurrence, in that the IRS has adjusted the amount of tax due without a corresponding payment or refund. The IRS adjusts the tax due and notifies the taxpayer of the adjustment independently of the time at which the statute of limitations closes.
Chapter 700 of the 1990 Acts of the General Assembly amended Va. Code §58.1-905 B to provide that:
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- "If the personal representative has obtained an extension of time for filing the federal estate tax return or paying the federal estate tax or any portion thereof, the filing required by subsection A or payment required by subsection C shall be similarly extended until the end of the time period granted in the federal extension.
The intent of the 1990 amendment was to conform Virginia law to federal law for estates making the election under I.R.C. §6166. Regulations interpreting this legislative change have not yet been promulgated.
In light of the legislative change, and in the absence of regulatory guidance to the contrary, it is unclear that the IRS's letter dated March 31, 1992 constitutes a final determination within the meaning of VR 630-1-1823 B 2, copy attached. Because a final determination has not occurred with respect to the federal change, the amended Virginia return claiming a refund resulting from the federal change (filed on October 2, 1992) was not filed outside the 90 day limitation as defined in VR 630-3-1823. Accordingly, the amended return shall be considered timely filed, and the refund will be allowed.
The department previously ruled in Public Document (P.D.) 90-179 (10/9/90), copy attached, that an estate can only claim a refund of Virginia taxes resulting from a federal election made pursuant to I.R.C. §6166 if such refund claim is made within 90 days of a "final determination." This ruling was made with respect to amended returns filed prior to the effective date of the 1990 legislation. Pending the issuance of revised implementing the 1990 legislation, estates making an election under I.R.C. §6166 shall be allowed to amend their Virginia estate tax returns to account for changes to their federal gross estate which have been accepted by the IRS until 90 days after the date the IRS adjusts the estate with respect to the final installment payment.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6923M
Rulings of the Tax Commissioner