Tax Type
Estate Tax
Description
Protective claim for refund
Topic
Payment and Refund
Date Issued
06-27-1997
June 27, 1997
Re: Protective Claim: Estate Tax
Dear***********
This will acknowledge receipt of your protective claim for a refund of Virginia estate tax paid on behalf of the Estate of *********(the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The decedent died on October 19, 1991. The Taxpayer was granted an extension to file the federal and Virginia estate returns from July 20, 1992, to January 20, 1993. The Taxpayer also elected, under § 6166 of the Internal Revenue Code (I.R.C.) to defer the payment of federal estate taxes and to make installment payments attributable to the decedent's interests in closely held real estate development businesses. The Virginia estate tax return was filed within the extension period, and extension and deferral tax payments were made by the Taxpayer. Two amended Virginia estate tax returns have already been filed requesting refunds of overpaid estate taxes.
When the sale of parcels of real estate exceeded 50% of the real estate businesses interest, the payment of deferred federal estate tax was accelerated, pursuant the l.R.C. § 6166(g). The Taxpayer was required to pay off the balance of the federal estate tax. On March 9, 1994, the Taxpayer borrowed the funds needed to pay the federal estate tax liability.
I.R.C. § 2053 allows the deduction on the federal estate return for expenses necessary to administer the estate. Additionally, interest on debt incurred to avoid a forced sale of assets is also deductible. The interest amounts, however, cannot be estimated and may only be deducted as accrued. Due to the amount of the indebtedness owed and the uncertain nature of the sale of its real estate, the Estate will not be in the position to pay off all of the indebtedness incurred to pay estate taxes and pecuniary bequests before the expiration of the three-year statute of limitations.
In instances where expenses to administer an estate cannot be paid and deducted within the three-year federal statute of limitations, the federal government allows a protective claim for refund of federal estate tax. Since the IRS allows a protective claim for refund under these circumstances, you are requesting that the department, likewise, allow a protective claim for Virginia estate taxes pursuant to Code of Virginia § 58.1 -1824 in order to preserve all of the Taxpayer's rights to claim a refund of all Virginia estate tax overpaid. Additionally, you request that the protective claim for refund be held in abeyance as to the determination of the exact amount of the refund by the department pending the full repayment of the indebtedness by the Estate and the filing of the Estate's final amended Federal and Virginia Estate Tax Returns.
DETERMINATION
Code of Virginia § 58.1-1824 provided that:
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- Any person who has paid an assessment of taxes administered by the Department of Taxation may preserve his judicial remedies by filing a claim for refund with the Tax Commissioner on forms prescribed by the Department within three years of the date such tax was assessed. Such a taxpayer may, at any time before the end of one year after the date of the Tax Commissioner's decision on such claim, seek redress from the circuit court under § 58.1-1825. The Tax Commissioner may decide such claim on the merits in the manner provided in § 58.1-1822 for appeals under § 58.1-1821, or may, in his discretion, hold such claim without decision pending the conclusion of litigation affecting such claim. The fact that such claim is pending shall not be a bar to any other action under this chapter. (Emphasis added.)
This code section is further interpreted by 23 Virginia Administrative Code (VAC) 10-20-190 A 1, which provides, in part, that:
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- The protective claim must furnish all information specified in subsection C of 23 VAC 10-20-160 and, if appropriate, should show that determination of the facts or law applicable to taxpayer depends upon the outcome of another case pending in the Department or the courts. (Emphasis added.)
As a result, the judicial remedies of a taxpayer may be preserved if a protective claim for refund is filed within three years from the date of the assessment, and the tax must have been paid. The Tax Commissioner may rule on the protective claim based on the information provided or delay a ruling pending the outcome of another case with the department, the courts, or the IRS.
In the instant case, the Taxpayer's refunds are not contingent upon the outcome of a court case, a ruling of the IRS, or a ruling of the department. I must, therefore, deny your protective claim for refunds, which are contingent upon the future filing of amended federal and Virginia returns. The department, however, will honor any refund request that is filed pursuant to Code of Virginia § 58.1-1823, which allows the Taxpayer to file an amended Virginia return within 90 days of the final determination of any change or correction to the federal estate tax liability. Such refund would be allowable even if the federal final determination is made subsequent to the expiration of the three-year statute of limitations period. Upon receipt of such an amended Virginia estate tax return, the department will conduct an examination and issue the appropriate refund.
Please contact **** at ******* if you need additional information.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10004N
Rulings of the Tax Commissioner