Settlement did not reopen untimely estate refund claims

Plain-English summary

An estate filed amended income tax returns seeking refunds after settling litigation over an asset's estate-tax value. The refund claims were otherwise untimely, so the estate relied on the mitigation provisions in IRC §§ 1311 through 1314. Chief Counsel advised that the stipulated Tax Court decision was not a qualifying determination because the settlement did not decide the asset's value on the merits or establish that the earlier income-tax treatment was erroneous. Even assuming it was a determination, the decision did not establish a qualifying basis adjustment or erroneous income inclusion under IRC § 1312(7). The IRS therefore should deny the refund claims as untimely.

Ruling snapshot

• Question: Did a stipulated Tax Court decision allow the estate to use the mitigation provisions for otherwise untimely refund claims?
• Outcome: Advice given, deny the claims as untimely
• Key authorities: IRC §§ 1311, 1312(7), 1313, and 1314; Treas. Reg. § 1.1313(a)-1

Full text (IRS public release)

ID:      CCA-01220247-16
UILC:    1313.01-00

Number: 201622032
Release Date: 5/27/2016
From: ----------------------
Sent: Friday, January 22, 2016 2:47 PM
To: --------------------
Cc: ---------------------------
Subject: application of mitigation to refund claim, POSTS-134863-15


UIL code: 1313-01-00

You requested our views regarding the application of the mitigation provisions, sections
1311-1314, to a refund claim being considered by the IRS Examination function. An
estate has submitted amended Forms 1041 that are untimely unless the mitigation
provisions can be properly invoked. As further explained below, we do not believe the
mitigation provisions are properly invoked; therefore, we recommend the claims be
denied as untimely.

Facts:
The value of an asset reported on a Form 706 for estate tax purposes was challenged
and litigated by the IRS. The same valuation listed on the Form 706 was used on
subsequent years’ Forms 1041, income tax returns, for purposes of reporting gain on
transactions involving the asset. The litigation involving the value on the Form 706 was
resolved based on a settlement on the issue of that asset’s value. The litigation then
concluded with a stipulated decision document signed by the parties and entered by the
Tax Court.

Analysis:
In order for the mitigation provisions to apply, the first requirement is that there be a
determination, as defined by IRC section 1313(a). The decision of the Tax Court in the
estate tax (Form 706) case is what the estate is relying on as the determination. While
this may appear to meet the definition of section 1313(a)(1), it is our position that it does
not.

For the mitigation provisions to apply, a determination must involve a substantive
decision on the merits which establishes that the inconsistent position in the closed year
is erroneous. See, e.g., Fruit of the Loom, 72 F.3d 1338 (7th Cir. 1996), affg. T.C.
Memo. 1994-492. Simply because the taxpayers have met the requirements in form
regarding what constitutes a determination does not mean that they have met the
substantive requirements. For example, even though under Treas. Reg. Section
1.1313(a)-1 a decision by the Tax Court or other court is a determination for mitigation
                                             2

purposes, that decision may not have the proper substance to demonstrate that there
was an inconsistent position and that the circumstances of adjustment were described
in section 1312. See, e.g., Fong v. Commissioner, T.C. Memo 1998-181. Additionally,
“general administrative settlement agreements are not regarded as constituting
determinations under section 1313(a).” See, e.g., Fruit of the Loom, supra; Rasmussen
v. United States, 811 F.2d 949 (5th Cir. 1987). A settlement agreement does not
indicate that the parties agreed on the particular value of the asset; instead, it indicates
the parties reached a result both sides felt warranted conclusion of the litigation due to
an acceptable result. Based on our review of the hearing transcript and documents filed
in the case, we do not believe there is a “determination” as defined by section 1313(a).

For purposes of a complete analysis, we will assume the Tax Court decision is a
determination under section 1313(a)(1). If that were the case, then the question would
be whether a circumstance of adjustment in section 1312 applies. Paragraph 7 of
section 1312 requires a determination that determines basis in property, which is what
the estate is arguing the Tax Court decision does (it does reflect an agreement
regarding the value, or basis), the same taxpayer (estate), and that there was an
erroneous inclusion in gross income on the Form 1041 due to the incorrect
valuation. However, because the Tax Court decision is a stipulated decision, neither of
these circumstances is actually shown in the decision. The determination does not
establish the basis, nor does it include in income the amount related to the basis. As
explained in the cases cited regarding the definition of a determination, the estate will
not be able to show a circumstance of adjustment applies.

We note that the requirements of section 1311(b) are satisfied here. That provision
requires in a case such as this one, where the adjustment would be in the taxpayer’s
favor and the circumstance of adjustment is paragraph 7 of section 1312, that the
determination (Tax Court decision) adopt the position of the IRS. That is the case here,
where the issue was raised in the deficiency notice and defended against by the
estate. As the regulations explain, the estate would fail this element only if the IRS did
not propose the adjustment and the estate had instead raised the issue itself in order to
pay the tax to later ask for a refund of the related income tax.

Because the value of the asset was determined through settlement negotiations that did
not result in agreement on the merits, but instead resulted in a general agreement on
the appropriateness of settlement in order to resolve the case, the mitigation provisions
do not apply and the refund claim should be denied as untimely.