Tax Deposits in Estate Litigation
When large taxable estates are involved in litigation, estate tax issues can be tricky. This problem is most pronounced where one outcome of the litigation would result in less estate tax being paid. For example, if an adult child is the beneficiary of the last will, but a charity is the beneficiary of a prior will, and the child and the charity are litigating over which is the valid will, how much estate tax will ultimately be owed is unknown.
If the charity prevails, because bequests to a charity are free of estate tax, the estate owes nothing. If the child prevails, the estate might owe estate tax on the bequest. Estate taxes are due and payable nine months from the date of death, or interest and possibly penalties could apply. Most complex estate litigation would still be pending nine months after death.
If the maximum amount of estate tax is paid to the Internal Revenue Service, the estate may have some difficulty getting the money back if the charity prevails. If the estate pays less than what it would owe if the child prevails, interest and penalties may apply.
In order to stop the possible imposition of interest and penalties, yet still allow for an easy return of funds should the estate not owe the tax, the Internal Revenue Code, Section 6603, allows a taxpayer to submit a deposit. The estate tax return would be filed as if the charity were to prevail, showing no tax owing, with adequate disclosure of the litigation. Simultaneously, the estate would place on deposit with the IRS an amount that would equal the tax were the child to prevail.
Under Revenue Procedure 2005-18, a deposit is automatically returned upon request, normally with interest. A payment is not returned so easily, and the IRS could refuse to make the payment refund or could delay the return of the payment for an extended period of time, complicating the closure of the estate.
