Suggested Procedure for Filing and Perfecting Protective Claims Under Treasury Regulations §20.2053-1

IRC §2053(a)(3) states, in relevant part, that, “[f]or purposes of [the federal estate tax], the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts … for claims against the estate … as are allowable by the laws of the jurisdiction … under which the estate is being administered.”[i]  IRC §2053(a)(3) is silent as to whether post-death events should be considered for purposes of determining the validity and/or value of claims against an estate, and the prior Treasury Regulations (last amended in 1958) offered somewhat conflicting guidance.

Over the years, two lines of case law developed with respect to the analysis of whether post-death events should be considered in determining the validity and/or value of claims under §2053.  One line of cases, following Jacobs v. Commissioner, concluded that post-death events are relevant and only amounts actually paid are deductible.  The other, more widely accepted line, follows Ithaca Trust Co. v. U.S., and concludes that post-death events are irrelevant and deductions under IRC §2053 should be based on the value of the pertinent claims at the date of death, rather than on amounts actually paid before the estate tax return (or a claim for refund with respect thereto) is filed.

On the premise that a split in authority among the various United States Circuit Courts of Appeal caused problems regarding consistency in deductions for claims involving post-death events, the IRS issued proposed regulations, followed by final regulations, which amended the existing regulations under IRC §2053.  The new regulations require actual payment prior to any deduction on the estate tax return for a claim against the estate.  The new regulations limit the availability of any deduction to amounts actually paid by the estate.  In essence, the regulations state that deduction is equal to the amount actually paid to settle the claim.

Since many such claims (e.g., litigation claims, environmental liability, etc.) remain pending prior to the statute of limitations for filing a refund request, the executor of an estate will now need to file a protective claim for a refund to preserve the estate’s right to claim a deduction under IRC §2053(a).  This filing will preserve the claim even if the statute of limitations has otherwise expired.  In this protective claim the executor will need to outline the reasons and circumstances why actual payment has not been made, i.e. why the claim is not ripe for settlement and remains contingent.  The IRS will then act on the claim and issue a refund only after the executor has notified the IRS that the claim has been paid and any and all contingencies have been resolved.

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