Estate of Shapiro v. C.I.R.
| Decision Date | 09 April 1997 |
| Docket Number | No. 876,D,876 |
| Citation | 111 F.3d 1010 |
| Parties | -2152, 97-1 USTC P 60,267 ESTATE OF Benjamin SHAPIRO, Deceased, Saul A. Shapiro, Executor, and Stephen Shapiro, Executor, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 96-4009. |
| Court | U.S. Court of Appeals — Second Circuit |
Myron S. Schulman, Scarsdale, NY (Bernard S. Mark, Richard S. Kestenbaum, Kestenbaum & Mark, Great Neck, NY, of counsel), for Petitioners-Appellants.
David English Carmack, Tax Division, United States Department of Justice, Washington, DC (Loretta C. Argrett, Assistant Attorney General, Pamela C. Berry, Tax Division, of counsel), for Respondent-Appellee.
Before: JACOBS, CALABRESI, and LAY, * Circuit Judges.
In Estate of Bell v. Commissioner, 928 F.2d 901, 903-04 (9th Cir.1991), the Ninth Circuit held that if a taxpayer, who has elected to defer estate tax liability pursuant to I.R.C. § 6166, overpays an installment of that tax, the amount of the overpayment will be credited against future installments rather than refunded to the taxpayer. Relying on Estate of Bell, the Tax Court in the case before us refused the taxpayer's request for a refund of its alleged overpayments. It is possible that the Tax Court placed more weight on Estate of Bell than that decision can safely bear. Nonetheless, since we find that the taxpayer did not, in fact, overpay its
installments, we affirm the Tax Court's decision without reaching the issue.
Benjamin Shapiro (the decedent) died testate on July 2, 1986. His estate, the petitioner-appellant in this case ("the Estate"), filed a tax return reporting the total amount of estate tax owed as $1,197,127.
Normally, estate tax payments are due within nine months of the decedent's death. See I.R.C. §§ 6075(a), 6151(a). Where the value of a decedent's interest in a closely-held business exceeds 35% of the decedent's adjusted gross estate, however, the estate may, pursuant to I.R.C. § 6166(a), elect to defer payment of the federal estate tax attributable to the value of that interest. 1 Section 6166 allows the estate to pay the portion of the estate tax attributable to the interest in the closely-held business in up to ten equal installments beginning five years after the tax would otherwise be owed. A taxpayer electing to defer estate taxes pursuant to § 6166 must nonetheless make annual payments of interest on the unpaid portion of the federal estate tax liability during the deferral period. I.R.C. § 6166(f). When the taxpayer fails to make such interest or installment payments, the Internal Revenue Service (the "IRS") may demand payment of the full unpaid portion of the deferred estate tax liability. I.R.C. § 6166(g)(3).
Since Shapiro's interest in his closely-held business, Benjamin Shapiro Realty Co., represented 95% of the adjusted gross estate, the Estate elected to take advantage of the deferral provisions of § 6166 and to pay the vast majority of its estate tax liability in 10 annual installments beginning on April 2, 1992.
In arriving at a total tax liability of $1,197,127, the Estate claimed a credit of $460,751 under I.R.C. § 2013. That section allows a credit for the federal estate tax that was paid with respect to the prior transfer of property to the decedent from a person who died in the ten years before the decedent's death. 2 In this case, the credit sought was based on the estate tax paid on the transfer of a trust interest to Shapiro from his wife upon her death. In September 1990, the IRS issued a statutory notice of deficiency in the amount of $208,540.56. This deficiency was attributable to the IRS's partial disallowance of the § 2013 credit. The Estate brought an action in the Tax Court to determine whether that disallowance was proper. On October 20, 1993, the Tax Court found for the Estate, ruling that it had properly calculated the § 2013 credit. See Estate of Shapiro v. Commissioner, 66 T.C.M. (CCH) 1067, 1993 WL 415532 (1993).
In the meantime, however, the IRS had been demanding interest payments and, later, installment payments on the deferred estate tax. The Estate made these payments, but in amounts less than the IRS had sought. The Estate arrived at these lower amounts on the following theory.
Pursuant to I.R.C. § 2053(a)(2), annual interest payments owing as a result of a § 6166 election are allowed as an "administration expense" deduction against the decedent's federal estate tax liability. See Rev. Rul. 78-125, 1978-1 C.B. 292; Estate of Bahr v. Commissioner, 68 T.C. 74, 1977 WL 3655 (1977), acq. 1978-1 C.B. 1. Since, however, it is not possible to ascertain the amount of the annual interest expenses until these "administration expenses" actually accrue, no deduction is allowed for as yet unaccrued interest expenses. See Estate of Bailly v. Commissioner, 81 T.C. 246, 252, 1983 WL 14862, modified, 81 T.C. 949, 1983 WL 14903 (1983). Accordingly, these deductions, which are not reflected in the estate's original tax return, are not taken into account by the IRS in calculating the size of the annual interest payments and installment payments that will come due each year under the § 6166 election. Relying on Revenue Procedure 81-27 Refusing to accept the Estate's supplemental tax returns, which took into account deductions for these accrued interest expenses, the IRS assessed penalties and interest on the difference between the amounts it demanded and the amounts it actually received. The Estate continued to make payments in accordance with the amounts that it believed it owed, and refused to pay those penalties or that additional interest.
1981-2 C.B. 547, 3 the Estate believed that it was allowed to recompute the amount of its estate tax liability, and hence of its annual payments, to reflect the § 2053(a)(2) administrative expenses as these deductions accrued. It did so unilaterally, and, as a result, paid the IRS less than the amounts billed.
Finally, on January 22, 1993, the IRS informed the Estate that it was planning to file notice of a Federal tax lien to seize the unpaid amounts. When the Estate's motion to restrain the IRS's tax collection was denied by the Tax Court, the Estate gave in and paid in full the amount that the IRS claimed it owed, including all past due amounts, plus penalties and interest thereon.
Later that year, however, when the Tax Court rendered its decision on the § 2013 credit issue, it became clear that the Estate had already paid to the IRS more than its total federal estate tax liability. The Tax Court therefore ordered the parties to submit Rule 155 computations to determine how much money the Estate had overpaid the IRS. 4 Both parties agreed that there had been a payment of $225,118.50 in excess of the Estate's final total tax liability, and the IRS refunded that amount to the Estate.
But the Estate also requested in its Rule 155 computation that the IRS return to it an additional $478,840.07, the sum that it claims represents taxes that would ultimately be payable, but that it had paid prematurely as a result of the IRS's failure to allow it to recalculate what it owed as it made interest payments, and hence accrued administrative expense deductions under § 2053(a)(2). 5 According to the Estate, if the IRS had not improperly refused to allow it to take these deductions as it went along, the Estate would not yet have paid the $478,840.07. The Estate therefore demanded that the IRS return that money (with interest) and allow the Estate to pay it later in annual installments, pursuant to its § 6166 election.
On October 31, 1995, the Tax Court rejected the Estate's request:
Petitioner's argument that the Court should order respondent to return the estate tax that petitioner characterizes as having been prematurely paid is in direct conflict with this Court's holding in Estate of Bell v. Commissioner, 92 T.C. 714, 1989 WL 28331 (1989), aff'd, 928 F.2d 901 (9th Cir.1991). In short, Estate of Bell stands for the proposition that, consistent with the plain language of [I.R.C. § ] 6403, an overpayment of an estate tax installment payment under section 6166(a) shall be credited against any unpaid installments. In the instant case, respondent credited all of petitioner's overpayments to unpaid estate tax installments leaving an overpayment of $225,118.50. We find Estate of Bell to be controlling under the circumstances presented, and, therefore, we reject petitioner's proposed decision.
This appeal followed.
Since the questions presented in this case are ones of law, our review is de novo. See, e.g., E. Norman Peterson Marital Trust v. Commissioner, 78 F.3d 795, 797 (2d Cir.1996) ().
This case poses two distinct questions. The first is whether the Estate is correct that it should have been permitted to recalculate its estate tax liability, and thus reduce its periodic payments, to take into account the interest deductions provided for in § 2053(a)(2) as the interest accrued. The second is whether, if the Estate was improperly denied its right to do this, its "overpayments" should now be returned to it, with interest, so that it may repay them over time pursuant to § 6166. Because the Tax Court found against the Estate on the second question, it did not reach the first one. We believe that the second issue may be more complicated than the Tax Court implied. Nonetheless, because we find against the Estate on the first issue, we affirm the Tax Court's decision.
We begin with the second issue.
Under I.R.C. § 6402, a taxpayer that overpays a federal tax liability may obtain a credit against any other federal tax liability or a refund of the overpayment through the filing of an administrative claim. However, I.R.C. § 6403 qualifies that provision by providing:
In the case of a tax payable in installments, if the...
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