The Tax Court upheld the government’s reduction of a widow’s estate tax credit for tax on prior transfers due to property included in her estate previously transferred from her late husband’s estate. The court held that the limitations of IRC §§ 2013(b) and 2013(c) applied to the credit; that the taxable estate used to compute the limitation could not be reduced by the portion of the taxable estate effectively exempted from tax by the unified credit; and that the estate tax paid to the state of Nevada was not a tax eligible for the credit. In addition, the court held that the estate tax liability of the husband’s estate could not be deducted from the widow’s gross estate, since it was not a debt of that estate.
A decedent’s estate tax liability is based on the decedent’s taxable estate, which is the gross estate minus various deductions, which include a deduction for any debts of the estate and a marital deduction for which a valid qualified terminable interest property (QTIP) election is made. For decedents dying before 2010, the estate’s tentative tax, based on the taxable estate, is reduced by various credits including the unified credit and a credit for federal estate taxes paid by another estate on property included in the decedent’s estate where such property is transferred from the other estate. This credit is limited to the estate tax paid by the other estate, multiplied by a fraction equal to the value of the property transferred from that estate divided by the transferor’s taxable estate, and can be further reduced depending on how much longer than two years the transferor’s death preceded the decedent’s death.
Lucien and Marie Le Caer were married residents of Nevada. Mr. Le Caer died on Jan. 19, 2004, and his estate reported a taxable estate of $1,995,000 and federal and state tax liabilities of $200,190 and $24,810, respectively. Under the terms of a family trust, his estate transferred property including property valued at $1,405,295 that qualified for the QTIP marital deduction. It also included property in which Mrs. Le Caer held a life estate, valued at $495,000, that was designed not to qualify for the QTIP deduction. Mrs. Le Caer died shortly thereafter on March 29, 2004, and her estate reported a tax liability of $1,259,596 after claiming a $225,000 credit for the estate taxes paid by her late husband’s estate. In 2004, both estates filed timely estate tax returns. Near the end of 2004, the estate of Mrs. Le Caer filed an amended return deducting the $225,000 paid by Mr. Le Caer’s estate, as a debt of her estate.
In 2007, the IRS assessed a deficiency against both estates, disallowing the credit for prior transfers and the $225,000 deduction on the amended return (subsequently, the IRS agreed that a credit was allowable but disputed the amount). Later in 2007, Mrs. Le Caer’s estate filed a protective QTIP election for certain property and subsequently petitioned the Tax Court for relief.
The estate argued that the tax credit for prior transfers had no limitations, since the entire tax liability of Mr. Le Caer’s estate was a result of the property valued at $495,000 that was also included in Mrs. Le Caer’s estate, while the rest of his taxable estate was effectively shielded from tax by the unified credit. The court rejected this view, stating neither the Code nor the regulations contained language supporting it.
Mrs. Le Caer’s estate also argued the IRS incorrectly calculated the limitation in two ways. First, it failed to reduce the taxable estate used in the denominator of the calculation by the amount of the taxable estate exempt from tax ($1,500,000) due to the unified credit. The court disagreed, stating section 2013(b) specifically states the taxable estate used for the limitation has the same meaning as elsewhere in estate tax law, which does not allow a taxable estate to be reduced by the equivalent exemption amount. The estate also argued the IRS incorrectly calculated the numerator of the calculation, since the Service had used the present value of Mrs. Le Caer’s life estate rather than $495,000, the entire value of the property. The court agreed with the IRS, since Treas. Reg. § 20.2013-4 specifically requires the use of normal transfer tax valuation methods to compute the numerator, which would include the use of present value techniques to determine the value of the life estate.
Mrs. Le Caer’s estate argued the Nevada estate tax should be included as a tax eligible for the credit since its calculation referred to federal law. The court held that the Code specifically states the only taxes eligible for the credit are federal estate taxes, and the Nevada estate tax is not a federal estate tax.
The court also would not allow Mrs. Le Caer’s estate to deduct the $225,000 tax liability of her husband’s estate as a debt of her estate, since there was no evidence her estate paid that tax. Finally, the court denied her estate the use of a protective QTIP election for certain property because the election was not made at the time of the filing of the original return and therefore was untimely.
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.
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