Income Tax Refunds Are Included in Decedent’s Estate.

The decedent’ died in early 2012 and shortly thereafter, the estate filed the decedent’s 2011 individual income tax return which showed a tax liability of $495,096 and total tax payments of $924,411 which resulted in an overpayment of $429,315 for 2011.  According to the return, $25,000 was to be applied to the decedent’s estimated 2012 taxes with the balance of $404,315 to be refunded to the decedent’s estate.  On Form 706, the estate did not include the value of the tax refund in the gross estate or the value of the $14,126 individual income tax refund for 2012.  The IRS claimed that the individual income tax refunds should have been included in the gross estate value based on I.R.C. Sec. 2033, and assessed a deficiency of estate tax of $146,454.  The estate claimed that under state (KY) law, the refunds were not in existence as of the date the estate tax was due and was, therefore, only a mere possibility or expectancy and that no property interest existed until the time the IRS determined entitlement to the refund.  The court agreed with the IRS on the basis that I.R.C. Sec. 6402(c) specifies that, absent an offsetting liability, the IRS “shall” refund overpaid taxes to the taxpayer.  As such, the refund was not merely an expectancy but was estate property.  Estate of Badgett v. Comr., T.C. Memo. 2015-226.