Page 50 - TaxAdviser_Jan_Apr23_Neat

TAX TRENDS
Author:
James A. Beavers, CPA, CGMA,
J.D., LL.M.
A taxpayer is
not entitled to a
refund under the
claim-of-right
doctrine, mitigation
provisions, or
doctrine of equitable
recoupment; the
statute of limitation
was tolled from the
time of an appellate
decision until the
Supreme Court
denied a petition for
a writ of certiorari.
48 January 2023
Analysis of and reflections on
recent cases and rulings
by the estate resulted in flowthrough
Gross Income income for the trust. The trust reported
this income on its returns.
Taxpayer’s argument for In June 2010, O’Neill’s estate timely
$1.5 million refund fails filed a Form 706, United States Estate
on several grounds (and Generation-Skipping Transfer) Tax
A taxpayer was not entitled to a $1.5 Return. The IRS audited the return
million refund under a Sec. 1341 claim and proposed adjustments to it. The
of right, the mitigation provisions of estate objected to the IRS’s proposed
Secs. 1311 through 1314, or the doctrine adjustments and challenged them in
of equitable recoupment. Tax Court.
While the case was pending, the
Background parties reached a settlement in their
Richard O’Neill, a prominent landowner dispute, and the Tax Court entered a
in Orange County, Calif., and political stipulated decision in the case. As part
of this decision, the court adjusted the
activist, established the revocable Rich-
ard J. O’Neill Trust in 1968. The trust value of the estate’s interest in RMV
became irrevocable upon O’Neill’s death from $30,725,000 to $40,614,822 under
on April 4, 2009. At the time of his Sec. 2036 and reduced the estate’s inter-
est deduction for the Graegin loan from
death, the trust held a majority owner-
ship interest in RMV Total Diversifica- 9% to 6%. Subsequent to the decision,
tion LLC (RMV), which was treated for the parties rewrote the loan note, which
tax purposes as a partnership and subject
resulted in a $500,538 reduction of ac-
to the Tax Equity and Fiscal Responsi- crued interest to the trust for 2010.
In October 2015, the trust timely
bility Act of 1982 (TEFRA). filed a Form 1045, Application for Tenta-
RMV sold capital gain assets during
2009 and 2010, resulting in flowthrough tive Refund, on which the trust made a
income to the trust, which the trust tentative claim for refund for the 2014
reported on its Forms 1041, U.S. Income tax year under a claim-of-right theory.
The tentative claim for refund was
Tax Return for Estates and Trusts, for
2009 and 2010. to recover an overpayment of income
O’Neill’s estate borrowed money tax by the trust for the 2009 and 2010
from RMV through what is commonly tax years. PHOTO BY ARCHEOPHOTO/ISTOCK
called a Graegin loan (see Estate of The IRS issued the trust a refund of
Graegin, T.C. Memo. 1988-477). RMV $1.5 million in response to the trust’s
charged the estate 9% interest on the Form 1045. On reflection, the Service
loan note, and the interest paid to RMV determined that the trust did not have
The Tax Adviser