IRS has issued a new revenue procedure providing guidance on the filing and subsequent resolution of a protective claim for an estate tax refund based on a deduction for a claim or expense under Code Sec. 2053 and the regs. Rev Proc 2011-48 is generally effective for protective refund claims filed on behalf of estates of decedents dying on or after Oct. 20, 2009.

Background. Code Sec. 2053(a) allows various deductions in arriving at the taxable estate including administration expenses (Code Sec. 2053(a)(2)) and claims against the estate. (Code Sec. 2053(a)(3))

The amount an estate may deduct for claims against the estate has historically been a highly litigious issue. There is little consistency among the many courts that have addressed the issue of the extent (if any) to which post-death events are to be considered in valuing claims.

Under the final regs issued in 2009, post-death events are taken into account in determining the deductible amount, and deductions generally are limited to amounts actually paid by the estate in settlement or satisfaction of deductible claims and expenses (subject to any applicable limitations in Reg. § 20.2053-1). For amounts that are not paid or otherwise deductible at the time of filing the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Reg. § 20.2053-1(d)(5)(i) permits the filing of a protective refund claim for refund.

A protective claim for refund may be filed at any time before the expiration of the period of limitation in Code Sec. 6511(a) to preserve the estate's right to claim a refund in the case of a claim or expense that might not be paid or might not otherwise meet the requirements of deductibility under Code Sec. 2053 and the regs until after the expiration of the period of limitation for filing a claim for refund. (Reg. § 20.2053-1(d)(5)(i)) A protective claim must identify the outstanding claim or expense that would have been deductible if it already had been paid, and must describe the reasons and contingencies delaying the actual payment of the claim or expense. When the contingencies are resolved, the fiduciary acting on behalf of the estate must notify IRS within a reasonable period (notification requirement).

New guidance. Rev Proc 2011-48 sets forth procedures for filing a Code Sec. 2053 protective claim for refund and notifying IRS that the protective claim is ready for consideration. A taxpayer that follows these procedures will satisfy the procedural requirements for claiming a refund.

The filing requirements are as follows:

•  Protective refund claims must be filed before the expiration of the period of limitation prescribed in Code Sec. 6511(a)—i.e., within the later of three years from the time the return was filed or two years from the time the tax was paid, or if no return was filed by the taxpayer, within two years from the time the tax was paid. (Rev Proc 2011-48, Sec. 4.01)

•  Protective refund claims must identify and describe in detail the claim or expense for which a deduction may be claimed under Code Sec. 2053. (Rev Proc 2011-48, Sec. 4.02)

•  Protective refund claims must be accompanied by certain documentary evidence establishing the legal authority of a fiduciary or other person to file and pursue a protective claim for refund on behalf of the estate of a decedent. (Reg. § 301.6402-2(e)) Simplified procedures are provided for when the protective claim for refund is filed by the same person who filed the Form 706. (Rev Proc 2011-48, Sec. 4.03)

•  Protective refund claims filed for decedents dying on or after Jan. 1, 2012, may be filed using any method described in Rev Proc 2011-48, Sec. 4.04(1)(a) (describing procedures for filing Schedule PC with Form 706) or Rev Proc 2011-48, Sec. 4.04(1)(b) (describing procedures for filing Form 843 where the Form 706 has already been filed). For claims filed for decedents dying after Oct. 19, 2009 and before Jan. 1, 2012, the claims must be filed using the method described in Rev Proc 2011-48, Sec. 4.04(1)(b). A taxpayer who is concerned that a prior filing doesn't satisfy these requirements may replace the initial filing with a second timely filing. (Rev Proc 2011-48, Sec. 4.04(1))

Observation: Schedule PC is first expected to be available for estates of decedents dying in 2012.

•  Protective refund claims may be filed by attaching one or more Schedules PC to the Form 706, or by filing a Form 843 where the Form 706 was previously filed. (Rev Proc 2011-48, Sec. 4.04)

•  A separate protective claim must be filed for each claim or expense, and each outstanding claim or expense must be clearly identified to give IRS adequate notice thereof. However, a claim or expense is deemed to include certain related and ancillary expenses of resolving or satisfying the claim, such as attorneys' fees, and no separate identification is required. (Rev Proc 2011-48, Sec. 4.05(2)) Additionally, when a protective claim involves a contested claim against the estate, IRS must be notified of the contested matter and the estate's potential liability. (Rev Proc 2011-48, Sec. 4.05(3))

•  If the protective claim for refund is based upon the potential deductibility of a claim or expense, then the estate must also disclose the amount of the deduction already claimed on Form 706 and reference the provision under which the deduction was claimed. (Rev Proc 2011-48, Sec. 4.04(3))

Protective refund claims can be initially rejected by IRS for failure to meet one or more of the procedural requirements. However, any such failure can be cured before the later of (i) 45 days after the date of IRS's notice, or (ii) the expiration of the period of limitation in Code Sec. 6511(a). (Rev Proc 2011-48, Sec. 4.06(3)) If the claim is not initially rejected, IRS will acknowledge receipt in written correspondence. If no such acknowledgment is received, the fiduciary or other person filing the claim should contact IRS. The processing and review of the estate's Form 706 generally isn't suspended or delayed by the filing of a protective refund claim. (Rev Proc 2011-48, Sec. 4.06)

The notification requirements for a protective refund claim are as follows:

•  The notification should describe the relevant facts that support, and provide evidence to substantiate, a deduction under Code Sec. 2053, and should claim a refund of the overpayment of tax based on the deduction and resulting recomputation of the estate tax liability. (Rev Proc 2011-48, Sec. 5.01)

•  The fiduciary or other person pursuing the claim should notify IRS within 90 days after the later of (i) the date that the claim or expense is paid, or (ii) the date on which the amount of the claim becomes certain, that the reason or contingency delaying the actual payment of the claim or expense has been resolved, or that the deductible amount has been established. For multiple or recurring payments, the 90-day period generally begins on the date of the last and final payment. (Rev Proc 2011-48, Sec. 5.02)

•  For decedents dying on or after Jan. 1, 2012, the notification may be filed using any method described in Rev Proc 2011-48, Sec. 5.03(1)(a) (describing the filing of a supplemental Form 706 and updated Schedule PC), or Rev Proc 2011-48, Sec. 5.03(1)(b) (describing the filing of an updated Form 843). For decedents dying after Oct. 19, 2009 and before Jan. 1, 2012, the notification must be filed using the method described in Rev Proc 2011-48, Sec. 5.03(1)(b). (Rev Proc 2011-48, Sec. 5.03)

•  The notification is made by filing an updated Form 706 and Schedules PC or Forms 843 at the same location where the protective refund claim was previously filed, with the described notation indicating that it's in regard to a protective claim. Separate notifications should be submitted for each protective refund claim. (Rev Proc 2011-48, Sec. 5.03)

•  Neither the charitable nor marital deduction is reduced by the amount of any claim or expense that may be the subject of a Code Sec. 2053 protective refund claim until the claim or expense has met the requirements for a deduction under Code Sec. 2053. The computation of the amount to be refunded should identify any adjustment to the marital and charitable deductions claimed by the estate, as well as any other arithmetic adjustments that result from the deduction. (Rev Proc 2011-48, Sec. 5.05)

Effective date. Rev Proc 2011-48 is applicable to protective refund claims filed on behalf of estates of decedents dying on or after Oct. 20, 2009 (i.e., the date final regs were published in the Federal Register), but only to the extent that the relevant sections of the Code are applicable to the decedent's estate. (Rev Proc 2011-48, Sec. 6)

Rev Proc 2011-48, 2011-42 IRB