United States District Court, D. Minnesota
Trevor R. Walsten and Danielle K. Nellis, Walsten & Te Slaa, P.A., 2000 Wells Fargo Plaza, 7900 Xerxes Avenue South, Bloomington, Minnesota 55431, for Plaintiff
Gregory E. Van Hoey, United States Department of Justice, Tax Division, PO Box 7238, Washington, DC 20044, for Defendant
MEMORANDUM OPINION AND ORDER
SUSAN RICHARD NELSON, District Judge.
This matter is before the Court on Plaintiff's Motion for Summary Judgment [Doc. No. 16] and Defendant's Motion for Summary Judgment [Doc. No. 20]. For the reasons set forth herein, Plaintiff's motion is denied and Defendant's motion is granted.
Plaintiff, the Estate of Donald McNeely (the "Estate"), filed this action seeking the refund of a portion of an estate tax payment made after the death of the decedent, Donald McNeely. At the time of his March 2009 death, McNeely was the sole shareholder of two closely-held companies. (Compl. ¶ 6 [Doc. No. 1].) Because estate tax returns are to be filed within nine months of the decedent's death, 26 U.S.C. § 6075(a), on December 8, 2009, the Estate filed IRS Form 4768, requesting an extension of time until June 9, 2010 in which to file the Estate's federal tax return. (Def.'s Admissions ¶¶ 3-4, Ex. 18 to Walsten Aff. [Doc. No. 18]; Form 4768, Ex. 2 to Walsten Aff. [Doc. No. 18].) A cover letter and an estimated payment of $2, 494, 088 accompanied the extension request. (Letter of 12/8/09 at 1, Ex. 4 to Walsten Aff.) Form 4768 requires an estate to estimate its federal estate liability when the estate seeks a filing extension. (Form 4768 at ¶ 5, Ex. 2 to Walsten Aff.) In the December 8, 2009 cover letter, the Estate also announced its intention to seek deferred estate tax treatment pursuant to 26 U.S.C. § 6166. Section 6166 of the Tax Code provides an exception to the general rule that estate tax payments are due within nine months of the decedent's death. 26 U.S.C. § 6166; United States v. Askegard , 291 F.Supp.2d 971, 974 (D. Minn. 2003) (citing 26 U.S.C. §§ 2001, 6075(a), 6161(a)). Pursuant to § 6166, where the decedent's interest in a closely-held business exceeds 35 percent of the adjusted gross estate, "the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments." 26 U.S.C. § 6166(a)(1). If the estate elects to make deferred installment payments, the first of those payments becomes due five years after the date on which the federal estate tax would otherwise be due. Id . § 6166(a)(3).
Interest continues to accrue annually, however, even during the deferment period. "The purpose of section 6166 is to prevent the forced liquidation of closely held businesses because substantial estate taxes must be paid." Estate of Bell v. Comm'r , 928 F.2d 901, 902 (9th Cir. 1991) (citations omitted); see also Askegard , 291 F.Supp.2d at 974, n.1. (citing Lake Shore Nat'l Bank v. Coyle , 419 F.2d 958, 962 (7th Cir. 1969)). In the Estate's December 8, 2009 letter, it also indicated that the enclosed $2, 494, 088 payment was intended to satisfy the amount of tax on the non-deferred portion of the federal estate tax, if the IRS agreed to deferred tax treatment for the Estate. (Letter of 12/8/09 at 2, Ex. 4 to Walsten Aff.) The IRS granted the Estate's request for a six-month extension in which to file its estate tax return. (Def.'s Admissions ¶ 4, Ex. 18 to Walsten Aff.)
The IRS provided notice to the Estate on February 18, 2010 that it had received the Estate's Form 4768. (Form 4768, Ex. 2 to Van Hoey Decl. [Doc. No. 23].) In addition, the IRS indicated that "[a] Section 6166 election cannot be requested by using the Form 4768. The 6166 election must be requested with the timely filing of the Form 706." (Id. at IDP3.)
On June 9, 2010, the Estate submitted its estate tax return, Form 706. (Form 706, Ex. 5 to Walsten Aff.; Letter of 6/8/10, Ex. 6 to Walsten Aff.) As reflected in Form 706 and in the Estate's letter of June 8, 2010, the Estate valued its gross assets at $230, 900.899. (Id.) Because Mr. McNeely's interest in his closely-held businesses exceeded 35 percent of the adjusted gross estate, the Estate sought to pay estate tax on a deferred basis, pursuant to § 6166. (Id.)
In addition, based on the Estate's revised calculations in Form 706, the Estate determined that the correct tax on the non-deferred portion of the federal estate tax - assuming that the IRS granted the § 6166 request - 512, 223. (Id.) Because it had previously estimated and paid $2, 492, 088 in federal estate tax, the Estate requested a refund of $1, 979, 865. (Letter of 6/8/10 at 2, Ex. 6 to Walsten Aff.) The Estate further noted that this would "leav[e] a balance of $8, 613, 655 on the deferred portion of the federal estate tax." (Id.) In the event that the IRS denied the Estate's § 6166 deferred payment election, the Estate requested an extension of time in which to pay the portion that would have been deferred under § 6166. (Id. at 3.)
On August 2, 2010, the IRS responded, acknowledging that the Estate's § 6166 request was pending. (Letter of 8/2/10 at 1, Ex. 7 to Walsten Aff.) Based on the Estate's tax return, the IRS assessed a net federal estate tax of $9, 125, 878, of which $512, 226.41 was ineligible for § 6166 installment payments, again assuming that the IRS granted the Estate's 6166 request. (Id.) Under this scenario, the IRS calculated a total tax of $8, 613, 651.59 that qualified for payment in installments. (Id.) On this amount, the Estate would be required to make annual installment payments of $861, 365.16, plus interest, beginning on December 9, 2014. (Id.) The Estate's first payment of interest on the deferred portion of estate taxes would be due on December 9, 2010. (Id.)
Also in Defendant's August 2, 2010 letter, the IRS denied the Estate's request for a refund, explaining:
Our records show that you currently have an overpayment of $1, 979, 861.59. [26 U.S.C.] § 6403 requires that the overpayment be credited against the unpaid installments. Your installments are or will be due 12/09/2014 through 12/19/2023, therefore this overpayment will be used beginning 12/09/2014 against the unpaid installments due. [Section] 6403 also regulates that no refund can be allowed until the total payments exceed the tax due.
The Estate objected to the IRS's denial of a refund. (Letter of 9/1/10 at 1, Ex. 8 to Walsten Aff.) The Estate noted that in its December 8, 2009 letter to the IRS, it had indicated that the estimated tax payment was to be applied to the "non-deferred portion of the federal estate tax." (Id. at 2.) Further, the Estate argued that § 6403 - on which the IRS based its decision to deny the refund - was inapplicable to the non-deferred portion of the federal estate tax because it applies only to overpayments of taxes payable in installments. (Id.) As the Estate noted, the IRS's August 2, 2010 letter indicated that the Estate's § 6166 deferred payment request was still pending. (Id.)
The IRS's Appeals Office acknowledged receipt of the Estate's appeal of the denial of refund. (Letter of 9/16/10, Ex. 9 to Walsten Aff.; Letter of 1/21/11, Ex. 10 to Walsten Aff.) Plaintiff's counsel transcribed two voicemail messages left for him by IRS Appeals Officer Stan Labuz in February and March 2012. (Transcriptions, Exs. 14-15 to Walsten Aff.) In the February 9, 2012 transcript, the Appeals Officer indicated that he was sympathetic to the Estate's argument for a refund. (Transcription of 2/9/12, Ex. 14 to ...