                       T.C. Memo. 1999-82



                     UNITED STATES TAX COURT



   ESTATE OF EVELYN M. MCMORRIS, DECEASED, JERRY D. MCMORRIS,
             PERSONAL REPRESENTATIVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1969-95.             Filed March 17, 1999.



     Kevin L. Brown and Leslie R. Kehl, for petitioner.

     Robert A. Varra, for respondent.



                       MEMORANDUM OPINION


     COHEN, Chief Judge:   Respondent determined a deficiency in

the Federal estate tax of the estate of Evelyn M. McMorris (the

estate) in the amount of $232,035.   By amendment to the answer,

respondent asserts an increased deficiency in the amount of

$2,383,056.
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     After concessions, the issue for decision is whether the

estate is entitled to deductions for (1) the portion of a Federal

income tax liability to be refunded due to a reduction in

reported income and (2) the corresponding portion of a State

income tax liability for which a refund has yet to be requested.

     This case was submitted fully stipulated under Rule 122.

Unless otherwise indicated, all section references are to the

Internal Revenue Code as in effect as of the date of decedent's

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.   The stipulated facts are incorporated

herein by this reference.

Background

     Evelyn M. McMorris (decedent) died on March 4, 1991, a

resident of Colorado.   The personal representative, decedent's

son Jerry D. McMorris (Jerry McMorris), was a resident of

Colorado at the time the petition was filed in this case.

     Donn D. McMorris, decedent's husband (Mr. McMorris), died on

April 10, 1990.   On June 11, 1990, decedent was declared

incompetent due to irreversible advanced Alzheimer's disease, and

Jerry McMorris was appointed as conservator for her estate.    In

partial distribution of decedent's interest in her husband's

estate, 13.409091 shares of stock in N.W. Transport Services,

Inc. (NW), were distributed to the estate of Evelyn M. McMorris,

Protected Person.   On September 19, 1990, decedent, through Jerry
                               - 3 -


McMorris as her conservator, entered into an agreement with NW,

through Jerry McMorris as president, to redeem the 13.409091

shares of NW stock in exchange for $29,500,000, payable over

120 months with interest at 10 percent.

     The Federal estate tax return (the estate tax return) for

decedent's estate was filed on December 4, 1991.   The estate tax

return reflected deductions for decedent's 1991 Federal and

Colorado income tax liabilities of $3,960,525 and $641,222,

respectively.   Decedent's Federal income tax return for 1991 (the

1991 Federal income tax return) was filed timely on or before

April 15, 1992.   The 1991 Federal income tax return reflected an

income tax liability of $3,681,703, which amount was paid with

the return.   Decedent's Colorado income tax return for 1991 also

was filed timely on or before April 15, 1992, and reflected an

income tax liability of $639,826, which was paid with the return.

     A large part of the income reported on decedent's 1991

income tax returns resulted from gains on the redemptions of NW

stock that were passed through to decedent's 1991 income tax

returns from the fiduciary income tax return for Mr. McMorris's

estate for the fiscal year ended March 31, 1991.   The NW stock

had been included on Mr. McMorris' estate tax return at an

appraised value of $1,726,562.50 per share.   Accordingly,

decedent's basis in the NW stock was determined using the value

of $1,726,562.50 per share, and substantial gain resulted.    After
                                - 4 -


examination of decedent's estate tax return, respondent

determined that the amounts allowable as deductions for

decedent's Federal and Colorado income tax liabilities were

$3,680,038 and $639,826, respectively.    Respondent issued a

notice of deficiency on November 8, 1994.    Petitioner does not

contest these adjustments, having conceded all issues raised in

the notice of deficiency.

     In January 1996, the parties in the case of Estate of

Donn D. McMorris v. Commissioner, docket No. 5952-94, reached a

basis for settlement that provided for an increase in the value

of the NW stock included in Mr. McMorris' estate to $2,500,000

per share.    The increase in the value of the NW stock created a

deficiency in the estate taxes for Mr. McMorris' estate.    The

increase in value of the NW stock also increased decedent's basis

in the NW stock, thereby eliminating the income attributable to

the redemptions of the NW stock.

     A protective claim for refund relating to the fiduciary

income tax return of Mr. McMorris' estate for the fiscal year

ended March 31, 1991, had been filed on September 12, 1994.     On

or about January 30, 1996, an amended fiduciary income tax return

was filed.    On January 30, 1996, an amended 1991 Federal income

tax return was filed for decedent, claiming a refund of

$3,332,443.   In settling the case of Estate of Donn D. McMorris

v. Commissioner, supra, the parties and petitioner agreed that
                               - 5 -


the overpayments of tax claimed on the amended fiduciary income

tax return and decedent's amended income tax return, as finally

adjusted, would be used to offset the deficiency in estate tax in

that case.

     Based on the above-described adjustments in Estate of

Donn D. McMorris v. Commissioner, supra, decedent's amended 1991

Federal income tax return reflected a loss from the redemption of

the NW stock, rather than the gain previously reported, and

certain dividend income previously reported was eliminated.    A

refund of $3,330,778 of decedent's 1991 Federal income taxes was

approved by respondent.   Due to the large amount of the refund,

it was subject to review by the Joint Committee on Taxation.

Petitioner's refund claim was reported to the Joint Committee on

October 30, 1997.   The 30-day period for review passed without

objection.   As of December 16, 1997, the closing of the record in

this case, neither an amended 1991 Colorado income tax return nor

a protective claim for refund had been filed with the Colorado

Department of Revenue.

     Respondent's amended answer requests an increased deficiency

in estate tax based on a reduction of the amounts claimed as

debts of decedent for 1991 Federal and Colorado income taxes.

Discussion

     Section 2053(a)(3) provides that the value of the taxable

estate shall be determined by deducting from the value of the
                               - 6 -


gross estate such amounts for claims against the estate as are

allowable by the laws of the jurisdiction under which the estate

is being administered.

     The amounts that may be deducted as claims against a
     decedent's estate are such only as represent personal
     obligations of the decedent existing at the time of his
     death, whether or not then matured, and interest
     thereon which had accrued at the time of death. * * *
     Only claims enforceable against the decedent's estate
     may be deducted. * * * [Sec. 20.2053-4, Estate Tax
     Regs.]

     Unpaid income taxes, whether or not determined as of the

date of death, are deductible if they are on income properly

includable in an income tax return of the decedent for a period

before his or her death.   See Schatzinger v. Commissioner, 12

B.T.A. 1353 (1928); sec. 20.2053-6(f), Estate Tax Regs.

     Deduction for Federal Income Tax Liability

     Respondent's position is that the estate tax deduction for

petitioner's 1991 Federal income tax liability should be limited

to the amount ultimately determined to be due.    Petitioner's

position is that the reported income tax liability, except as

modified by respondent's determination in the 1994 notice of

deficiency, should be allowed in full, unreduced by the refund

approved in 1997.   The decision in this case turns on whether we

should consider the postdeath adjustment in petitioner's income

tax liability due to the change in valuation of the NW stock.

     The Supreme Court in Ithaca Trust Co. v. United States, 279

U.S. 151, 155 (1929), stated that "The estate so far as may be is
                                - 7 -


settled as of the date of the testator's death."     This principle

is followed in cases involving the valuation of a claim that is

valid and fully enforceable on the date of a decedent's death.

See Estate of Smith v. Commissioner, 108 T.C. 412, 419 (1997),

supplemented by 110 T.C. 12 (1998).     In cases where the

decedent's creditor has only a potential, unmatured, contingent,

or contested claim that requires further action before it becomes

a fixed obligation of the estate, postdeath events warrant

consideration.   Id.   Where a claim is disputed, contingent, or

uncertain as of the date of a decedent's death, the estate is not

entitled to a deduction until the claim is resolved and it is

determined what amount, if any, will be paid.     Id.

     We have held that a claim that is valid and enforceable at

the date of a decedent's death must remain enforceable in order

for the estate to deduct the claim.     Technical claims that

disappear in the light of subsequent circumstances should not be

allowed.   Thus, postdeath events must be taken into consideration

in determining the enforceability of a claim that a creditor

fails to make and preserve within the time allowed by local law.

See Estate of Hagmann v. Commissioner, 60 T.C. 465, 469 (1973),

affd. 492 F.2d 796 (5th Cir. 1974).

     Petitioner argues that the income tax liability that was

timely paid was a valid and enforceable claim on the date of

decedent's death, and, therefore, postdeath events are not to be
                               - 8 -


considered.   Petitioner cites Propstra v. United States, 680 F.2d

1248, 1254 (9th Cir. 1982), for its holding that, "as a matter of

law, when claims are for sums certain and are legally enforceable

as of the date of death, post-death events are not relevant in

computing the permissible deduction."   That case involved lien

claims against property owned by the decedent.   At the time of

the decedent's death, the water users' association to which the

money was owed had no authority to settle its claims for less

than the full amount, and the executrix had no legal or factual

arguments to support a challenge.   After the estate return was

filed, the association's bylaws were amended to authorize it to

settle outstanding claims.   The Court of Appeals for the Ninth

Circuit declined to follow cases like Estate of Hagmann v.

Commissioner, supra, and applied the Ithaca Trust principle

enunciated supra p. 6.   The Court of Appeals made it clear that

the date of death was the critical reference point in testing

whether a claim was enforceable.

     Petitioner also cites Estate of Sachs v. Commissioner, 88

T.C. 769 (1987), revd. 856 F.2d 1158 (8th Cir. 1988), which

involved a deduction for income tax where a refund had occurred

due to a change in legislation 4 years after the decedent's

death.   The decedent's reported income tax liability previously

had been increased in accordance with a Supreme Court opinion

decided 2 years after the decedent's death, and an increased
                                - 9 -


estate tax deduction for that liability had been allowed.     The

parties did not contest these adjustments.     The legislation

negated the effect of the Supreme Court decision.     This Court

reasoned that the legislative change was not foreseeable and that

the claim for income tax had been paid in accordance with the law

in effect as of the date of death.      We held that the estate was

entitled to deduct, as a claim against the estate, the income tax

paid unreduced by the refund.   The Court of Appeals for the

Eighth Circuit reversed, holding that the effect of the

legislation was retroactive and that no deduction was allowable

for the refunded tax.

     This case is unlike Estate of Sachs v. Commissioner, supra,

which dealt with a change in income tax resulting from

retroactive legislation, not with the adjustment otherwise

resulting from the examination of the income tax and estate tax

returns.   Also, the holding in Propstra v. United States, supra,

cited by petitioner applies where claims are for "sums certain"

as of the date of death.    The amount of tax reported on a Federal

income tax return may be challenged by the Commissioner until the

applicable period of limitations has expired.     See sec. 6501.

Similarly, the taxpayer may request a refund and, if denied,

pursue judicial remedies.   See secs. 6511, 6512, 6532, 7422.      The

amount of tax reported, if contested, remains contingent until a
                               - 10 -


decision is reached.    See Broadhead Trust v. Commissioner, T.C.

Memo. 1972-196.

     In the instant case, petitioner filed an amended Federal

income tax return requesting a refund.   The request stemmed from

the agreement of the parties as to the increased value of the NW

stock included in Mr. McMorris' estate, which value became the

basis of the NW stock redeemed from decedent.   Because the amount

of income tax was challenged in that fashion, it is appropriate

that we consider postdeath events when determining the deduction

for estate tax purposes.

     Respondent has approved petitioner's refund request.   That

portion of the Federal income tax liability that is to be

refunded is no longer a valid and enforceable claim against the

estate.   Accordingly, we hold that the amount of the deduction

for petitioner's Federal income tax liability is reduced by the

amount of the refund.    Cf. Estate of Shedd v. Commissioner, 37

T.C. 394 (1961), affd. 320 F.2d 638 (9th Cir. 1963) (deduction

for transferee liability reduced by amount recovered from

transferor husband's estate upon receipt of refund); sec.

20.2053-6(f), Estate Tax Regs.

     Deduction for Colorado Income Tax Liability

     An individual's liability for Colorado income tax is based

on Federal taxable income with certain adjustments.   See Colo.

Rev. Stat. sec. 39-22-104(1) (1998); see id. sec. 39-22-601(6)(a)
                              - 11 -


(1998) (Colorado taxpayer required to report changes in Federal

taxable income due to final determination by the Commissioner or

to taxpayer's filing amended Federal return).   Respondent's

position is that the deduction for the Colorado income tax

liability should be limited to the amount of the State tax on

income properly includable in decedent's Colorado return, which

would reflect the adjustment in decedent's income for Federal

income tax purposes.   Petitioner's position is that the entire

amount of the Colorado income tax liability as paid should be

allowed as a deduction because the liability was valid and

enforceable as of the date of decedent's death, thereby

precluding consideration of postdeath events.   In the

alternative, petitioner argues that, even if postdeath events are

considered, respondent has not established that a refund of

Colorado tax would be granted.

     The same analysis and result apply to the Colorado income

tax claim as apply to the Federal tax liability.    Colorado

statutes provide for assessment of deficiencies and for claims

for refunds.   Where either the Federal or Colorado income tax

return is challenged, the Colorado income tax may be subject to

change.   See Colo. Rev. Stat. sec. 39-22-601(6).   Postdeath

events are thus relevant to determining whether the claim is

enforceable.
                              - 12 -


     Under the applicable period of limitations, a refund of

Colorado income tax is available or would have been available to

petitioner after the correct Federal tax liability was

determined.   As of December 16, 1997, the closing of the record

in this case, petitioner had not filed a protective claim with

the State of Colorado or an amended Colorado income tax return.

Section 39-21-108(1)(a) of the Colorado Revised Statutes (1998)

provides that, in the case of income tax,

     the taxpayer must file any claim for refund or credit
     for any year not later than one year after the
     expiration of the time provided for filing a claim for
     refund of federal income tax, including any extensions
     of the period by agreement between the taxpayer and the
     federal taxing authorities; but nothing in this
     subsection (1) shall be construed to shorten the period
     for filing claims provided by section 39-22-601(6)(f).
     * * *

Section 39-22-601(6)(f) of the Colorado Revised Statutes

provides:   "Notwithstanding any provision of law, the statute of

limitations relating to claims for refund or credit for any year

shall not expire prior to the expiration of the time within which

a deficiency for such year could be assessed."   Generally, a

deficiency in Colorado income tax can be assessed until 1 year

after the date of expiration of the period for assessing

deficiencies in Federal income tax, including any extensions of

the period by agreement between the taxpayer and the Internal

Revenue Service.   See Colo. Rev. Stat. sec. 39-21-107(2).
                                - 13 -


     The claim for refund of Federal income tax must be filed

within 3 years from the time the return was filed or 2 years from

the time the tax was paid, whichever is later.    See sec. 6511(a).

The expiration of the period for assessing deficiencies in

Federal income tax generally occurs 3 years after the return was

filed.   See sec. 6501(a).

     Petitioner filed decedent's original 1991 Federal income tax

return and her Colorado return on or before April 15, 1992.     The

taxes were paid with the returns.    Although the parties'

arguments focus on the period of assessing a deficiency, the

record contains no evidence of agreements or other actions that

would have extended the period of assessment.    The period for

filing a refund claim for Federal income tax and that for

assessing a deficiency in Federal income tax both expire 3 years

after the date decedent's Federal income tax return was filed.

Thus, the period in which a claim for refund of decedent's

Colorado income taxes could have been filed ran at least until

April 15, 1996, 1 year later.    So far as the record reflects,

only petitioner's failure to file a claim for refund of Colorado

taxes prevented or prevents receipt of the refund.    (Moreover, it

is not clear that the refund of Colorado taxes will never be paid

or credited to petitioner.)

     Petitioner filed the amended Federal income tax return on

January 30, 1996, once the parties in Estate of Donn D. McMorris
                              - 14 -


v. Commissioner, docket No. 5952-94, had reached the basis of

settlement.   At that time, the period in which to file a claim

for refund of Colorado income taxes was still open.   We recognize

that, in spite of the settlement agreement, respondent did not

approve petitioner's refund request until late in 1997.   However,

nothing in the Colorado tax statutes prevented petitioner from

filing a claim for refund of Colorado income taxes in advance of

that approval.   Indeed, had petitioner filed such a refund claim,

petitioner would have preserved the right to sue for a refund

pursuant to section 39-21-108(1)(a) of the Colorado Revised

Statutes (1998), which provides:

     No suit for refund may be commenced before the
     expiration of six months after the date of filing the
     claim for refund required under this section unless the
     executive director of the department of revenue renders
     a decision thereon within that time, nor after the
     expiration of two years after the date of mailing * * *
     of a notice of disallowance of the part of the claim to
     which the suit relates. * * *

Thus, under the Colorado statutes of limitations, petitioner

could have filed a timely claim for refund of that portion of

Colorado income tax related to the reduction in Federal taxable

income.   The calculation of Colorado income tax is dependent upon

the amount of Federal taxable income, and decedent's Colorado

income tax would be reduced proportionately.   Petitioner's

unexplained failure to seek a refund of Colorado income tax does

not prevent the correct determination of the amount of the claim.

We hold that the deduction for decedent's Colorado income tax
                             - 15 -


liability should be reduced to reflect the amount of Colorado

income tax calculated using the decreased Federal taxable income.

     To reflect petitioner's concessions, the above holdings, and

additional administrative expenses,

                                           Decision will be entered

                                      under Rule 155.
