                              T.C. Memo. 2015-226



                        UNITED STATES TAX COURT



 ESTATE OF RUSSELL BADGETT, JR., DECEASED, BENTLEY BADGETT,
                  JR., EXECUTOR, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 3503-15.                          Filed November 24, 2015.



      Rebecca A. Martin and William J. Cooper, Jr., for petitioner.

      Diana N. Wells and Denise A. Diloreto, for respondent.



                           MEMORANDUM OPINION


      JACOBS, Judge: The parties submitted this case fully stipulated pursuant

to Rule 122. The issue for decision is whether Federal income tax refunds for

2011 and 2012 due Russell Badgett, Jr. (decedent), at the time of his death are

includible in the value of his gross estate. Respondent (Internal Revenue Service
                                        -2-

[*2] or IRS) claims they are and thus determined an estate tax deficiency of

$146,454; decedent’s estate (estate) claims they are not.

      Decedent resided in Kentucky at the time of his death. The legal address of

the estate and the residence of the executor at the time the petition was filed was

also in Kentucky.

      All section references are to the Internal Revenue Code, as amended, in

effect at the time of decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                                    Background

      The stipulation of facts and the exhibits attached thereto are incorporated

herein by this reference.

      Decedent died on March 8, 2012. On April 11, 2012, the estate filed a Form

4868, Application for Automatic Extension of Time to File U.S. Individual

Income Tax Return, with respect to decedent’s Federal income tax for 2011. On

May 1, 2012, a Form 1040, U.S. Individual Income Tax Return, for 2011 was filed

for decedent reflecting total tax of $495,096, total payments of $924,411, and an

overpayment of $429,315. The return further reflected that $25,000 of the

overpayment was to be applied to decedent’s 2012 estimated tax and $404,315

was to be refunded. The IRS applied the $25,000 estimated tax payment to
                                         -3-

[*3] decedent’s 2012 Federal income tax on April 15, 2012, and refunded

$404,315 to the estate on May 28, 2012.

      On December 13, 2012, the estate filed a Form 706, United States Estate

(and Generation-Skipping Transfer) Tax Return. The 2011 Federal income tax

refund due decedent was not included in the value of the gross estate.

      On April 15, 2013, a Form 1040 for 2012 was filed for decedent reflecting

total tax of $10,874, total payments of $25,000, and an overpayment of $14,126.

On May 13, 2013, the IRS issued a refund of $14,126 to the estate. The $14,126

refund for 2012 was not included in the value of decedent’s gross estate as

reflected on the Form 706.

      On January 6, 2015, the IRS mailed a notice of deficiency to the executor of

the estate determining a deficiency in estate tax; the entire amount of the

deficiency is the result of the estate’s not including the amounts of the 2011 and

2012 Federal income tax refunds in the value of decedent’s gross estate.

                                      Discussion

      Section 2031(a) provides that “[t]he value of the gross estate of the decedent

shall be determined by including to the extent provided for in this part, the value at

the time of his death of all property, real or personal, tangible or intangible,

wherever situated.” Section 2033 provides that “[t]he value of the gross estate
                                          -4-

[*4] shall include the value of all property to the extent of the interest therein of

the decedent at the time of his death.”

      To determine a decedent’s interest in property, we first look to State law:

      State law creates legal interests and rights. The federal revenue acts
      designate what interests or rights, so created, shall be taxed. Our duty
      is to ascertain the meaning of the words used to specify the thing
      taxed. If it is found in a given case that an interest or right created by
      local law was the object intended to be taxed, the federal law must
      prevail no matter what name is given to the interest or right by state
      law.

Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940) (fn. ref. omitted). Similarly,

in Frank Lyon Co. v. United States, 435 U.S. 561, 572 (1978), the Supreme Court,

quoting Corliss v. Bowers, 281 U.S. 376, 378 (1930), stated: “[T]axation is not so

much concerned with the refinements of title as it is with actual command over the

property taxed--the actual benefit for which the tax is paid.” Thus, we are not

necessarily bound by State law formalities; we may look through to the substance

of the matter. Estate of Fortunato v. Commissioner, T.C. Memo. 2010-105.

      The estate asserts that under Kentucky law, property must be in existence on

the tax assessment date to be subject to tax and cannot be a mere possibility or

expectancy. See Commonwealth v. Travelers’ Ins. Mach. Co., 205 S.W. 561 (Ky.

1918); Comcast Cablevision of the South v. Revenue Cabinet, Commonwealth of

Ky., No. K-18194, 2001 WL 484469, at *7 (Ky. Bd. Tax. App. May 1, 2001).
                                        -5-

[*5] The estate acknowledges that decedent overpaid his 2011 and 2012 income

tax but posits that an “overpayment” does not create a right to an income tax

refund. The estate argues that there is no property interest until the refund has

been declared by the Government. Continuing, the estate postulates that even if

decedent had an expectancy to receive the income tax refunds, “under Kentucky

state law, a mere expectancy is not the same as an interest in property.” The estate

cites a number of cases to support its position, but these cases are distinguishable

from the case before us.

      In re Pigott, 330 B.R. 797 (Bankr. S.D. Ala. 2005), was a bankruptcy case in

which the IRS sought to offset an unpaid dischargeable tax debt of the debtors

(husband and wife) incurred in 1996 and 1998 against a “potential” tax

overpayment they made in 2004.1 In that case, the bankruptcy court found that the

debtors’ tax overpayment was not a property interest, stating: “[T]he court is

convinced that the tax law that holds that an overpayment is not the same as a

refund is correct. Since an overpayment is not credited to the debtor until after

offsets have occurred, if the IRS chooses to make such offset, there is no property

interest in a debtor until the refund has been declared.” Id. at 802; see also U.S.


      1
        The bankruptcy debtors had not filed their 2004 Federal income tax return
at the time their case was heard.
                                         -6-

[*6] Dep’t of Agric. Rural Hous. Serv. v. Riley, 485 B.R. 361 (W.D. Ky. 2012);

Lopes v. United States HUD (In re Lopes), 211 B.R. 443 (D. R.I. 1997) (cited by

the estate for similar propositions).

      Estate of Bender v. Commissioner, 827 F.2d 884 (3d Cir. 1987), aff’g in

part, rev’g in part 86 T.C. 770 (1987), was an estate tax case in which the testator

had unpaid Federal tax liabilities for years other than those involving the tax

overpayments. The Court of Appeals for the Third Circuit concluded that the

testator did not have a property interest in the tax overpayments for purposes of

calculating his gross estate. The court held that the IRS’ discretionary power to

offset the testator’s tax overpayments against his unpaid liabilities meant that the

estate could not compel the IRS to issue a tax refund for the years for which the

testator overpaid his taxes; therefore, the tax overpayments “never attained the

status of independent assets for estate tax purposes.” Id. at 887.

      In re Pigott and Estate of Bender each involved a taxpayer who had

undisputed and unpaid tax liabilities that offset his/her respective tax

overpayments. Section 6402(a), which authorizes the Government to make tax

refunds, provides:
                                         -7-

[*7]         SEC. 6402(a). General Rule.--In the case of any overpayment,
       the Secretary, within the applicable period of limitations, may credit
       the amount of such overpayment, including any interest allowed
       thereon, against any liability in respect of an internal revenue tax on
       the part of the person who made the overpayment and shall, subject to
       subsections (c), (d), (e), and (f) refund any balance to such person.[2]

Thus, the IRS has discretion in determining whether overpayments should be

refunded to the taxpayer or applied to outstanding tax (or other3) liabilities of the

taxpayer. Because there was no guarantee that the IRS would refund the full

amounts of the overpayments to the taxpayers, we, in Estate of Bender, and the

bankruptcy court, in In re Pigott, concluded that the overpayments could not be

treated as taxpayer property.

       However, we reached a different conclusion in another case where a

deceased taxpayer had no tax liabilities to which a tax overpayment could be

offset. In Estate of Chisolm v. Commissioner, 26 T.C. 253 (1956), the taxpayer

died before his Federal income tax return was filed. We determined therein that




       2
       Sec. 6402(c), (d), (e), and (f) provides for the offset of any portion of a
taxpayer’s overpayment against past-due support (as defined in sec. 464(c) of the
Social Security Act), debts to Federal agencies, State income tax obligations, and
unemployment compensation debts owed by the taxpayer.
       3
      See, e.g., U.S. Dep’t of Agric. Rural Hous. Serv. v. Riley, 485 B.R. 361
(W.D. Ky. 2012), in which the IRS applied an overpayment to reimburse the
Department of Agriculture under sec. 6402(a) and (d))).
                                          -8-

[*8] the full value of the deceased taxpayer’s viable but unasserted income tax

refund claim was an asset of the estate, stating:

      The entire taxes on the income of Harvey [the deceased taxpayer] and
      his wife for 1950, as disclosed on the return filed for that year, were
      paid by Harvey. He was dead at the time the return was filed and of
      course did not join in filing it. However, the type of return that was
      filed for that period is immaterial as is the crediting of the
      overpayment as requested on that return. The fact is that Harvey had
      overpaid not only his own taxes but those of himself and his wife.
      The resulting overpayment was really his. It was valuable property
      and a part of his estate at the time he died. It was includible in his
      estate under section 811(a) [a precursor to the current section 2033],
      and incidently would have been includible in his estate even if it
      represented jointly held property since he had supplied the entire
      consideration therefor. * * *

Id. at 257; see Estate of Swezey v. Commissioner, T.C. Memo. 1976-361 (Federal

and State tax refunds for year of decedent’s death were includible in value of

decedent’s gross estate); Estate of Law v. Commissioner, T.C. Memo. 1964-257

(Federal tax refund received by decedent’s widow was includible in value of

decedent’s gross estate even though decedent died before tax return was filed).

      We believe it proper to herein follow the holdings in these cases. Simply

stated, if no offsetting liability exists, section 6402(a) is clear: The statute

mandates that the IRS “shall” refund any balance to the taxpayer. In the matter

herein, there is no indication that decedent was subject to any liability or

obligation against which the IRS could offset his overpayments. The status of the
                                         -9-

[*9] tax refund is more than a mere expectancy; the estate has the right to compel

the IRS to issue a refund for the years for which decedent overpaid his tax. Thus,

we hold that the overpayments in question attained the status of independent assets

for estate tax purposes; they constitute decedent’s property for estate tax purposes.

      The estate maintains that Estate of Chisolm and its progeny are not herein

applicable because the “[d]ecedent [in Chisolm] knew before he died he was

entitled to an income tax refund”. But the facts in Estate of Chisolm do not

support that conclusion. The facts in Estate of Chisolm merely state that the

decedent overpaid his tax, and the Court concluded that the overpayment

constituted valuable property that was includible in the value of the decedent’s

gross estate.

      The estate also argues that “a taxpayer has ‘no legal right’ to a tax refund

unless and until the taxpayer files a successful suit within the permitted statutory

periods against the IRS for that tax refund after meeting all conditions precedent.”

See, e.g., Commissioner v. Lundy, 516 U.S. 235, 237 (1996) (Tax Court lacks

jurisdiction to award refund of tax paid more than two years prior to date on which

Commissioner mailed taxpayer notice of deficiency in a case where taxpayer failed

to file return); Hampton v. United States, 513 F.2d 1234, 1243 (Ct. Cl. 1975)

(filing claim for refund is condition precedent to maintenance of any suit for
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[*10] recovery of wrongfully assessed tax); Bank of Cal., Nat’l Ass’n v.

Commissioner, 133 F.2d 428 (9th Cir. 1943) (decedent’s claim for refund was

property and includible in the value of her gross estate). Ebert v. United States, 66

Fed. Cl. 287, 290 (2005) (taxpayer bears burden of establishing she is entitled to

refund and exact amount thereof). These cases do not support the estate’s

contention. Rather, they merely discuss the requirements imposed on a taxpayer

of prosecuting a tax refund action.

      We therefore hold that decedent had property interests in the values of his

2011 and 2012 Federal income tax refunds and consequently the refunds are

included in the value of decedent’s gross estate for Federal estate tax purposes. In

reaching our holding, we have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be either without

merit, irrelevant, or moot.

      To reflect the foregoing,


                                                      Decision will be entered for

                                                respondent.
