We welcome first-time guest blogger Conner Watts, Clinical Supervising Attorney of the Philip C. Cook Low-Income Taxpayer Clinic at the Georgia State University College of Law. Prior to joining the College of Law, Conner practiced in the area of trusts and estates, with a special concentration in planning intra-family transactions and bequests motivated by federal estate and gift tax concerns.
In the Estate of Barbara B. Rosenthal v. Commissioner, T.C. Docket No. 9353-23, the Service includes in the decedent’s gross estate an asset that is contingent in nature. In other words, it cannot be adequately determined whether the asset is properly includible in the decedent’s gross estate until a local Virginia court makes a ruling with respect to the property interests of the estate in an entirely separate action – yet the Service nonetheless included the asset in the notice of deficiency and proposed the assessment of estate tax on the basis of its inclusion. The case has not yet been decided, with a Tax Court petition only having been filed recently on June 12, 2023, and the Service’s initial Answer having been filed on August 2, 2023. (The text of the petition can be found here, where a PDF of the petition and associated notice of deficiency is also linked).
The co-petitioners, Citibank, N.A., Keith W. Rosenthal, and Andrew R. Rosenthal, are the co-executors of the Estate of Barbara B. Rosenthal, deceased. According to the petition, the co-petitioners filed a Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) on July 1, 2020, in order to disclose to the Service the value of the estate and corresponding estate tax due under the provisions of section 2001.
In response, the Service issued a notice of deficiency adjusting certain entries on the Form 706. Among them was the inclusion of the estate’s potential beneficial interest in another estate – specifically, the estate of the decedent’s late brother, Michael Bakwin, claimed to be worth $11,707,649.00. At present, it is uncertain how the Service learned of the Rosenthal estate’s contingent interest in the Bakwin estate, although it cannot be ruled out that the information was obtained via manual research given the level of scrutiny that estate tax issues often generate.
According to the petition, the administration of the Bakwin estate is currently pending in the Circuit Court for the City of Suffolk, Virginia, where certain beneficiaries filed a motion to disqualify and remove the trustee of certain testamentary trusts created under Mr. Bakwin’s Last Will and Testament. In response, the executor of the Bakwin estate filed a subsequent motion to enforce the Will’s no-contest clause which, if enforced, would have the effect of treating said beneficiaries as deceased and, in turn, one-third of the Bakwin estate would vest in the Rosenthal estate. As of the date of this article, the Suffolk Circuit has not yet entered a Final Order on this matter.
The Form 886-A (Explanation of Items) affixed to the notice of deficiency stated the following in connection to the Rosenthal estate:
It is determined that Decedent may be a potential legatee under the Estate of her brother Michael Bakwin who died on December 3, 2018. While Decedent was not an initial beneficiary, the stated beneficiaries of Mr. Bakwin’s Estate may have violated an [in terrorem] clause in Mr. Bakwin’s will, which may entitle Decedent to one-third of that Estate. The issue is in litigation. Accordingly, the potential inheritance should be included, and the taxable estate should be increased by $11,707,649.00. (Emphasis added).
The co-petitioners and the Service appear to agree that the Rosenthal estate’s receipt of funds from the Bakwin estate is wholly and completely dependent upon the subsequent ruling from a local court. On this issue, the petition states:
If the Court upholds the validity of the No Contest Clause and applies the provisions of Article Seven of Mr. Bakwin’s Will, finding that the Mr. Bakwin died intestate, the Petitioner would be entitled to one-third of Mr. Bakwin’s estate, however if the Court finds that the No Contest Clause was not violated, the Petitioner would receive nothing.
The Service is almost certainly concerned about the statute of limitations for assessment in this case. The Form 706 was filed on June 1, 2020, providing the Service with 3 years from said date to assess additional tax due under section 6501. Nonetheless, if the local court were to find that the No Contest Clause applies, the Service may still have a good argument for a 6-year statute of limitations under section 6501(e)(2) on the grounds of omission of includible items in the gross estate on Form 706. (Presumably, the omission would not be of a willful nature here given that the matter was unsettled as of the date of the filing of the return). Even so, the Service does not care to leave this matter to chance and determined a deficiency.
In all likelihood, the Service would have preferred that the co-petitioners make use of protective refund claim procedures. Notably, the Form 706 packet does include a Schedule PC (Protective Claim), however the form itself appears to be structured solely to make a refund claim regarding unresolved estate claims or expenses that may ultimately become deductible in the future. That is distinct from the facts of the present case, where the issue revolves around the existence of the estate’s unresolved interest in property and the inclusion of such interest as an asset in the decedent’s gross estate (i.e., a secondary beneficial interest in the Bakwin estate after the primary beneficiaries presumably forfeited said interests by triggering the in terrorem clause of the Will).
For this purpose, Form 843 (Claim for Refund and Request for Abatement) may be more directly applicable, particularly with its open-ended prompts allowing for a greater explanation. The provisions of I.R.M. 4.25.9.3.1(3) (01-07-2014) also support this method.
Of interest here, however, are the competing responsibilities of the co-petitioners. While the protective claim approach is more conservative from a federal tax standpoint (and is almost guaranteed to garner more sympathy within this tax law community), consider that the co-petitioners themselves are fiduciaries and have other dynamics in force as well. If, for example, the co-petitioners were to file a Form 706 including an approximately $12 million asset in the gross estate (cash which, as a reminder, has not yet been received) and payment of estate tax on the same was rendered, one must recall the basic landmines inherent in being an estate fiduciary in the first place. Unhappy and disgruntled beneficiaries can file lawsuits (even ones without merit), and – while there is no way to know of the individual personalities involved in the Rosenthal estate – a significant reduction in estate distributions in the immediate term would not be a happy moment for anyone.
Aside from the refund claim, one additional issue that may present itself in this case is the valuation of the contingent interest. The Service’s approach seems to indicate that the interest in the Bakwin estate should be included at its full value on the basis that the condition for realization of the contingency may be fulfilled. It should be noted, however, that, at the moment of Ms. Rosenthal’s death, her interest in the Bakwin estate was still contingent, and realization of the contingency, if fulfilled, did not take place until after she passed away. As a result, even if the Rosenthal estate is entitled to significant proceeds from the Bakwin estate, it is an interesting question to consider whether the valuation for purposes of Ms. Rosenthal’s gross estate is close to zero. The co-petitioners do not raise this question in their petition, although they do raise valuation questions related to other assets such as pieces of artwork.
This should be an interesting case to watch for the variety of issues it presents.