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Estate Tax 2010: Timing the Test Case for Retroactivity

Written by Jeffrey Skatoff • January 3rd, 2010

Estate Taxation,  

In a startling display of Congressional ineptitude, Congress allowed the estate tax to expire as of January 1, 2010.  Before the trust fund babies trade in their Porches for Lamborghinis, realize that Congress may successfully enact an estate tax for 2010, and make it retroactive to January 1, 2010.  Although such retroactivity is likely to pass scrutiny, the results of any court  test are not likely to be resolved for years.  Here's why:

Assuming our hypothetical deceased passes away on January 1, 2010, the estate tax return is due nine months from the date of death.  Therefore, the estate tax return is due to be filed by October 1, 2010.  Assuming that prior to October 1, 2010 the Federal government enacts a new estate tax retroactive to January 1, 2010, the executor of the estate is likely to file the estate tax return showing zero estate tax liability, and include a disclosure statement that the estate is challenging the retroactive nature of the estate tax.  (To avoid interest and penalties while taking such a position, an executor should consider an estate tax deposit.) 

The audit of the estate tax return is not likely to conclude for eighteen months after filing the return, which takes us to April 1, 2012.  Assuming that the audit results in the IRS assessing the full estate tax, the estate has 90 days from the receipt of the IRS Notice of Assessment to file a Tax Court Petition.  Assume that the estate files its Tax Court Petition within one month, which takes us to May 1, 2012.

A Tax Court case typically takes approximately one year to resolve (although some tax court cases go on for many, many years).  Lets assume one year, so now we are at May 1, 2013.

Assume the Tax Court rules in favor of the IRS and upholds the retroactive estate tax.  The estate appeals the Tax Court ruling to a Court of Appeals.  The appeal may take approximately one year to resolve, depending on which circuit the appeal lies.  Lets assume one year, which takes us to May 1, 2014. 

Assume the Court of Appeals rules in favor of the IRS.  The estate seeks review by the Supreme Court.  Even if the Supreme Court refuses to hear the case, that process can take approximately two months to play out.  So now we are at July 1, 2014. 

For the "test case" to challenge the retroactivity of the estate tax back to January 1, 2010 (assuming Congress enacts such a statute), the results may not be known for over four years!