Right to Tax Court When a Taxpayer Dies

Published Categorized as Tax Litigation, Tax Procedure

What do you do if a loved one is under audit by the IRS and then dies before the audit is closed? Imagine that the IRS issues a Notice of Deficiency to the taxpayer. Do you have the right to petition the U.S. Tax Court for the taxpayer?

The court recently addressed this in Sanders v. Commissioner, T.C. Memo. 2022-103 case. The question in the case is whether a daughter can file a tax court petition for her recently deceased mother.

Facts & Procedural History

The IRS was apparently auditing the taxpayer’s income tax returns for the 2013 and 2014 tax years. The taxpayer died in 2016 during the course of the audit. After the taxpayer died, the IRS issued notices of deficiency for the 2013 and 2014 tax years.

Prior to her death, she created a trust and executed a will. She named her daughter as the trustee and the executor under her will.

The daughter hired an attorney to probate the taxpayer’s estate. No probate was needed given that the assets had passed to the trust. So no probate was done.

The daughter filed a petition in U.S. Tax Court and then filed a motion to substitute her, as trustee, as the named petitioner.

IRS Attorney Jamie M. Powers filed a motion to dismiss arguing that the petition was not valid as it was not filed by a fiduciary.

About the U.S. Tax Court

The U.S. Tax Court is a court of limited jurisdiction. One of the types of cases it can hear is deficiency cases. These cases come from IRS audits where the IRS proposes adjustments that the taxpayer does not agree with.

To invoke the court’s jurisdiction, the taxpayer has to timely-file a petition with the tax court. Even missing this filing deadline by a day can foreclose on the ability to pursue a case in tax court.

Usually, the only way to remedy this is to pay the tax and then sue for a refund in either the U.S. District Court or the Federal Court of Claims.

Who is a Fiduciary?

The tax court rules say that a petition can be filed by a fiduciary in the event that a taxpayer has died. Rule 60(a) says that the case can be brought “by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person.” Rule 60(c) says that “[t]he capacity of an individual, other than one acting in a fiduciary or other representative capacity, to engage in litigation in the Court shall be determined by the law of the individual’s domicile.”

The court read Rule 60(c) to mean that state law controls whether a person is a fiduciary. In this case, the court considered Florida law as the taxpayer resided in Florida at the time of her death. Apparently, Florida law requires probate to be commenced to appoint an executor to maintain litigation on behalf of the deceased.

With this interpretation, the daughter did not have the authority to file the tax court petition.

The Court’s Work Around

The tax court decided to hold off on ruling on the IRS’s motion to dismiss for six months to give the daughter time to file a probate case and get appointed as the fiduciary. This is likely the correct outcome as the state court would be able to ascertain the validity of the will and/or consider any challenges by others to the will or the appointment of the daughter as the executor.

From the IRS’s perspective, this has the added benefit of having a probate estate opened. This provides an easier means for the IRS to collect any taxes that may be owed by the decedent after the tax court proceeding is complete. This can be particularly helpful given that the assets were all transferred to a trust and the trust might not be liable for the decedent’s tax debts.

Texas law has concepts similar to those cited by this court for Florida. Probate is not always needed in Texas–particularly if there are no probate disputes by family members or creditors and the estate has few assets.

The Takeaway

The lesson from this case is that a person who dies and whose loved one receives a notice of deficiency for taxes due to the decedent should timely file a tax court petition and, simultaneously, file a probate case. They can then ask the court to change the named party in their tax court petition once they are appointed as the executor or personal representative of the estate.

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