Who Will Read The 706 You File?
In any litigation matter, key questions include: “What’s discoverable? What’s privileged? What will the bad guys be able to find out?” These same questions present in probate litigation and estate planning for potentially contested administrations. If a client and the client’s advisors are planning for a contested administration, one option is to shift assets from the probate estate to the non-probate estate (e.g., survivorship accounts, or a revocable trust). (Note: Florida provides for a statutory definition of the “elective estate” that prevents one spouse from hiding assets from the other through non-probate transfers.)
But if one is able to use non-probate transfers to prevent assets from being discovered in a contested administration, is that the end of the story? Not if there is a taxable estate….
On February 5, the IRS released Chief Counsel Advisory 201005052, relating to Code section 6103. It appears that in a contested administration, the executor had filed one 706, and the decedent’s heirs had filed a separate, competing 706. The IRS decided to accept the executor’s return (good news), and also to send the statutory notice of deficiency to the executor (bad news). The CCA advised, however, that the heirs did have a right under section 6103(e)(3)(B) to see the return that the executor filed. Further, the heirs were entitled to request a copy of the “return information”, including the statutory notice of deficiency. The CCA cited IRM 11.3.2.4.7 as support. That section of the Internal Revenue Manual provides that “any heir at law, next of kin, or beneficiary who establishes a material interest which will be affected by the return or return information may also receive returns and return information.” It explains that a “material interest is an important interest and is generally, but not always, financial in nature.”
The example used in the IRM is of a beneficiary “described in the will as entitled to ‘x’ percent of the decedent’s gross estate, together with a statement that the decedent’s return is needed to assist the beneficiary in determining whether he/she has received a proper share of the estate.” The IRM advises that such facts “would generally be sufficient to permit disclosure. The merits of an action, such as a lawsuit brought by a beneficiary, will generally, but not always, have no bearing on the material interest determination…Generally, written evidence such as a copy of the will. . . [shows] satisfactory proof of entitlement.”
The conclusion reached by the CCA isn’t too surprising. Nonetheless, it’s an important reminder for advisors engaged in actual or potential fiduciary litigation. Estate tax returns are filed under penalties of perjury, and therefore must be truthful. Clearly, however, in certain situations, much of the information they contain could be useful to litigant beneficiaries. The best approach: prepare the return thoughtfully and carefully, and as if opposing counsel were looking over your shoulder. Because, in a very real sense, they are.