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There is no explicit requirement in the Code, Regs., case law, or IRS pronouncements that a Supplemental 706 must be filed where the value of an estate changes as a result of litigation. Nevertheless, a Supplemental 706 may be required to be filed.
When a decedent's estate is being contested, the litigation often extends beyond the time that the decedent's federal estate tax return (the "706") is required to be filed and federal estate taxes are required to be paid. If, upon conclusion of the litigation, the amount of the Taxable Estate1 changes, the executor is often faced with the dilemma as to whether to file an amended or Supplemental 706 (referred to herein as a "Supplemental 706"). This article will discuss the law regarding the filing or nonfiling of a Supplemental 706, factors to consider with respect to filing or not filing, and the ramifications to the estate, the fiduciaries and the preparers of the decision to file or not file.
Supplemental 706s and filing requirements (or the lack thereof)
The general rule regarding the filing of tax returns is that the statute of limitations for assessment is three years from the date that the return was filed (the "3-Year Period").2 Exceptions to the 3-Year Period will be discussed later.
The Code and Regulations are devoid of any provision that requires a taxpayer to file an amended tax return.3 While the Regulations indicate that, in certain circumstances, a taxpayer "should" file an amended "income" tax return,4 there is no similar suggestion regarding an amended estate tax return. Furthermore, the Regulations provide that an estate tax return "cannot be amended after the expiration of the extension period although supplemental information may subsequently be filed."5
Support for the position that a supplemental return is not required to be filed is contained in the U.S. Supreme Court's opinion in Badaracco.6 Badaracco resolved a longstanding judicial conflict as to whether a taxpayer who filed a fraudulent return can later, by filing a nonfraudulent amended return, terminate the indefinite statute of limitations period in Section 6501 (c)( 1 ) and commence the general 3-Year Period. The Supreme Court stated that "the Code does not explicitly provide for or require the filing of an amended return," which the...