Estate Planning Legal Topics Tax Law

Tell It to the (Tax Court) Judge: If You Prefer District Court, Pay the Tax First and Then Ask for a Refund


Michael Jackson is back in the news. The IRS added some $700 million to the reported value of Jackson’s estate, based on posthumous publicity rights valued by the estate at $1200. The news brought to light an interesting issue: To get a regular trial with a district judge on a tax deficiency, you have to pay the tax first.

The Jackson valuation issue is not unique. Similar issues have arisen from reported plans to publish five finished manuscripts produced by reclusive author J.D. Salinger who died in 2010.

Media reports have highlighted the uncertainties and complexities of appraisal methodology and bargaining tactics involved in such cases.

But these cases bring up another interesting point: The only way to dispute a deficiency without paying the tax first is to file a petition in Tax Court. The petition must be filed within 90 days (150 days in some cases) after the notice of deficiency is mailed. IRC §6213(a).

You can also sue the government for a refund in U.S. District Court (or in the U.S. Court of Federal Claims), but you have to pay the tax first.

Either way, you don’t get a jury trial, because the Seventh Amendment right to a jury trial does not apply to statutory actions against the federal government. Wickwire v Reinecke (1927) 275 US 101, 48 S Ct 43. The same rule applies to state income tax refund actions in California. Franchise Tax Bd. v Superior Court (Gonzales) (2011) 51 C4th 1006.

But some practitioners prefer district judges with less expertise (or more open minds) to hear the facts and decide the legal issues. Win or lose, however, appeals from either the Tax Court or district court still go to the Ninth Circuit for taxpayers in California.

Paying the tax first poses a problem for estates with intangible or illiquid assets which already may need a payment plan to pay the tax. Michael Jackson’s estate might need to raise over $200 million in cash to pay the tax on a $700 million deficiency just to get in the courthouse door.

Call it a “Catch” in the Rye.

On planning for payment of estate tax, see California Estate Planning §§10.69-10.78. On publicity rights, see Estate Planning for Special Assets §8.35. Also check out Intellectual Property in Business Transactions §9.18.

Other CEB blog posts of interest:

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