Executor Seeks Refund Of Fiduciary Income Taxes, And The Application of Iqbal/Twombly To Defensive Pleadings In Tax Cases

The executor of the Estate of Tamir Sapir is seeking a refund of more than $25 million of fiduciary income tax alleged to have been overpaid to the Internal Revenue Service (“IRS”).  While the refund suit is currently teed up before a federal district court, the estate sought judgment on the pleadings, attempting to seize on the government’s sparse affirmative-defense pleading.  The case addresses a question on which federal courts have split: Whether a heightened-pleading standard—a la the Supreme Court’s Iqbal/Twombly line of cases—applies to pleadings raising a defense in a tax refund suit.


The estate had previously filed income tax returns as required by law.  The executor filed the Estate’s initial Form 1041 for FYE 16 in November 2016, and promptly made a payment of $50.2 million to the IRS, consisting of an approximately $48.6 million tax payment and a $1.6 million late penalty and interest payment.

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Some Nonresidents With U.S. Assets Must File Estate Tax Returns

Certain deceased nonresidents who were not citizens of the United States are subject to U.S. estate taxation with respect to their U.S.-situated assets. For estate tax purposes, a citizen of a U.S. possession is not a U.S. citizen.

U.S.-situated assets that are subject to estate tax include, for example:

  • Real estate located in the U.S.,
  • Tangible personal property (excluding some art), and
  • Stock of corporations organized in or under U.S. law, even if the nonresident held the certificates abroad or registered the certificates in the name of a nominee.

Examples of property treated as situated outside the U.S., and therefore not subject to the U.S. estate tax, include certain deposits and debt obligations described in Section 871(g)-(i), bank accounts deposited with a foreign branch of a domestic commercial banking business, and proceeds of life insurance on the life of a nonresident who is not a U.S. citizen.

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