The facts in the case are not complicated. Joseph Mangiardi died, leaving an estate essentially composed of two assets: a trust worth $4.5 million and IRAs worth $3.4 million. The estate calculated an estate tax due in excess of $2.5 million.
The IRAs were distributed to Mangiardi's nine children. Over a four-year period, the estate requested six separate extensions of time to pay the estate tax. In the final request for an extension of time, the estate explained that the unliquidated value of the trust had shrunk to $542,714, and the liquidation of the securities in the trust to pay the estate tax would result in a substantial loss to the estate. The IRS granted the final extension, but only for two and one-half months.
Three years later, the estate offered to settle its tax debt for $700,000, all of the assets remaining in the trust at that time. The IRS rejected the offer because it planned to proceed to collect the tax from the children who had received the IRAs.
The estate went to court to challenge the IRS, claiming the agency had abused its discretion in failing to properly consider the settlement offer. First the Tax Court and now the Appeals Court upheld the decision by the IRS to reject the offer from the estate and to proceed to attempt to collect the tax debt from the Mangiardi children. (Estate of Joseph L. Mangiardi v. Commissioner, TC Memo 2011-24, Jan. 27, 2011; CA-11 (unpublished opinion))
The moral of this story: It's difficult to settle your tax debts for pennies on the dollar if you have the money to pay the taxes owed.