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which included the $2,357,493 paid.
In October 1991, the IRS and the estate entered into a
settlement agreement in which the Federal estate tax liability and
additions to tax previously assessed were decreased in the
respective amounts of $4,122,736 and $1,042,403.
In late September 1992, the IRS, the trust representatives,
and petitioner agreed that the trust should have been taxable as a
grantor trust pursuant to sections 671 through 678 since its
inception.5 Accordingly, in November 1992, amended Forms 1041 were
filed for the trust, recharacterizing the trust as a grantor trust.
As a result of this recharacterization, the $2,357,493 of interest
paid on the estate tax was attributed to petitioner and was
reflected as an interest deduction on her 1988 amended income tax
return.6
The Refund Check
On February 18, 1992, the IRS issued a $10,364,431 refund
check (the refund check) made payable to the estate. The refund
check included $2,290,469 in interest that previously had been
5 A grantor trust is not subject to the income tax.
Rather, all of the income and deductions pertaining to a grantor
trust must be taken into account by the grantor. See secs. 671-
678.
6 The “Explanation of Change to Income and Tax Reduction
For 1988" attached to petitioner’s 1988 amended return in
relevant part states: “the administrative expenses of the Hunter
Estate are to be flowed through the E.V. Hunter Trust (grantor
trust) and ultimately reflected on the individual income tax
returns of Edith Hunter Hornberger.”
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