Claims for Unpaid Estate Tax Allowed to Proceed (Marin, DC, N.Y.)

04 February 2020

The government’s action to collect unpaid estate tax from the estate’s executors, in their capacity as executors, individuals and beneficiaries, was allowed to proceed. The estate’s primary asset was real estate. At the time the estate tax return was filed, the estate elected to defer payment of the estate tax and made timely interest payments for five years before it defaulted on making additional payments and providing the IRS a bond or special lien consent. The executor informed the IRS that the estate was in poor financial condition and did not have sufficient assets to pay its tax liability. Upon the decedent’s death, the beneficiaries received property that was held in certain “in trust for” accounts. In addition, the estate paid debts to other creditors.

Executor’s Personal Liability

The government stated a claim against the executor under 31 USC §3713 because the government asserted that the estate was insolvent, based on the estate’s own claims, and that the executor made payments to other creditors with knowledge of the government’s priority claim for unpaid taxes. Further, this claim was not barred by the doctrine of collateral estoppel because the issue was not fairly or fully litigated in the probate court, as suggested by the executor.

Transferee Liability

An assessment against the transferees under Code Sec. 6901 was not required because the government made a timely assessment against the estate. Code Sec. 6324 imposes liability on the transferees of an estate’s property when the estate does not pay its taxes. Personal liability may be imposed under Code Sec. 6324(a)(2) against the transferees of the estate’s property to the extent of its date-of-death value. Contrary to the claim of the beneficiaries, the government was not first required to make a claim directly against them pursuant to Code Sec. 6901 before bringing a Code Sec. 6324(a)(2) transferee liability claim.

Foreclosure of Tax Liens

The government’s claim to foreclose its federal tax liens, for an order of judicial sale of the estate’s properties, and to appoint a receiver to operate and liquidate the properties was allowed to proceed. The estate argued that the probate exception to federal jurisdiction resulted in the court not having jurisdiction over the foreclosure claim. However, the probate court was not exercising custody or jurisdiction over any estate property. The issue of whether the estate owned the 29 properties at the time of assessment was a determination of fact. Based on the allegations of the compliant, the government stated a Code Sec. 7403 claim to foreclose upon the government’s Code Sec. 6321 estate tax lien. In addition, the government may seek to foreclose upon a Code Sec. 6324 estate tax lien, which although not explicitly stated in the complaint, was determined to be an additional basis for the government’s foreclosure claim.