Estate Tax Liability Applies to Persons Who Received Property After Decedent's Death

(Parker Tax Publishing June 2023)

The Ninth Circuit reversed a district court and held that an estate's beneficiaries and trustees who received estate assets after the date of the decedent's death were personally liable for the estate's unpaid estate taxes under Code Sec. 6324(a)(2). The court rejected the district court's reasoning that the taxpayers were not liable because they were not in possession of estate property at the time of the decedent's death and found that Code Sec. 6324(a)(2) imposes personal liability for unpaid estate taxes on the categories of persons listed in the statute who have or receive estate property, either on the date of the decedent's death or at any time thereafter. U.S. v. Paulson, 2023 PTC 153 (9th Cir. 2023).

Background

Allen Paulson died on July 19, 2000. He was survived by his third wife Madeleine Pickens, three sons - Richard Paulson, James Paulson, and John Michael Paulson - and several grandchildren, including Crystal Christensen. Richard Paulson died after his father, and Vikki Paulson is Richard Paulson's widow. At the time of Allen Paulson's death, his gross estate was valued at $193,434,344 for federal estate tax purposes. Nearly all his assets, which included real estate, stocks, bonds, cash, and receivables, were held in a living trust. The living trust was revocable during Allen Paulson's lifetime and, according to its terms, the trust was to pay any estate taxes.

When Allen Paulson died, his son John Michael Paulson became a co-trustee of the living trust and the sole executor of the estate. He filed an estate tax return with the IRS. The IRS determined an estate tax liability of $4,459,051. The estate paid $706,296 with the return and elected to pay the balance in installments under Code Sec. 6166. As executor, John Michael Paulson made interest installment payments until his removal as trustee in 2009, and he timely made the first estate tax and interest payment in April 2007. He obtained a one-year extension, until April 2009, to make the 2008 tax and interest payment. But neither he nor anyone else made that payment or any of the subsequent installment payments.

Meanwhile, various disputes arose between Madeleine Pickens and Allen Paulson's other heirs. In settlement of those disputes, Madeleine Pickens received in 2003 certain assets including cash, two residences, and an ownership interest in a country club. Between 2003 and 2006, John Michael Paulson distributed at least $7,261,887 in cash from the living trust to other trust beneficiaries. In March 2009, Vikki Paulson and James Paulson were appointed as co-trustees. They said that by this time the living trust was insolvent, with $10.8 million in assets, but $28.3 million in liabilities, including $9.6 million in federal tax liability.

In May 2010, the IRS terminated the Code Sec. 6166 election because of missed installment payments and issued a notice of final determination under Code Sec. 7479. James Paulson was removed as co-trustee, and Vikki Paulson and Crystal Christiansen became co-trustees of the living trust. At that time, according to the government, the living trust held assets worth at least $8.8 million.

In 2011, the IRS recorded notices of federal tax liens against the estate. In 2015, the government filed an action in a district court against John Michael Paulson, Madeleine Pickens, James Paulson, Vikki Paulson, and Crystal Christensen in their individual and representative capacities. The complaint sought a judgment against the estate and the living trust for the outstanding balance of the 2006 estate tax liability, which then exceeded $10 million, as well as judgments against the individual taxpayers under Code Sec. 6324(a)(2). In U.S. v. Paulson, 2018 PTC 294 (S.D. Cal. 2018), the district court held that Madeleine Pickens was not liable for the unpaid estate taxes as a beneficiary of the living trust because she did not receive life insurance benefits. The district court further concluded that James Paulson, Vikki Paulson, and Crystal Christensen were not liable under Code Sec. 6324(a)(2) as transferees or trustees because they were not in possession of estate property at the time of Allen Paulson's death. The government appealed to the Ninth Circuit.

Code Sec. 6324(a)(2) imposes personal liability on transferees and others who receive or have property from an estate. The statute provides that: "If the estate tax... is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent's death, of such property, shall be personally liable for such tax."

As the Ninth Circuit saw it, the issue before it was whether the phrase "on the date of the decedent's death" in Code Sec. 6324(a)(2) modifies only the immediately preceding verb ("has") or if it also modifies the more remote verb, "receives." The government argued that the phrase "on the date of the decedent's death" modifies only the verb "has," not the more remote verb "receives." Therefore, in its view, the statute imposes personal liability on those listed in the statute who (1) receive estate property at any time on or after the date of the decedent's death, or (2) have estate property on the date of the decedent's death. The government also argued that the ordinary meaning of the term "beneficiary" as used in the statute includes "trust beneficiaries" and therefore, Crystal Christensen and Madeleine Pickens were liable as beneficiaries under Code Sec. 6324(a)(2).

The taxpayers contended that the phrase "on the date of the decedent's death" in Code Sec. 6324(a)(2) modifies both "has" and "receives." Thus, they argued that personal liability for the unpaid estate taxes is imposed only on those who receive or have property included in the gross estate on the date of the decedent's death. According to the taxpayers, the government's interpretation would lead to two absurd outcomes. First, personal liability for unpaid estate taxes would be imposed on purchasers of estate assets. Second, because the estate property is valued at the time of the decedent's death, if the property later depreciates, those who receive estate property after the date of the decedent's death could be personally liable for estate taxes that exceed the value of the property they received. In addition, Crystal Christensen and Madeleine Pickens argued that they were not "beneficiaries" because that term as used in Code Sec. 6324(a)(2) has a narrow meaning and applies only to life insurance beneficiaries.

Analysis

The Ninth Circuit reversed the district court and held that Code Sec. 6324(a)(2) imposes personal liability for unpaid estate taxes on the categories of persons listed in the statute who have or receive estate property, either on the date of the decedent's death or at any time thereafter, subject to the applicable statute of limitations. The court further held that the taxpayers were within the categories of persons listed in the statute when they received or had estate property, and therefore were liable for the unpaid estate taxes as trustees and beneficiaries.

Analyzing the text of the statute, the court found that the word "receives" stands independent of the language that follows, "on the date of the decedent's death." Therefore, the court determined that this limiting phrase does not modify the remote verb "receives." The court explained that this reading of Code Sec. 6324(a)(2) is supported by the rule of the last antecedent, which states that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. This rule, the court found, supports the conclusion that the limiting phrase "on the date of the decedent's death" modifies only the immediately preceding antecedent "has," and not the more remote antecedent "receives."

The court further found that its interpretation was supported by the text and context of the statute. The next clause of the statute applies Code Sec. 6324(a)(2) to "property included in the gross estate under sections 2034 to 2042, inclusive." Those Code sections, in turn, attach personal liability for the unpaid estate taxes on the gross estate to assets that are receivable. Thus, the court found that the statute clearly anticipates that at the time of the decedent's death, the categories of persons listed in the statute may receive the expectation of the right to receive certain estate property. Thus, the court concluded that personal liability for the estate tax applies to those who receive estate property, on or after the date of the decedent's death (i.e., through annuities, other receivable payments, powers of appointment, or insurance policies), and to those who have estate property on the date of the decedent's death (e.g., through a survivorship tenancy).

The court rejected the taxpayers' absurdity argument. In the court's view, bona fide purchasers of estate property would not be liable for estate taxes under the plain language of Code Sec. 6324(a)(2), since the statute does not impose liability on purchasers. The court also found that the possibility of estate property depreciating in value, resulting in tax liability that exceeds the property's value, did not meet the high bar for showing absurdity.

Regarding the meaning of the term "beneficiary" as used in Code Sec. 6324(a)(2), the court found that the term is not defined by the statute and that its ordinary meaning therefore applies. The ordinary meaning, the court found, includes trust beneficiaries. The court also found that the taxpayers' argument that "beneficiary" means life insurance beneficiaries was based on cases interpreting earlier versions of the statute with substantively different language. Therefore, the court concluded that Crystal Christensen and Madeleine Pickens were liable for the unpaid estate taxes as beneficiaries.

Observation: In a dissenting opinion, one judge called the majority's interpretation a "hypertechnical reading" of Code Sec. 6324(a)(2) and reasoned that Congress did not intend to allow a person who receives estate property years after the estate is settled to be held personally liable for estate taxes that potentially exceed the current value of the property received. According to the dissenting judge, the taxpayers' reading of the statute accorded with the plain language of the text and was more logical because it would allow the government to impose personal liability for estate taxes only on a person who receives (or holds) estate property on the date of the decedent's death.

For a discussion of an estate executor's potential liability for estate taxes, see Parker Tax ¶228,940.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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