Executor Who Transferred Estate Assets Held Personally Liable for Unpaid Estate Taxes

(Parker Tax Publishing January 2020)

A district court held that the executor of an estate who, during the administration of the estate, transferred several properties to himself and others for no consideration, was personally liable for the estate's estate tax deficiency. The court rejected the executor's argument that the government's action was time barred because the statute of limitations under Code Sec. 6502(d) began running when the executor signed a waiver of assessment and held that the waiver was not an assessment and therefore did not begin the running of the limitations period. U.S. v. Kohls, 2020 PTC 1 (S.D. Ohio 2020).

Background

Corwin Kohls died in September of 2001. His son, Douglas, opened an estate in probate court and was named the executor. Following an estate tax return extension request, the estate filed its Form 706, United Sates Estate (and Generation-Skipping Transfer) Tax Return, in December of 2002. As a result of prior payments to the IRS, the return showed an overpayment of $7,520. About a month later, the IRS opened an audit of the estate's return.

In March of 2004, the estate filed a report with the probate court, signed by Douglas, stating that the administration needed to be continued until a determination was made by the IRS regarding a family-owned business interest deduction on the estate tax return. In November 2004, the estate, through Douglas, transferred real property with net equity of $182,747 to Douglas in his individual capacity. The estate received no money for this transfer. In December 2004, the estate filed another report with the probate court in which Douglas stated that he had been unable to distribute the assets and finalize the administration of the estate due to the IRS's ongoing review of the estate's tax return. The December report again mentioned the family-owned business deduction and stated that if the deduction was not approved, additional estate assets would have to be sold to pay any estate taxes that might be due.

The IRS completed its audit and, on May 27, 2005, Douglas signed a Form 890, Waiver of Restriction on Assessment and Collection of Deficiency and Acceptance of Overassessment - Estate Gift and Generation Skipping Transfer Tax (the waiver). In the waiver, Douglas consented to the immediate assessment and the collection of a $199,077 estate tax deficiency. Also on May 27, 2005, Douglas applied for an extension of time to pay the estate taxes. After the IRS granted the extension, the $199,077 liability, plus interest, was due on May 27, 2006. On July 4, 2005, the IRS made an assessment against the estate of the $199,077 estate tax liability.

In August and October of 2005, the estate, through Douglas, transferred two more properties for no consideration with net equity of $53,439 and $571,001. The estate applied for a received another one-year extension to pay the estate's taxes, extending the due day to May 27, 2007. Although the taxes were unpaid, the estate was closed in February of 2007. The estate received another extension from the IRS to May 27, 2008, to pay the estate taxes. As of May of 2018, the estate's tax bill, including penalties and interest, totaled $322,875.

On July 2, 2018, the government filed a complaint against Douglas in a district court. It sought a judgment against him personally and in his capacity as the executor for the estate's unpaid taxes under 31 U.S.C. Sec. 3713, which provides that an executor can be held personally liable if he or she pays any part of a debt before paying a federal estate tax claim. The government also contended that Douglas was liable for the taxes under state-law principles of equity and unjust enrichment.

Douglas filed for summary judgment, arguing that the government's complaint was time barred under Code Sec. 6502(d), which gives the government 10 years (plus extensions) after an assessment to begin a court proceeding to collect a tax. According to Douglas, the complaint had to be filed either by May 27, 2018 - 13 years from the date he signed the Form 890 - or June 2, 2018, 13 years from the date the IRS received the Form 890. Douglas questioned how an assessment could have occurred on July 4, 2005, a federal holiday.

District Court's Analysis

The district court granted summary judgment for the government and held that Douglas was liable in his personal capacity and as executor for the estate's $322,875 estate tax liability, plus penalties and interest.

The court found that Douglas's reliance on the Form 890 as the assessment for purposes of Code Sec. 6502 was misplaced. The court explained that a Form 890 is a waiver of restriction on assessment and collection of the deficiency, but it is not an assessment. The court explained that an assessment is made by recording the taxpayer's liability in accordance with prescribed rules and regulations, and under Reg. Sec. 301.6203-1, the date of assessment is the date the summary record of assessment is signed by the assessment officer. The court noted that the government filed a Form 4340, Certificate of Official Record, establishing the assessment date as July 4, 2005, and was entitled to a presumption of correctness, and found that, other than noting that the date was Independence Day, Douglas offered nothing to refute the assessment date as stated in the Form 4340.

Next, the court found that the government had established all of the evidence for liability under 31 U.S.C. Sec. 3713. The court found that Douglas, as the executor, transferred property to himself and to others for no consideration. Following these transfers, there were no further assets left in the estate and, according to the government, the estate was rendered insolvent. Finally, the court found that these transfers occurred after Douglas was aware that the estate's return was under audit and after he filed status reports with the probate court stating that no distributions could be made because of the audit and noting concerns about a business deduction not being approved. The court also concluded that Douglas was liable under the government's state-law theory of unjust enrichment.

For a discussion of the statute of limitations on assessments of tax, see Parker Tax ¶260,130.

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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