Beneficiary Is Liable for Estate Taxes as a Result of Transfers Received

(Parker Tax Publishing November 2020)

A district court held that a taxpayer who received property from her aunt's and her father's estates, was liable for unpaid estate taxes as a transferee of property from those estates. However, the court concluded that the government did not prove that the taxpayer was liable under the New Jersey Uniform Fraudulent Transfer Act (UTFA) because the transfers in which the taxpayer was involved were outside the scope of the types of transfers the UFTA is designed to protect against. U.S. v. Estate of Kelley, 2020 PTC 341 (D. N.J. 2020).

Background

Lorraine Kelley (Kelley) died on December 30, 2003. Her brother, Richard Saloom, and Richard Lecky (Lecky) were co-executors of her estate (Kelley Estate). Kelley's gross estate included property valued at over $2.6 million on the date of her death, including (1) her primary residence, valued at $490,000; (2) an annuity, valued at over $1 million; and (3) stocks and securities, valued at over $900,000.

On August 20, 2004, Richard Saloom and Lecky sold Kelley's primary residence for $490,000. Additionally, Richard Saloom received over $1 million in proceeds from Kelley's annuity, $50,000 of which he gave to his daughter, Rose Saloom, via check cashed on November 8, 2004. Richard Saloom used these proceeds to run his business and buy and develop other property.

On September 23, 2004, Richard Saloom and Lecky, as co-executors of the Kelley estate filed on its behalf Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, reporting an estate tax liability of approximately $214,000 and a gross estate of over $1.7 million. Richard Saloom, the sole beneficiary of the Kelley Estate, distributed and received all the property of the Kelley Estate for free.

In 2005, the IRS opened an examination of the Kelley Estate's estate tax return. In 2006, Richard Saloom, as co-executor of the Kelley Estate, consented on its behalf to the assessment of an additional tax liability of $448,000, which was based on a corrected gross estate of over $2.6 million, a taxable estate of over $2.3 million, and a total tax of $662,780. In late 2007, Richard Saloom tried to resolve the Kelley Estate's tax liability and entered into an installment agreement with the IRS, eventually making several significant payments toward the tax liability.

By January 2008, the Kelley Estate had no property, yet still owed over $400,000 in estate tax. Some time before his death in March 2008, Richard Saloom instructed Rose to continue to make payments to the IRS for the Kelley Estate's tax liability. Rose made several payments on her father's behalf. Richard Saloom's gross estate included property valued at over $1.1 million on the date of his death, including (1) his primary residence, valued at $220,000; (2) real property valued at $225,000; and (3) interests in two companies valued at $305,400 and $312,000. Rose, as executrix of the Richard Saloom Estate, filed on his behalf a New Jersey inheritance tax return that listed his debt as including $456,406 in "indebtedness" for "federal tax." Rose was the sole beneficiary of the Richard Saloom Estate. Eventually, Rose distributed and received all the property of the Richard Saloom Estate. The Richard Saloom Estate no longer has any property, and Rose no longer has any property from the Richard Saloom Estate.

In February of 2017, the United States filed a five-count complaint in a New Jersey district court seeking a reduction of estate tax assessment to judgment against the Kelley Estate (Count I) and alleging transferee liability against the Richard Saloom Estate (Count II), fiduciary liability against the Richard Saloom Estate (Count III), fiduciary liability against Rose Saloom (Count IV); and liability against Rose under the New Jersey Uniform Fraudulent Transfer Act (UTFA) (Count V). On May 5, 2017, Rose filed a motion to dismiss the complaint, which the district court denied. The government filed for summary judgment, contending that it was entitled to summary judgment against the Richard Saloom Estate for transferee liability under Code Sec. 6324(a)(2) for the stated tax liability of the Kelley Estate. Code Sec. 6324(a)(2) imposes liability on the transferees of a decedent's estate when the estate itself fails to pay its federal taxes. A transferee who receives property from a decedent's estate is personally liable for any unpaid estate tax based on the value of the property received.

As of September of 2019, the total unpaid balance of the Kelley Estate's estate tax liability was $688,644 plus statutory additions accruing after that date. The court entered a Consent Judgment and Order with respect to Count I against the Kelley Estate and Lecky in the amount of $688,644 and closed the case. On March 4, 2020, the United States, by letter, requested that the district court re-open the case and restore the Motion for Summary Judgment against Rose Saloom and the Richard Saloom Estate for Counts II through V of the Complaint. On March 5, 2020, the court reopened the case and restored the government's motion for summary judgment.

Analysis

The district court granted the summary judgment to the government on Counts II through IV but not on Count V. In its reasoning for ruling the way it did, the court cited Code Sec. 6324(a)(2) and the decision in U.S. v. Tyler, No. 10-1239 (E.D. Pa. 2012) in which a district court held that personal liability can attach, to the extent of a distribution from an estate, if the government establishes three elements: (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes. According to the Tyler court, the purpose of imposing personal liability on estate representatives is to make those into whose hands control and possession of the debtor's assets are placed, responsible for seeing that the government's priority is paid.

With respect to Count II, the court found that although Rose presented arguments for why she was not liable for the Kelley Estate tax liability, she did not present evidence to dispute the transferee liability against the Richard Saloom Estate. As such, the court said, no genuine issue of material fact existed with respect to the transferee liability against the Richard Saloom Estate.

With respect to Count III, the court noted that 31 U.S.C. Section 3713(b) places personal liability on an executor of an estate who pays the debts of the estate, or distributes assets to himself, before paying a claim of the United States. First, the court found no genuine dispute of material fact that Richard Saloom distributed the assets of the Kelley Estate and that such distribution rendered the Estate insolvent. Additionally, there was no genuine dispute of material fact that Richard Saloom had at least constructive knowledge that there existed at least some tax liability for the Kelley Estate. Further, Richard Saloom indicated he had knowledge of the debt by entering into an installment agreement with the IRS and making periodic payments to satisfy the estate tax liability.

With respect to Count IV, the court agreed with the government's claims that, as executor of the Richard Saloom Estate, Rose (1) distributed all of the approximately $1.1 million of property of the Richard Saloom Estate to herself; (2) rendered the Richard Saloom Estate insolvent; and (3) made such distributions despite knowing her father's tax liabilities.

With respect to Count V, the court found that the government failed to demonstrate that the conveyance of property from the Richard Saloom Estate to Rose was fraudulent. The court noted that, in the cases on which the government was relying, courts have entered summary judgment and enforced personal money judgment against transferees who were explicitly engaged in schemes to defraud creditors and no such intent existed in Rose's situation. The transfer of property from the Richard Saloom Estate to Rose was the result of inheritance, the court said. Additionally, the property remained within the reach of the United States via transferee liability. In looking at the premise of the UFTA, the court found that it was clear that the type of testamentary transfer involved in the instant situation was outside the scope of the types of transfers the UFTA is designed to protect against.

For a discussion of transferee liability for estate taxes, see Parker Tax ¶262,530.

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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