IRS Wins Judgment Against Estate Where Decedent Used Tax Shelter to Avoid Taxes

(Parker Tax Publishing July 2018)

A district court granted in part and denied in part an IRS motion for summary judgment in a case involving the nonpayment of taxes by a decedent on a $132 million stock gain and the use by the decedent of an abusive tax shelter to hide the gain. While giving the IRS an opportunity to file a supplemental brief if it so chose, the court ruled that the IRS failed to establish any liability on the part of a trust set up by the decedent but did grant the IRS summary judgment against the decedent's estate for more than $9 million in taxes plus interest. U.S. v. Gonzales, 2018 PTC 200 (N.D. Calif. 2018).

In 2000, Thomas J. Gonzales II (Gonzales II) sold shares of stock resulting in a capital gain of over $132 million. To avoid income taxes on the gain, Gonzales II participated in a tax shelter and, in April 2001, he filed a tax return for 2000 on which he reported capital losses from the tax shelter. Gonzales II died in December 2001. Upon his death, his father, Tom Gonzales (Gonzales), became the personal representative of his son's estate, the Estate of Thomas J Gonzales II (the Estate), and the successor trustee of a trust his son had established, The Thomas J. Gonzales II 2001 Trust (the Trust). Thereafter, Gonzales signed a series of consent forms (i.e., the Consents) that purported to extend, through December 31, 2006, the deadline for the IRS to assess taxes against Gonzales II for the 2000 tax year.

On December 6, 2006, the IRS issued a statutory notice of deficiency (SNOD) to Gonzales, in his capacity as the representative of the Estate, for underpayment of income taxes in the amount of $26.2 million and an accuracy-related penalty in the amount of $5.2 million. On April 12, 2007, the IRS assessed these sums on Form 4340, Certificate of Assessments and Payments, as well as $13.3 million in interest. The Estate paid the tax and penalty under protest on August 17, 2007, and then Gonzales, as the personal representative of the Estate filed an administrative claim for refund. The IRS abated the penalty in full because the Estate had complied with an IRS disclosure initiative regarding abusive tax shelters, but otherwise disallowed the claim. The IRS did not refund the penalty, however, but retained the funds as a setoff against a portion of the interest owed on the additional tax liability for 2000. On behalf of the Estate, Gonzales filed a refund suit in district court. Among the issues raised was whether the IRS had properly credited the refund of the accuracy-related penalty against the Estate's unpaid statutory interest. The refund suit was resolved in the government's favor on summary judgment and was affirmed by the Ninth Circuit. The Supreme Court denied a petition for writ of certiorari.

Although Gonzales paid the underpayment of income tax and the penalty prior to filing the refund suit, he failed to pay the interest assessed against Gonzales II for 2000 and Gonzales II remained indebted to the U.S. for approximately $8.7 million, plus such additional amounts, including interest and penalties, which accrued and continued to accrue. The government filed suit against Gonzales - in his capacity as the personal representative of the Estate and as successor trustee of the Trust - to collect unpaid interest assessed against Gonzales II. Subsequently, the government filed a motion requesting summary judgment against Gonzales, as personal representative of the Estate and successor trustee of the Trust, in the amount of $9.2 million for unpaid interest associated with the tax liability of Gonzales II for 2000, less any additional credits and plus interest and other statutory additions.

Parties Arguments

Gonzales argued that the government was not entitled to summary judgment for the following reasons: (1) the government failed to establish the liability of either the Trust or the Estate; (2) the government's claim was barred by the three-year statute of limitations in Code Sec. 6501(a); (3) the government did not give the requisite notice of the assessment of interest; (4) the government's claim was barred by estoppel; and (5) the government cannot rely on the Form 4340 to carry its burden of proving the amount owed.

As evidence of the purported failure to provide notice of the interest assessment, Gonzales noted that he had previously requested all notices and assessments sent by the IRS but received nothing regarding the interest assessment. With respect to the statute of limitations claim, Gonzales argued that either the consents were invalid against the Estate, and thus, failed to extend the statute of limitations or, even if the consents were valid, the time to assess any tax or interest was extended only through December 31, 2006. Gonzales noted that the statute of limitations was initially set to expire in 2004 and although the consents purported to extend the statute of limitations to December 31, 2006, Gonzales claimed that the forms were "ambiguous." The government asserted that the refund suit conclusively determined Gonzales II's liability for the 2000 tax year and, thus, the accrual of interest on that tax was automatic. The government further argued that the Form 4340 established that the assessment of interest was proper.

District Court's Decision

The district court agreed that the Estate and Trust were separate entities and that the government failed to establish that the Trust was liable for any outstanding debt of Gonzales II. As a result, the court held that the government failed to demonstrate that the Trust was a proper party to the government's action and denied summary judgment as to the Trust.

With respect to the argument that the time period for assessing the tax and interest was extended only through December 31, 2006, and thus was time barred, the court found two material errors in this argument. First, by operation of Code Sec. 6503(a)(1) and Code Sec. 6213(a), the statute of limitations was suspended for 150 days after the SNOD was issued on December 6, 2006. Consequently, the limitation period to assess a tax deficiency did not expire on December 31, 2006, but rather, on May 30, 2007. The assessment on April 12, 2007, the court found, was therefore timely. Second, although a tax deficiency must be assessed within three years after a return is filed, under Code Sec. 6601(g), interest may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected. Under Code Sec. 6502(a), the collection period for the underlying tax at issue extended ten years after the assessment of the tax. Thus, the court said, given that the assessment of interest coincided with the beginning of the collection period, the assessment of interest was timely.

With respect to the argument that the IRS did not give the requisite notice for the assessment of interest, the court noted that the SNOD issued in December 2006 did not include interest and this was standard procedure. However, the court said that the government's assertion that notice separate and apart from the SNOD was not required was tantamount to an argument that no notice is required at all. The court disagreed, noting that the government provided no authority to support its assertion, which was contradicted by Code Sec. 6601(e)(1). Generally, the notice and demand requirement is satisfied when the IRS informs a taxpayer of the amount owed and requests payment thereof, the court said. While the court concluded that Gonzales was thus entitled to notice of the assessment of interest, it also found that Gonzales did, in fact, receive notice of the assessment of interest because documents filed in the refund suit indicated that the IRS had credited the accuracy-related penalty against asserted interest allegedly due of more than $13 million.

The court also concluded that Gonzales failed to establish the elements of estoppel and found without merit his argument that the government was not entitled to rely on the Form 4340's presumption of correctness to prove the amount of interest owed. According to the court, the IRS does not have to "prove" the amount of interest because, while establishing the amount of tax liability is a matter of evidence, the amount of interest accrued on such liability is a matter of law. The court concluded that the government could rely on Form 4340 to establish the amount of interest owed. Consequently, the court found that the Estate remained indebted to the government in the sum of $9.2 million plus interest provided by Code Sec. 6601 and Code Sec. 6621.

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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