Dissipation of Decedent's Assets by Son Justified Jeopardy Assessment

(Parker Tax Publishing August 2024)

A district court granted summary judgment to the IRS after concluding that it was appropriate for the IRS to initiate a jeopardy assessment against a deceased taxpayer's son who was overseeing his father's estate. The court found that the fact that the son and his mother were using the estate's assets for personal purposes was reason enough for a jeopardy assessment. Geiger v. U.S., 2024 PTC 260 (S.D. Fla. 2024).

Background

Gunter Geiger was a German citizen who became a permanent U.S. resident in 1965. In 2010, he moved to Europe and in 2011, a foreign foundation, the World Capital Foundation, distributed all of its funds to Geiger. Geiger did not report the income on his 2011 income tax return.

In 2012, the IRS maintained a program called the Offshore Voluntary Disclosure Program (OVDP). The purpose of the program was to provide amnesty and protection from criminal prosecution to taxpayers who were willing to come forward and disclose income from foreign sources. Geiger applied for admission into the OVDP in 2012 and the IRS approved his application. Shortly thereafter, Geiger informed the IRS that he had received undisclosed income (from the World Capital Foundation and from other sources as well) from 2003 through 2010. He also informed the IRS that the World Capital Foundation was a grantor trust. Based upon that fact, Geiger completed, under penalty of perjury, a worksheet that computed the total amount he owed the IRS to be approximately $6,281,000.

Geiger made an initial payment of approximately $2 million. In early 2015, before Geiger made any additional payments, he died. The personal representative of Geiger's estate was his son, Grant Geiger. The IRS sent Grant a letter asking him to approve and conclude the 2012 OVDP program by agreeing that his father had received income from a grantor trust and that the amount of tax owed was close to the amount previously computed by his father. Grant declined to agree and instead took the position that his father had received income from a non-grantor trust, which would receive better tax treatment than a grantor trust. The IRS continued, to no avail, to try to get Grant to approve and sign a document concluding the OVDP program and treating his father's income as derived from a grantor trust.

In 2021, Grant informed the IRS for the first time that: "the Estate distributed $14.4 million to the beneficiaries, leaving $1 million to deal with winding up the OVDP" and that "the Estate of Gunter A. Geiger has no assets . . . and the beneficiaries of the Estate are unable to pay the balance due with the current treatment that the World Capital Foundation is a grantor trust as they do not have enough assets to make the payment." The IRS officially removed Geiger from the OVDP program on January 6, 2023.

While the IRS can attempt to collect taxes through litigation in the Tax Court, if the IRS believes that Tax Court litigation would, through delay, impair its ability to collect a tax, the IRS may immediately initiate, under Code Sec. 6861, a jeopardy assessment. Because the collection of a tax might happen before the Tax Court finishes its judicial review of a case, Code Sec. 7429 allows a taxpayer to seek an expedited, limited judicial review of such a jeopardy assessment. The IRS initiated a jeopardy assessment to collect the taxes owed by Geiger, and Grant requested a review of the jeopardy assessment by a district court. The IRS and Grant each filed a motion for summary judgement.

The IRS argued that the jeopardy assessment was reasonable because (1) Grant distributed and transferred almost all of the estate's assets without informing the IRS; (2) Grant attempted to impair the ability of the IRS to collect the assets by placing them in irrevocable Wyoming trusts; (3) the Wyoming trusts further reduced the collection abilities of the IRS by investing the funds in illiquid assets, including foreign accounts and foreign entities; (4) as a fiduciary of the estate, Grant made the decision to transfer ownership of the funds to himself and to his mother, even though he knew the estate's tax liability remained outstanding and unpaid, leaving the estate with insufficient funds to pay the tax as determined by the IRS; and (5) Grant and his mother lacked sufficient income to pay their personal expenses and are dependent upon the consumption of the estate/trust assets for their personal expenditures, and lack sufficient assets to pay the disputed income tax. Taking these facts into account, the IRS said, it can reasonably be anticipated that, barring a jeopardy assessment, Grant and his mother will continue to dissipate the assets in the future.

In response, Grant emphasized the slowness of the IRS actions in the case, such as the multi-year delay between his informing the IRS of the estate's depleted assets and the IRS's termination of the OVDP program. He also emphasized that he has always provided the IRS with the documents it requested and that the Wyoming trusts are available to pay tax liabilities, once those liabilities are conclusively determined.

Analysis

The district court granted summary judgment to the IRS and denied Grant's summary judgment request. The court gave five reasons for finding that the jeopardy assessment was reasonable.

First, the court said, the governing statute, Code Sec. 7429, does not require that the IRS act with any particular speed and all that the court must decide is whether the jeopardy assessment is reasonable.

Second, the court was persuaded that the risk of the quick dissipation of estate assets in the future was sufficiently great that a jeopardy assessment was warranted. The court noted that Grant could have kept sufficient assets in the estate's possession to pay the tax at issue (as determined by the IRS), but he didn't and he could have declined to use the estate's assets for personal expenditures, but he didn't do that either.

Third, the court observed, courts routinely look to whether there is evidence of criminal activity surrounding a jeopardy assessment. In this case, the court found it significant that the father had admitted that he failed to disclose large amounts of income to the IRS; thus, there was no question that some sort of unlawful activity took place (even if it was just a failure to report) and that some of the estate's assets were therefore unlawfully retained from the United States government. For that reason, the court said it was reasonable for the IRS to take the position that the (unlawfully retained) funds never should have been disbursed or otherwise transferred: (1) to Grant, (2) to a trust, and (3) to foreign accounts, as they were in this case. The court noted that some courts have gone so far as to reason that the failure to file correct income tax returns and to pay tax liabilities when due are sufficient facts to justify jeopardy assessments. While noting that a son is not his father, the court observed that the son in this case had transferred the funds to trusts and foreign holdings, just like his father. As the unlawfully retained funds were again placed in such a position, all without informing the IRS, the district court was persuaded that the IRS had a reasonable basis to fear its collection of the funds would be impaired, thus making a jeopardy assessment reasonable.

Fourth, the court addressed Grant's argument that he had put the IRS on notice of the depletion of the estate's assets in 2021, yet the IRS waited until 2023 to take the necessary steps to put this case at issue. While the court found that to be a fair point, it said it was not dispositive citing the decision in Revis v. U.S. Revis v. U.S., 558 F.Supp. 1071 (D. R.I. 1983), which analyzed a similar fact pattern where it took years for the IRS to act upon various pieces of information provided to it by a plaintiff. The Revis court went on to cite a case where a three-year delay by the IRS was held to be permissible, but it based its decision upon the Code Sec. 7429 standard: was the jeopardy assessment reasonable. Based on the reasoning outlined in Revis, the district court found the jeopardy assessment was reasonable.

Fifth, the court looked at Grant's argument that the IRS had an improper motive in bringing the jeopardy assessment. Grant characterized the assessment as a negotiation tactic to force him to concede that his father's trust was a grantor trust. The court rejected this argument and said that any subjective intention the IRS may have had when it made the jeopardy assessment was completely irrelevant because the court's decision is governed by Code Sec. 7429 and focuses on the objective evidence such as whether an assessment is reasonable.

Finally, the court said that the amount assessed by the IRS in a jeopardy assessment is presumed to be reasonable and appropriate and the plaintiff bears the burden of proving the amount is not reasonable or not appropriate. In the instant case, the court concluded that Grant had not carried that burden.

For a discussion of jeopardy assessments, see Parker Tax ¶262,520.

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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