State Law Cured Defective Conveyance of Property Out of Estate

(Parker Tax Publishing February 2019)

The Eleventh Circuit held that a tax lien on property the United States claimed was part of an estate was not valid because the property had been conveyed out of the estate by operation of state law. The court held that a state statute, which cured the defective deed which had conveyed the property out of the estate, was self-executing and did not require a formal adjudication to effect the conveyance, and it rejected the argument that the government was not bound by the state statute. Saccullo v. U.S., 2019 PTC 22 (11th Cir. 2019).

Background

Mark Saccullo lived on a property in Florida beginning in 1991. Mark's father, Anthony, who owned the property in fee simple, executed a deed in 1998 purporting to convey the property to a trust for Mark's benefit. The deed conformed to most of the necessary formalities, and it was properly notarized and recorded in 1998. However, the deed bore the signature of only one witness, not the two required by Florida law. That failure effectively negated the conveyance, at least for the time being, and Anthony retained title to the property despite the deed.

When Anthony died in 2005, Mark became the trustee of his father's irrevocable trust. Mark filed an estate tax return and mistakenly included the property among the estate's assets. In 2007, the IRS assessed estate tax of almost $1.4 million, apparently under the impression that the estate owned the property. Shortly thereafter, Mark, acting as trustee, conveyed the property by quitclaim deed to himself and his wife.

Because the estate tax liability remained delinquent, the government filed two tax lien notices in Charlotte County, Florida: one against the estate in 2012, and another against the property in 2015. The IRS later administratively seized the property and unsuccessfully sought to sell it, as the estate tax liability increased to $1.6 million.

After the administrative seizure, Mark filed a quiet title action in a Florida district court, contending that the liens did not cover the property because it was in fact not part of his father's estate when he died. The government counterclaimed, seeking to foreclose on its liens. In a motion for summary judgment, the government argued that the property remained in Anthony's estate and was thus subject to the tax liens because the 1998 deed was not properly witnessed. Mark responded that under Florida law, any defects in the title were cured in 2003, five years after the deed's initial recording.

The district court granted the government's motion, holding that the property remained in the estate and that the IRS could therefore foreclose on its liens. The district court found that the defective deed was not cured because its missing second signature was not among the technical defects cured by the Florida statute. The district court further found that the Florida statute was essentially a statute of limitations which did not bind the United States. Accordingly, the district court ordered the foreclosure and sale of the property and required Mark to vacate within 30 days. Mark appealed to the Eleventh Circuit.

Analysis

Florida Statute Sec. 95.231(1) provides in part that, five years after the recording of an instrument attempting to convey property, the instrument "shall be held" to have its purported effect as if there had been no lack of witness or witnesses. In Sec. 95.231(2), the statute states that after 20 years, no person shall assert any claim to the property against the claimants under the deed or will or their successors in title.

Under U.S. v. Summerlin, 310 U.S. 414 (1940), state statutes of limitation are unenforceable against the federal government. The Summerlin rule is founded on concern that the public suffers when the government sleeps on its rights, and thus provides that while individual citizens can be penalized for inattentiveness in enforcing their rights, the United States cannot be. The Summerlin rule has its limits; in Bresson v. Comm'r, 213 F.3d 1173 (9th Cir. 2000), the Ninth Circuit held that the rule applies only when the United States has come into possession of a valid claim. If a claim already has become infirm (for example, when a limitations period expires) by the time the United States acquires the purported right, the rule in Summerlin does not operate to revive the claim.

On appeal, the parties agreed that the absence of a required witness signature did not invalidate the 1998 deed beyond the reach of Sec. 95.231. However, they disagreed on (1) whether the "shall be held" language in the statute meant that a defective deed could cured only through a formal adjudication, and (2) whether the Summerlin rule precluded enforcement of the five -year cure provision in Sec. 95.231.

Mark contended that Sec. 95.231 was automatic and self-executing, and that therefore, the once-defective 1998 deed was rendered valid by operation of law in 2003, five years after the deed was originally recorded. Mark argued that as a result, the property was no longer part of his father's estate in 2003, which was two years before Anthony died and thus, before any claim asserted by the United States could have accrued. The government contended that the phrase "shall be held" in Sec. 95.231 meant that a valid cure required some form of formal adjudication before marketable title could transfer. Because there was no such adjudication, the property was never transferred, according to the government.

The Eleventh Circuit held that Sec. 95.231(1) cured the deed by operation of law in 2003 and that the property was at that point validly transferred to the trust. Thus, the court said, the Summerlin rule was inapplicable because, by the time the United States asserted its tax lien, the property no longer remained in the estate. The Eleventh Circuit therefore reversed the district court's entry of summary judgment for the government.

The Eleventh Circuit found that the clear weight of Florida authority favored reading the term "held" in Sec. 95.231 to mean "considered." The court reasoned that while it was plausible to read the statute to require an adjudication, under Florida precedent, the deed was "held" - as in "considered" - to have its purported effect by operation of law in 2003, five years after it was initially recorded.

Next, the court found that the Summerlin rule did not apply because the property dropped out of the estate in 2003, two years before any claim by the United States could have accrued. The court noted that, as the Ninth Circuit explained in Bresson, if a limitations period has already expired by the time the United States acquires a purported right, the Summerlin rule will not operate to revive the claim. That is, the Summerlin principle cannot create rights that do not otherwise exist.

The Eleventh Circuit reasoned that the United States' claim to Anthony's estate accrued, at the earliest, when he died in 2005, but by operation of Florida law, Mark had acquired good title to the property two years earlier, in 2003. Accordingly, the court found that this was not a situation in which a valid cause of action had accrued to the United States only to later perish through the passage of time. Rather, Sec. 95.231 prevented the property from becoming part of the United States' claim in the first place. The Eleventh Circuit also reasoned that this case was not within the spirit of the Summerlin rule, because no amount of diligence on the part of the IRS could have made it possible for the government to acquire a valid estate tax claim before the deed was statutorily cured in 2003.

For a discussion of liens for estate tax, 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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