A federal district court found in Estate of Kelley, (DC NJ 10/22/2020), that transferee and fiduciary liability attached to the estate of an individual who, as executor, distributed the assets of his sister’s estate to himself while leaving the estate tax liability unpaid. Further, the court found that fiduciary liability attached to the decedent's daughter, executrix of his estate, who paid herself ahead of paying the estate tax liability of her father’s estate.
Where an estate fails to pay estate taxes, a transferee of that estate is personally liable for any unpaid estate tax up to the value of the property he or she received. (Code Sec. 6324(a)(2))
Personal liability can attach to the extent of the distribution 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 unpaid taxes. (Tyler, (CA3 2013) 111 AFTR 2d 2013-2300)
An executor of an estate who pays the debts of the estate, or distributes assets to himself, before paying a claim of the U.S. is personally liable for that claim to the extent of the payment or distribution. (31 USC §3713(b))
Code Sec. 6324 applies to individuals who receive transfers from a decedent's estate that owes estate taxes, while 31 USC §3713 provides creditor priorities that estate fiduciaries must follow. Under Code Sec. 6901, the liability of a transferee or a fiduciary is assessed, paid and collected in the same manner as the original tax. When a fiduciary is also a transferee, either statute or both statutes may apply to that individual.
Lorraine Kelley died on December 30, 2003. The estate’s co-executors were Richard Saloom, Kelley’s brother, and Richard Lecky. Saloom and Lecky filed the estate’s tax return on September 23, 2004.
After an IRS examination of the returns, Saloom, on behalf of the estate, consented to the assessment of additional liability based on a corrected gross estate.
Between 2003 and 2007, Saloom, who was the sole beneficiary, distributed and received all of the property of Kelley's estate. By January 2008, the Kelley estate had no property and still owed over $400,000 in estate tax.
Saloom made estate tax payments to IRS and, prior to his death on March 21, 2008, instructed his daughter Rose Saloom to continue to make payments to IRS toward the tax liability owed by Kelley's estate.
As executrix of Saloom’s estate, Rose filed a state inheritance tax return listing one of his liabilities as $456,406 in indebtedness for “federal tax.” Rose, who was the sole beneficiary, distributed and received all of the property of Saloom's estate.
The district court found that Saloom was liable as a transferee and as a fiduciary for the tax liability owed by Kelley's estate.
Saloom was liable as transferee to the extent of the distributions he received from the estate. Since he received $2.6 million in property from Kelley's estate when the estate owed IRS over $688,000 in estate taxes, he was personally liable for the entire amount of estate tax.
In addition, Saloom was personally liable as a fiduciary under Tyler because he (1) distributed all the assets of Kelley's estate; (2) the distribution rendered the estate insolvent and unable to pay its creditor, IRS; and (3) Saloom knew that Kelley's estate owed unpaid estate taxes because he was making payments on the tax liability.
Finally, Rose was also personally liable as a fiduciary under Tyler because she (1) distributed all of the assets of Saloom's estate to herself; (2) that distribution rendered the estate insolvent; and (3) Rose knew that Saloom was liable for Kelley's estate tax because she filed a state inheritance tax return listing one of his liabilities as $456,406 in indebtedness for “federal tax."
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