October 22, 2012
Authored by: Kathy Sherby and Stephanie Moll
When is a transferee of a decedent’s assets not a transferee subject to liability under §6324(a)(2) of the Code? The U.S. District Court of Utah’s answer to that question in United States v. Johnson, 109 AFTR 2d 2012-2253 (DC UT, 5/23/2012) was surprising when it held that the trust beneficiaries who had received the outright distribution of all of the assets of the decedent’s trust, subject to a Distribution Agreement that each beneficiary would be responsible for the payment of any unpaid estate tax, were not transferees subject to transferee liability for the estate tax under §6324(a)(2).
This case came before the Court in a motion to dismiss for failure to state a claim upon which relief can be granted. The defendants in this case consisted of the four residuary trust beneficiaries (referred to as the Defendant Heirs) and the Personal Representative of the Estate administering the decedent’s pour over will and the Trustees of the decedent’s revocable trust charged by the trust instrument with the payment of the decedent’s debts and estate taxes (referred to as the Defendant Fiduciaries). The Trustees filed the estate tax return and, since the bulk of the estate consisted of closely held stock, elected to defer the payment of a portion of the estate tax under § 6166 of the Code. Within six months after the filing of the estate tax return, the Trustees distributed all of the trust assets to the Defendant Heirs, and the Defendant Heirs and Defendant Fiduciaries executed a Distribution Agreement under which the Defendant Heirs acknowledged that the payment of the federal estate tax had been deferred under § 6166 and would be an “equal obligation of the Beneficiaries to pay as the same becomes due.”
Less than 10 years later, the closely held company filed for Chapter 11 bankruptcy, and the Defendant Heirs received no value for the shares they had received from the trust. Within a year, the estate and the trust defaulted on the remaining $1.6 Million in federal estate tax (after having paid $5 Million of the total taxes due). The Government then filed this action to collect the outstanding tax liability from the Defendant Heirs and Defendant Fiduciaries under § 6324(a)(2) of the Code, which provides that, whenever estate tax liability remains unpaid, the“transferee, trustee … or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate … to the extent of the value, at the time of the decedent’s death, of such property, shall be personally liable for such tax.”
The Defendant Heirs’ motion to dismiss is based on their denial that they are either a “transferee” or “beneficiary” within the meaning of § 6324(a)(2) of the Code, so that they are not subject to transferee liability as trust beneficiaries even though they received distribution of all of the trust assets.
Surprisingly, the Court agreed with the Defendant Heirs, finding that the term “transferee” in § 6324(a)(2) refers only to those who are in possession of the decedent’s property at the time of the decedent’s death or receives such property immediately after such death. “Transferee” does not refer to a person who receives property included in the decedent’s gross estate regardless of the time when he or she receives it. The Court found the provisions of § 6324 ambiguous as to the meaning of “receives”, and where a tax statute is ambiguous, the court must resolve the ambiguity in favor of the taxpayer. The use of the term “transferee of a transferee” in the second sentence of § 6324(a)(2) in connection with special liens, bolstered the Court’s view that the Defendant Heirs were not “transferees”. To find otherwise would have violated the Court’s view of statutory construction, that Congress could have used that phrase in the first sentence imposing the transferee liability, did not do so, and therefore, did not intend such phrase to apply to the first sentence. Therefore, the Court found that the Defendant Heirs were not transferees within the meaning of § 6324.
The Court then examined whether the Defendant Heirs were “beneficiaries” within the meaning of § 6324(a)(2). The Court found that Congress intended this term to refer only to insurance beneficiaries and did not apply to trust beneficiaries.
The Court, therefore, granted the Defendant Heirs’ motion to dismiss the government’s action against them as transferees under §6324(a)(2). (While § 6901 of the Code may not suffer from the same ambiguity as to the collection of the estate tax liability from a transferee of a transferee, the government was not pursuing collection under that section of the Code, because the government had never assessed the tax against the Defendant Heirs and the statute of limitations had run as to collection of any transferee liability pursuant to § 6901(c).
The Defendant Fiduciaries were not so fortunate in achieving a dismissal of the government’s action against them under the Federal Priority Statute, 31 U.S.C. § 3713, which imposes personal liability on fiduciaries who pay a debt or make a distribution before paying a claim of the government. The Defendant Fiduciaries claimed that they could not be liable under the Federal Priority Statute because the estate had sufficient assets when the distribution occurred as a result of the Distribution Agreement entered into by the Defendant Heirs, whereby they each agreed to pay the remaining estate tax liability. The Court held that the duty of an executor of an estate to pay the estate tax cannot be delegated, so that the Federal Priority Statute does not require the government to recognize this attempted delegation of the Defendant Fiduciaries.
So long as the estate tax remains unpaid, the fiduciaries will need to retain assets in the estate/trust to pay those taxes, or risk personal liability for the same.