I recently wrote about a fiduciary liability case in which the fiduciary of a trust was held personally liable for the unpaid taxes of a trust. In that post I discussed the requirements that 31 U.S.C. 3713(b) imposes on a fiduciary. On March 14 of this year, Judge Nega of the Tax Court rendered an opinion in Singer v. Commissioner, T.C. Memo 2016-48 in which he determined that the executor of a decedent’s estate was not liable for unpaid estate taxes. In the opinion the judge grappled with the issue of who bore the burden of proof on the issue of insolvency. It is surprising both that this issue still exists regarding a statute that traces its roots back to 1789 and that in resolving this issue the Tax Court assigned the case to its non-precedential grouping of cases.
Before focusing on the burden of proof issue, the facts of the case and the resolution of an offer in compromise deserve some attention. The decedent was a lawyer in New York City and a partner in the law firm of Sacks and Sacks. He accumulated a fair amount of assets and income tax liabilities during his life. He must have lived an interesting life based on the distribution of his assets. He was married at the time of his death but had not lived with his wife for over 25 years. He lived primarily with Ms. Atwell whom he never married but also lived at times with Ms. Parker. He purchased property with both Ms. Atwell and Ms. Parker as joint tenants with rights of survivorship. Perhaps it is not surprising that he was not paying his taxes given his other obligations. At the time of his death in 1990, he owed income taxes for several years totalling something between $1.7 and $4 million.
The first issue that the Court addressed involved the compromise of the income tax debt by the estate. The confusion over whether a compromise occurs casts significant doubt on the business records of the IRS. Just as its business records were cast into doubt in the case of Grauer v. Commissioner discussed in the post written recently by Les, the issue of whether the IRS compromised the income tax liabilities of Mr. Singer formed the basis for a dispute between the parties one would expect the business records of the IRS to resolve. The IRS argued that it never received the $1 million dollar payment from the estate to consummate the offer and the Court finds that it did. That’s a pretty big discrepancy and failure of proof and should concern the IRS. Taking an offer from an estate is a bad practice in my opinion. The estate assets are fixed. The estate has a duty to pay all of the taxes to the extent estate assets exist allowing it to do so. For the same reason that the IRS has a policy of refusing to consider offers in compromise during bankruptcy cases because a statutory regime exists for the payment of the taxes, I could never see any benefit in entering into a compromise with a decedent’s estate. Nonetheless, the IRS did so here agreeing to compromise a liability described in the offer documents as exceeding $4 million dollars for a payment of $1 million. The existence of the agreement is clear in the record but the IRS says it never received payment. The Tax Court finds that it did. While this is not the focus of the case, this finding is somewhat remarkable as a statement of the business records of the IRS and its inability to prove that it did not receive a payment of this amount. The compromise of the debt becomes important in the application of 3713(b) because it impacts the insolvency calculation.
Once the Court disposes of the income taxes by determining the parties had a consummated offer in compromise, it turns its attention to the primary focus of the case which is the liability of the executor for paying out estate assets while not paying the federal estate taxes. At issue is whether the executor made payments that rendered the estate insolvent and unable to pay the estate taxes. To determine if the executor made the type of distributions that will result in a personal liability for him, the Court must look at the three tests necessary to create 3713(b) liability: 1) knowledge of tax owing – not an issue here; 2) a distribution from the estate – not an issue here; and 3) insolvency at the time of distribution. The third test, the only issue in this case, requires examine the value of the estate at the time of the distributions and the amount of the distributions. The insolvency test used in 3713(b) is a balance sheet test that looks at whether the liabilities exceed the assets.
On April 15, 1999, the executor asked the surrogate court for permission to pay $753,321 from a brokerage account of the estate to three parties: 1) $251,107 to the estate of the wife of Mr. Sacks; 2) $446,772 to the IRS; and 3) $171,587 to the New York tax department. The IRS argued that the payments to Mr. Sack’s wife’s estate and to New York breached his fiduciary duty to pay the estate taxes. If these payments rendered the estate insolvent or were made when it was insolvent, then the executor would have a 3713 problem. The IRS said that the burden was on the executor to show that the estate was not insolvent at the time of or as a result of these distributions. The executor countered that the IRS had the burden to show insolvency and that it had the burden to show that the executor had knowledge that the debts for the taxes existed. It seems as though a statute of the age of this one would have a clear answer to this question but apparently it does not either in the language of the statute or in the decisional law over the past two centuries. So, the Court must decide this basic question of procedure before it can move forward to evaluate the proof offered.
The Court looked at some very old cases and some newer cases in deciding that the burden of proof of insolvency rested with the IRS. Even though the Court designated that its decision here should be a non-precedential memorandum opinion, the opinion itself cites to several memorandum opinions provided to it by both sides because of the lack of a precedential opinion in the Tax Court on this issue. Add to that list yet one more non-precedential opinion for future litigants to cite as precedent for who has the burden of proof. Is it time yet to rethink the role of precedent in Tax Court cases? Has the exception for what is precedential overtaken the rule. For anyone who has not yet read the previous discussion of the Tax Court’s nominal rules concerning what is and what is not precedent, here, here, here and here are links to Andy Grewal’s posts on this issue.
After taking several pages to set the scene, the Court gets down to deciding whether the distribution in this case will result in personal liability to the executor. Under New York law if a fiduciary must pay federal or state taxes related to property in the gross estate the amount of the tax is “equitably apportioned among the persons interested in the gross taxable estate.” Here, several individuals received property included in the gross estate and therefore bore responsibility for paying a portion of the estate’s taxes. Property from the gross estate went to two women with whom he bought property as joint tenants, some went to a former law partner and some to grandchildren. The Second Circuit requires valuing the contingent subrogation and contribution rights as assets in determining insolvency. The Court found that the IRS did not prove that the value of the subrogation and contribution rights was so low that the estate was insolvent at the time of the distribution. So, the executor does not end up with a personal liability as a result of the distributions.