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Passing Fiduciary Liability from Generation to Generation

Posted on Dec. 8, 2020

The case of Estate of Kelley, 126 AFTR 2d 2020-5398 (D. N.J. 2020) does not break much new legal ground but presents a rare case of a two generation failure to pay tax liabilities before distributing estate assets. You could say it is a case of like father like daughter. The case also offers a chance to closely examine the statute of limitations for filing the suit. Original documents were attached to the responsive pleadings filed here and the reply to those pleadings lays out the IRS position on the statute. This is a difficult issue. I take some time to analyze the statute. The court does not address it.

Lorraine Kelley passed away on December 30, 2003. Her brother, Richard Saloom served as a co-executor of her estate and was the sole beneficiary. The IRS audited the estate tax return and determined an additional liability. Despite the existence of the estate tax liability, Mr. Saloom distributed all of the property of the estate to himself and failed to fully pay the estate tax liability.  He received over $2.6 million in property at a time when the estate owed almost $700K. He entered into an installment agreement and made some payments before his death but still owed over $400K. His daughter made some payments on the installment agreement after his death.

Mr. Saloom passed away on March 21, 2008. His daughter, Rose Saloom, served as executrix of his estate. She was aware of the outstanding liability stemming from the audit of her aunt’s estate. Her father told her of the death and estate tax liability prior to his passing instructing her to satisfy the debt. She also listed the liability on an inheritance tax form filed with the state. Nonetheless, Rose, the sole beneficiary of her father’s estate, distributed all of the property of her father’s estate to herself without satisfying the liability of her aunt’s estate. His estate had property worth about $1 million although by the time the IRS brought the suit she no longer had any of the property of his estate.

The IRS decided that it would like to receive payment on the estate tax liability. It brought an action against Rose seeking transferee and fiduciary liability in February of 2017 only 14 years after the aunt’s death and 9 years after her father’s death. The timing of the suit so long after the death of the aunt at the end of 2003 raises questions about the statute of limitations regarding the collection of the liability. The normal period for collecting a liability expires 10 years after assessment. The return of the aunt’s estate was timely filed on September 23, 3004, within the nine month period for filing the return of an estate. After an audit of the return an additional liability was assessed on August 7, 2006. The assessment started the running of the statute of limitations on collection. After filing suit the IRS filed a motion for summary judgment.

On October 4, 2007, the estate requested an installment agreement. (I pick this date based on the collection history statements included with Rose’s response but note that the IRS picks a date 13 days later in its response.) The IRS approved the installment agreement on March 24, 2008. It is possible to following the timing of the request because in her response to the IRS motion for summary judgment Rose includes 130 pages of case documents including the notices of federal tax liens, the account transcript and the collection history. Because of her mostly hand-written response and the large group of attachments the true history of the case is laid out in the court filings.

The request for an installment agreement suspends the statute of limitations on collection pursuant to Treasury Regulation § 301.6159-1(g) which tolls the CSED while an installment agreement (IA) is pending. This is an odd tolling provision because it appears in a regulation rather than the statute. The regulation provides:

The statute of limitations under section 6502 for collection of any liability shall be suspended during the period that a proposed installment agreement relating to that liability is pending with the IRS … .

The National Taxpayer Advocate blogged about the high rate of IRS mistakes in calculating the statute of limitations in installment agreement cases here. We have blogged about the difficulty of calculating the collection statute of limitations in a post collecting other posts here.  In the IRS reply to Rose’s response to the motion for summary judgment, it provides a relatively complete explanation of why its suit was timely filed:  

Under 26 U.S.C. § 6502(a)(1), the United States generally has ten years from the assessment of a tax to collect on the outstanding liability. This period of limitations, though, is suspended while an installment agreement request is pending, and an additional thirty days following termination of such an agreement. 26 U.S.C. § 6331(k). The Lorraine Kelley Estate’s estate tax liability, which is at the heart of this matter, was assessed on August 7, 2006. Absent tolling, the statute of limitations for these taxes would have expired at the earliest on August 7, 2016, However, as reflected in the account transcript and the United States’ exhibits, the Lorraine Kelley Estate requested an installment agreement on October 17, 2007, which was accepted on March 24, 2008, and then terminated on December 1, 2008. Together these circumstances suspended the running of the limitations period by 189 days, so that the complaint, filed February 10, 2017, is timely.  

Although the IRS brought the suit against the estate of Richard Saloom and Rose Saloom more than 10 years after the assessment of the additional liability against the aunt’s estate it relies on the suspension of the statute of limitations. The IRS cites IRC 6331(k)(2) as providing the statute extension but that statute only provides that the IRS cannot levy. Included in the period the IRS cannot levy pursuant to IRC 6331(k)(2)(C) is the period the installment agreement is pending. Look to the regulation cited above for the actual statute suspension.

In its calculation the IRS does not count the period the offer was pending but only counts the period it was considering the installment agreement and the 30-day period when the installment agreement terminated for failure to make the payments. The period from October 17 to March 24 is 159 days and the additional 30-day period takes it to the 189 used by the IRS in calculating the extension of time to collect to be added onto the original expiration of the statute of limitations on August 7, 2016. If you add 189 days to the original expiration date you get February 11, 2017 making the filing date timely by one day. The Tax Division of the Department of Justice likes to cut it close when filing suits. Based on the IRS records included with Rose’s response to the motion for summary judgment, I think the suit is timely, but it’s worth the effort anytime a suit is brought to make the calculation and satisfy yourself that a motion to dismiss for filing out of time will not succeed. The suspensions based on installment agreement requests pose many issues not always easily resolved. I have not discussed here the additional time period available to the IRS in a transferee case since the IRS did not rely on that additional time period.

To obtain a judgment against Rose it had a few tools in its arsenal. First, the general insolvency statute found in 31 USC 3713(b) requires that individuals responsible for administering estates must, assuming assets exist in the estate, satisfy all federal taxes owed by the estate or become personally liable.  IRC 6324 creates a lien on property of the estate that attaches to property of beneficiaries. The existence of this lien can aid the IRS in its quest to obtain payment from estates. Finally, IRC 6901 can apply in these situations to assert transferee liability. The IRS asserted all three in its effort to obtain a judgment in this case.

The complaint filed by the IRS sought several determinations that would allow it to pursue Rose: 1) it sought to reduce the assessment against the aunt’s estate to judgment; 2) transferee liability against her father’s estate; 3) fiduciary liability against the father’s estate; 4) fiduciary liability against Rose with respect to her father’s estate and 5) a personal judgment against Rose under New Jersey’s Uniform Fraudulent Transfer Act. She filed an unsuccessful motion to dismiss the complaint. The IRS eventually filed a motion for summary judgment which she opposed. A consent judgment was entered on the first count which the IRS must have thought at the time would resolve the case (perhaps with payment) but it eventually came back to the court seeking a ruling on the last four counts and that’s what the court addresses here.

Rose presented no evidence or arguments why her father’s estate should not be held liabile as a transferee and the court held for the IRS. With respect to the fiduciary liability of her father’s estate for failing to pay the taxes of the aunt’s estate the court quoted from the Third Circuit regarding the application of 31 URC 3713(b):

In recognition of the insolvency statute’s “broad purpose of securing adequate revenue for the United States Treasury, courts have interpreted it liberally.” [Coppola, 85 F.3d at 1020.] With respect to “the type of payments or ‘distributions’ from the estate for which an executor may be held liable,” “a fiduciary, e.g., an executor, may be held liable under the federal insolvency statute for a distribution of funds from the estate that is not, strictly speaking, the payment of a debt.” Id. (alteration and internal quotation marks omitted). He may, for example, be held liable for “stripp[ing]” an otherwise solvent estate “of all of its assets and render[ing] it insolvent” by “provid[ing] for the distribution of all of the estate assets” to the heirs of the estate. Id. (internal quotation marks omitted).

Here it found again that Rose presented no evidence to dispute the liability of her father’s estate for failing to pay the liability of the estate he administered. In addition to other evidence he knew of the liability, the court pointed to his agreement to pay the liability through an installment agreement as conclusive proof as it granted summary judgment on the third count.

The court then moved to the fiduciary liability of Rose herself. It applied the same tests applied to determine the fiduciary liability of her father’s estate namely the distribution of property to herself, the insolvency of the estate as a result and the making of the distributions despite knowing the liabilities. Her defense seemed to be that both her father and she were in touch with IRS agents. The fact that she was talking to the IRS has no benefit to her when her actions resulted in the distribution of the property to herself.

The IRS runs out of luck in its attempt to obtain a summary judgment based on the uniform fraudulent transfer act. In New Jersey that act provides:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: a. With actual intent to hinder, delay, or defraud any creditor of the debtor, or b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

((1)) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

((2)) Intended to incur or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due.

Here, the court finds that the IRS has the burden and has not proved that the conveyance of property from her father’s estate to Rose was fraudulent. The transfer was the result of inheritance and not a fraudulent scheme. The court also notes that the IRS can still reach Rose through the fiduciary liability. It decides that this count does not fit the statute.

As I mentioned at the outset, this case is not groundbreaking, but I found the intergenerational aspect of it to be interesting. It is not clear that Rose has money with which to satisfy the liability. Usually, the IRS does not go to the trouble of bringing a suit unless there is collection potential. Based on that norm, I will assume that there are assets available here. If so and if Rose decides not to voluntarily pay, this may not be the last action.

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