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Reliance on Counsel to Avoid Tax Liability

Posted on Apr. 4, 2014

We regularly see taxpayers asserting reliance on advice of counsel as a basis for removal of penalties.  Not too many cases involve an argument that the tax liability itself should be removed due to reliance on counsel.  A recent unsuccessful case, US v. Shriner, making that argument caught my eye as did the name of the judge deciding the case, Marvin Garbis.

Tax practitioners like to describe district court judges as generalist to distinguish them from the tax specialists who populate the Tax Court.  Occasionally, a tax specialist slips onto the district court just as occasionally a lawyer with a more general practice slips onto the Tax Court.  Judge Garbis on the district court in Maryland is a tax practitioner with a capital T.  When he writes a tax opinion, it deserves notice although this one did not “tax” his abilities.  Prior to becoming a district court judge he practiced tax law in Baltimore for more than two decades and was well known for his knowledge of tax procedure.  He wrote “Cases and Material on Tax Procedure” published by West which may have been the first case book on tax procedure as the topic gained prominence and he wrote “Federal Tax Litigation” published by Warren Gorham and Lamont.  He practiced with Tax Court Judge Paige Marvel and with former Deputy Assistant Attorney General and Acting Assistant Attorney General of the Tax Division of the Department of Justice Paula Junghans in the Baltimore firm of Garbis, Marvel and Junghans.  I was always glad I worked for the Chief Counsel office in Richmond rather than Baltimore so I did not have to regularly face the heavy hitting tax litigation lineup presented by that firm.

So, into Judge Garbis’ court comes a pro se litigant who wants to argue that his lawyer messed up and he, the executor and beneficiary of an estate in which the decedent had significant tax liabilities still owing at death, did not need to pay the estate taxes of the decedent because he received bad advice from his lawyer.  The facts were clear that the decedent had assets of about $470,000 and federal tax liabilities of about $231,000.  The IRS had told the estate’s lawyer who had a proper filed power of attorney the existence and the amount of the liabilities.  Yet, the estate’s assets were distributed without paying the taxes.  The litigant here was one of two executors of the estate who became personally liable for the unpaid taxes as a result of the distribution by virtue of 31 USC 3713.

Section 3713(b) provides that “[a] representative of a person or an estate … paying any part of a debt of the person or Estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”  This statute not only applies to tax debts but to all debts owed to the federal government.  It is not found in title 26.  It traces its lineage back to the earliest of statutes passed in the United States and back past that to English common law and the maxim that “The King’s debtor dying the King comes first.”  Although Section 3713 imposes this personal liability and is often enough to allow the IRS to collect in these circumstances, it is not the only mechanism for collection of the federal tax debt where pre death liabilities of the decedent go unpaid while estate assets get distributed.  The federal tax lien imposed under title 26 will continue to attach to the property distributed and the transferee liability provisions of 6901 could come into play as well.

Most executors come to the IRS with a request to find out if the decedent had federal taxes before making a distribution of estate assets in order to avoid these problems.  Pursuant to IRC 6905 the IRS can discharge the executors from personal liability for the unpaid taxes of the decedent – of course, that requires paying the taxes with available assets from the estate.  Somehow the person holding the power of attorney for Estate of Carol Shriner did not seek the discharge of personal liability before the distribution of the estate’s assets were made.  The IRS sought to hold the executors personally liable and the executors, or at least one of the two, sought to remove the proposed liability based upon reliance on counsel.

The IRS filed a motion for summary judgment.  The judge granted it.  The case is not remarkable in its outcome but it provides an opportunity to think again about the limits of blame that can be shifted to counsel.  We have blogged before about this issue.  Individuals serving as executors have an especially high duty to “get it right.”  That duty applies to the timely filing of the return as the Supreme Court made clear in Boyle and to the payment of liabilities of the estate as the 5th Circuit recently made clear in Renda.  If the representative has actual knowledge of a federal claim that knowledge is sufficient to trigger the liability of the executor even where the representative gives erroneous advice on how to address the federal claim.  Executors should seek the safe haven of IRC 6905 by obtaining a statement of any tax liabilities, satisfying them and requesting a discharge.  Finding and obtaining a discharge of other federal liabilities may not come as easy as tax liabilities.  The IRS is set up to meet these requests and the opportunity for this relief should not be missed.

The executor made one final argument that Judge Garbis rejected.  He argued that the Tax Court case of Little v. Commissioner provided relief.  In that case, the decedent’s representative was absolved of personal liability under 31 U.S.C. §3713(b) for the estate’s unpaid income tax liabilities.  The court found that while the representative had been placed on inquiry notice after receiving Forms W-2 and 1099 for the estate’s liabilities, he acted in a prudent and reasonable manner by bringing the forms to the attention of the estate’s attorney and relying on the attorney’s mistaken advice that, because of the estate’s size, it owed no income taxes.  Judge Garbis found that the Little case differed because the estate’s counsel had told the executor no tax liabilities existed.  Here, the undisputed facts showed that the representative, and thus the estate, knew that some income tax liability existed.

The outcome here did not turn on the tax procedure expertise of Judge Garbis but his knowledge of tax procedure no doubt made the outcome more certain and more straightforward.

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