Transferees Held Liable for Unpaid Federal Estate Tax
In Ringling, 1 the United States District Court of South Dakota granted the government's motion for summary judgment against defendants who received estate property and failed to pay the outstanding federal estate taxes on the property. In granting the motion, the court found each defendant personally liable pursuant to Section 6324(a)(2) , based on the property that each received from the estate.
On 12/24/1999, Harold Arshem died testate. He bequeathed his estate in equal parts to his three daughters, Donna Ringling, JoAnn Jandreau, and Kathryn Standy, defendants in this matter. His will also contained a specific bequest of real estate to Ringling. Arshem nominated his three daughters to serve as co-personal representatives of his estate. The fourth defendant in this matter was Kory Standy, the son of Kathryn Standy and grandson of Arshem.
The estate included real property, stocks and bonds, shares in a cooperative apartment, cash, certificates of deposit, bank accounts, two contracts for deeds, a retained life estate in real property, proceeds from two life insurance policies, crops, household goods, farm machinery, equipment, and vehicles.
Prior to his death, Arshem jointly owned property with his three daughters, including government H/HH series bonds, a pickup truck, a van, and a checking account. None of the daughters contributed towards the jointly owned property. Furthermore, Arshem was the owner of two life insurance policies and named all three daughters as beneficiaries of the policies.
Arshem and his grandson, Kory Standy, entered into multiple transactions prior to Arshem's death. First, Kory Standy contracted to purchase real property from Arshem for $32,000. Three years later, Arshem forgave the remaining balance of $27,600.96 due on the contract. Second, Arshem conveyed a warranty deed to Kory Standy for the family farm and retained a life estate. Third, in December of 1999, Kory Standy contracted to purchase real property from Arshem for $90,000. Kory Standy was not to take possession, or receive the rent or profits until March 2000. At Arshem's death, Kory Standy still owed $80,093.30 on the contract for the deed. Furthermore, prior to his death, Arshem transferred to Kory Standy a certificate of deposit and 6,000 bushels of corn.
In December 1999, the three daughters filed for informal probate, and in January 2000, they were appointed as co-representatives of the estate. In September 2000, the Estate reported Arshem's property interests and filed a South Dakota Inheritance Tax Report and Information for Judicial Determination of Inheritance Tax. The Report incorrectly used assessed values for the real estate rather than appraised values.
In June 2003, upon petition filed by Defendant Ringling, the court appointed a special administrator to investigate various issues, including whether a federal estate tax return was required. In August 2003, the court ordered the special administrator to file a federal estate tax return and amend the state inheritance tax return.
In April 2008, eight years after Arshem's death, Ringling signed Form 706, the federal estate tax return, and reported a gross estate of $834,336.00 and a net estate tax due of $28,939. The estate did not make any payments. The estate also reported the values of the assets each defendant received: Kathryn Standy and Jandreau each received $121,988.00, Ringling received $121,987.00, and Kory Standy received $416,116.00.
On 7/14/2008, assessments were made against the estate for a total of $65,874.80, and the IRS sent the estate a notice of assessment and demanded payment. The estate tax owed was $28,939.00, the late filing penalty was $6,511.27, the failure to pay penalty was $7,234.75, and the interest was $23,189.78. Over the next three years, the IRS sent numerous notices and requests for payment. Interest continued to accrue. On 7/24/2013, a Notice of Federal Tax Lien was filed against the estate.
In January 2017, the U.S. filed suit against defendants seeking a judgment for personal liability for the unpaid federal estate tax. Defendants made some payments to reduce the estate's tax liability, but as of 5/25/2018, the estate had a remaining balance of $63,479.08.
Defendant Ringling was the sole defendant to file a response in opposition to the government's motion for summary judgment. Ringling's sole contention was that the government erred by reporting in its motion for summary judgment a remaining tax liability of $63,470.08 rather than $63,479.08, as the evidence indicated. Ringling argued that this "discrepancy is material and forbids summary judgment."
The government claimed that the defendants were liable for unpaid federal estate taxes, interest, and penalties pursuant to Section 6324(a)(2) and moved for summary judgment. Section 6324(a)(2) provides that if an imposed federal estate tax is not paid when due, a transferee, surviving tenant, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under Sections 2034 to 2042, is personally liable for such tax. To establish liability under Section 6324(a)(2) , the government must prove: (1) the estate tax was not paid when due, and (2) the transferee, surviving tenant, or beneficiary received property included in the gross estate under Sections 2034 through 2042.
As to the first requirement to establish liability, the court rejected Ringling's argument that the typographical error in the government's motion created a genuine dispute of material fact and found that the undisputed facts establish that Arshem's estate tax was not paid when due. The court found that in July 2008, the IRS made assessments against the estate for a total of $65,874.80 and that as of 5/25/2018, the estate's estate tax liability was not fully paid, and the remaining liability was $63,479.08.
As to the second requirement to establish liability, the court agreed with each argument advanced by the government regarding the transfers made by Arshem to the defendants. First, the gifts from Arshem to Kory Standy are includable in the gross estate under Section 2035 (as in effect at the time of Arshem's death) because the transfers were made within the three-year period ending before Arshem's death. Kory Standy, as a transferee of Section 6324(a)(2) property, is liable for the unpaid portion of the estate's liability in an amount attributable to the value of those gifts.
Next, the court found that the family farm that Arshem transferred to Kory Standy was includable in the gross estate because Arshem retained a life estate in the property. Pursuant to Section 2036 , the gross estate includes all property transferred by the decedent in which he retained an interest for his life or for a period that does not end before his death. Kory, as a transferee of Section 6324(a)(2) property, is liable for the unpaid portion of the estate's liability in an amount attributable to the value of the family farm.
Next, the court found that the property that the three daughters jointly owned with Arshem, including the bonds, the pickup truck, the van, and the checking account, was includable in the gross estate under Section 2040 and is considered Section 6324(a)(2) property. Pursuant to Section 2040 , the gross estate includes all property the decedent and any other person held as joint tenants with right of survivorship except such property that has been shown to belong originally to the joint owner and never was received or acquired by the joint owner from the decedent for less than adequate and full consideration. The court found that none of the daughters provided any contribution for the jointly owned property. The court held that the three daughters, as surviving tenants, were liable for the unpaid portion of the estate's liability in an amount attributable to the value of the jointly owned property.
Lastly, the court found that the proceeds from the life insurance policies that the three daughters received were included in the gross estate under Section 2042 . The gross estate includes life insurance policies with respect to which the decedent possessed incidents of ownership at the time of his death. Therefore, the court held that the policies were included in Arshem's estate because he remained the owner of the two policies. The court held that the three daughters, as beneficiaries of the policies, are liable for the unpaid portion of the estate's liability attributable to the value of the life insurance proceeds.
Ringling asserted several affirmative defenses in her answer, including estoppel, waiver, and accord and satisfaction. Each of these defenses was rejected by the court because she did not meet her burden of establishing that the government engaged in affirmative misconduct and she did not support the defenses with specific facts in the record. Ringling also asserted the affirmative defense of "reasonable cause" to avoid the additional liability of failing to pay the tax before its due date. The court also rejected this defense because she did not establish that she reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return. Finally, Ringling alleged that the government's claim was barred by the statute of limitations, but she failed to provide arguments or facts in support of the defense. The court stated that the government could assert personal liability under Section 6324(a)(2) ten years from the date the assessment is made against the estate, in accordance with Section 6502(a) . Here, the government filed the case within the ten-year statute of limitations, on 1/23/2017.
This case is based on the well-established rule of transferee liability, i.e., that recipients of estate property must pay the outstanding federal estate tax liability attributable to the property they receive from the estate. The undisputed facts in this case established the defendants' liability for the estate's unpaid tax liability under Section 6324(a)(2). The federal estate tax was not paid when due, and each defendant received property includable in the gross estate.
1 123 AFTR2d 2019-814 (DC S.Dak., 2019).
Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or email@example.com.
This article originally appeared in the June 2019 edition of Estate Planning, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets.