United States v. Estate of Kelley, Et Al.
In U.S. v. Estate of Kelley, Et Al., the U.S. District Court of New Jersey upheld transferee liability and fiduciary liability against defendants on summary judgment for unpaid estate tax based upon the defendant's personal conduct in the administration of the estates.
It denied liability on summary judgment for one fiduciary defendant under the New Jersey Uniform Fraudulent Transfer Act because it found the conveyance of property was not fraudulent.
Lorraine Kelley died in 2003 and her brother, Richard Saloom, served as a co-executor of her estate. The estate reported a tax liability of $214,412 and a gross estate of over $1.7 million. Thereafter the IRS opened an examination into the estate tax returns and Richard Saloom ultimately consented to an assessment of an additional tax liability of $448,367, based on a corrected gross estate of over $2.5 million.
Richard Saloom, as the sole beneficiary of the Kelley estate, distributed the entirety of the estate property to himself. He used the assets to run his business and buy and develop property. Five years after Lorraine Kelley's death, her estate had no property yet still owed over $400,000 in estate tax.
Richard Saloom entered into an installment agreement with the IRS, made several payments towards the Kelley estate tax liability, and instructed his daughter, Rose Saloom, to continue making payments. He died in 2008.
Rose Saloom was appointed to administer her father's estate, which included property valued at over $1.1 million. Rose filed a New Jersey inheritance tax return listing her father's debt as including $456,406 in "indebtedness" for "federal tax." She thereafter distributed all the estate property to herself as the sole beneficiary.
In 2017, the United States filed a Complaint for:
- Reduction of estate tax assessment to judgment against the Kelley estate;
- Transferee liability against the Richard Saloom estate;
- Fiduciary liability against the Richard Saloom estate;
- Fiduciary liability against Rose Saloom; and
- Liability against Rose Saloom under the New Jersey Uniform Fraudulent Transfer Act (UFTA).
Count 1 was settled by way of consent judgment. The Court upheld Counts 2, 3 and 4 on summary judgment and denied Count 5.
Regarding Count 2, a transferee who receives property from a decedent's estate is personally liable for any unpaid estate tax based on the value of the property received.
Richard Saloom's estate is liable for the Kelley estate tax liability, valued at $688,644 as of September 2019, because he received $2.6 million in property from the Kelley estate.
As to Count 3, an executor of an estate who pays the debts of the estate, or distributes assets to himself, before paying a claim of the United States is personally liable to the extent of the payment for the unpaid claims. 3 Three elements are required for personal liability to attach: (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.
Richard Saloom, as executor of the Kelley estate, distributed all of its approximately $2.6 million in property to himself, which rendered the estate insolvent. Furthermore, Richard Saloom entered into an installment agreement with the IRS and made periodic payments towards the debt, which indicates he had at least constructive knowledge that the Kelley estate had some tax liability.
Similarly, for Count 4, personal liability attached to Rose Saloom under section 3713(b) because she distributed all the property of the Richard Saloom estate to herself, thereby rendering it insolvent. Furthermore, she had knowledge of her father's tax liabilities, which she demonstrated by filing a New Jersey inheritance tax return that listed "indebtedness" for "federal tax."
The Court denied Count 5 because the United States failed to demonstrate that the conveyance of property from the Richard Saloom estate to Rose Saloom was fraudulent. The relevant part of the UFTA states that a transfer made or obligation incurred by a debtor is fraudulent as to a creditor 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 of obligation, and the debtor: (1) was engaged or was about to engage in a business or 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, Rose Saloom is not liable because the transfer to her from the Richard Saloom estate was the result of inheritance. Additionally, the property remained within the reach of the United States via transferee liability.
The Court upheld summary judgment against the defendants for transferee liability and fiduciary liability because there was no genuine issue as to any material fact that the defendant fiduciaries received property from the estates that rendered the estates insolvent, and the distributions took place after the defendants had knowledge of the estate's liability for unpaid taxes. It denied summary judgment for liability under the New Jersey Uniform Fraudulent Transfer Act because the defendant received the transfer by way of an inheritance and the property remained in reach of the United States through transferee liability.
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 firstname.lastname@example.org.