Executors personally liable for decedent's unpaid taxes

U.S. v. David A. Tyler and Louis J. Ruch, (DC PA 03/13/2012) 109 AFTR 2d ¶2012-583

A district court has held that co-executors of a decedent's estate were personally liable for his unpaid income taxes under the federal priority statute because they distributed assets of the estate, the distribution rendered the estate insolvent, and it took place after they had actual knowledge of the decedent's liability for unpaid taxes.

Facts. In 2002, IRS assessed David J. Tyler with income tax liabilities for the years '92 through '98. He failed to pay them.

At the time of the assessments, Tyler owned real property in Pennsylvania (the Cricket Lane Property) with his wife, Paula J. Tyler, as tenants by the entirety. In 2003, the Tylers executed an indenture placing the Cricket Lane Property solely in the name of Mrs. Tyler for a stated consideration of $1. In 2004, IRS recorded a notice of federal tax lien reflecting a total of $436,349 in unpaid taxes in connection with the Cricket Lane Property.

Tyler died on Aug. 15, 2006. His son, David A. Tyler (Son), and Louis J. Ruch were co-executors of his estate. However, a formal estate was never submitted to probate for Tyler.

About one year later, Mrs. Tyler passed away. Son and Ruch also were co-executors of her estate.

IRS sent letters to Son and Ruch advising them that the federal tax lien encumbered the Cricket Lane Property and that, as co-executors of the two estates, they were obligated to satisfy the lien out of estate assets. Subsequently, Ruch filed an administrative appeal but lost.

On Nov. 21, 2008, the co-executors conveyed the Cricket lane property to Son for a stated consideration of $1. Without approval of the state court handling his mother's will, he sold the property, netting over $300,000, which he said he lost in the stock market.

On Mar. 22, 2010, IRS commenced an action under Code Sec. 7401 and Code Sec. 7403 to enforce the lien on the Cricket Lane Property. Eventually, the matter wound up in district court. IRS wanted the following relief:

... a declaration that the U.S. had a valid and subsisting lien on the Cricket Lane Property when Son and Ruch, acting as co-executors of the estate of Mrs. Tyler, transferred the property to Son for $1, and

... a judgment against both Son and Ruch, jointly and severally, for one-half the value of the proceeds of Mr. Tyler's subsequent sale of the property to a third party.

Background. A tenancy by the entirety is a form of property ownership, including personal property in some jurisdictions, available only to a husband and wife as a marital unit. Its key feature is the right of survivorship—the survivor becomes the fee simple owner of the property on the other spouse's death. The tenancy also is terminated by transfer of the property or divorce.

Entireties property is subject to the claims of the spouses' joint creditors. However, the majority of jurisdictions that recognize tenancy by the entirety completely prohibit creditors from attaching entireties property to satisfy the debts of only one spouse. The other jurisdictions that recognize tenancy by the entirety permit creditors to attach one spouse's interest in entireties property for that spouse's debts only, subject to the rights of the non-liable spouse.

The Supreme Court in U.S. v. Craft, Sandra L., (2002, S Ct) 89 AFTR 2d 2002-2005, held that an individual's interest in a tenancy by the entirety held by him and his wife in Michigan was a property interest to which a federal tax lien could attach even though the other spouse was not liable for the unpaid taxes (see Weekly Alert ¶  3  4/25/2002). In Popky v. U.S., (CA 3 2005) 95 AFTR 2d 2005-2464, the Third Circuit, to which this case would be appealable, reached the same conclusion with respect to a Pennsylvania tenancy by the entirety. In Notice 2003-60, 2003-2 CB 643, IRS provided detailed guidance on how it will pursue collection issues that can arise with respect to entireties property (see Weekly Alert ¶  6  9/18/2003).

An exception to the general rule that a federal tax lien continues unabated regardless of sale appears in Code Sec. 6323. It provides that the lien imposed by Code Sec. 6321 is not valid as against any purchaser until notice of the lien has been filed by IRS. A purchaser is a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. (Code Sec. 6323(h)(6))

Dispute over whether lien was extinguished. The parties disputed whether the federal tax lien resulting from Tyler's failure to pay his income taxes continued to encumber the Cricket Lane Property when Son and Ruch, while acting as co-executors of the estate of Mrs. Tyler, transferred the property out of her estate to Son for $1.

Son and Ruch did not dispute that the federal tax lien initially encumbered a one-half interest in the Cricket Lane Property. Rather, they contended that the federal tax lien ceased to encumber the property before their transfer of the property out of Mrs. Tyler's estate because (1) Tyler's one-half interest in the property was extinguished by operation of law upon his death, and (2) even if his death did not extinguish the lien, it was still unenforceable because Mrs. Tyler was a “purchaser” within the meaning of Code Sec. 6323.

Lien not extinguished. The district court agreed that Notice 2003-60 does state that if a taxpayer's interest in entireties property is extinguished by operation of law at the death of the taxpayer, then there is no longer an interest of the taxpayer to which the federal tax lien attaches. But it also provides that the rule that the federal tax lien does not survive the death of the taxpayer does not apply if the entireties estate previously has been terminated. Here, the entireties interest was severed when the Tylers transferred the property to Mrs. Tyler. Therefore, Tyler's death did not extinguish his one-half interest in the property or the federal tax lien encumbering it.

Mrs. Tyler was not a purchaser under Code Sec. 6323. The district court observed that the Cricket Lane Property was conveyed to Mrs. Tyler for $1. It noted that numerous district courts in the Third Circuit have determined that $1 does not constitute adequate and full consideration in money or money's worth under Code Sec. 6323. Accordingly, it found that Mrs. Tyler was not a purchaser within the meaning of Code Sec. 6323.

IRS complied with the requisite collection procedures. Son and Ruch then argued that IRS failed to timely make valid assessments of the Tyler's federal tax liabilities and was required to assess Mrs. Tyler with the same before proceeding against them as fiduciaries. The court disagreed. It found that IRS's assessments were timely and valid. It rejected the argument of the need to assess Mrs. Tyler because case law established that an assessment against a transferee of property encumbered by a federal tax lien is not a prerequisite to maintain a collection action against a fiduciary. Accordingly, it found that the government complied with collection procedures before bringing this case.

Son and Ruch liable as fiduciaries. The district court observed that personal liability may be imposed upon a fiduciary of an estate in accordance with the federal priority statute, 31 USC 3713(b). (Code Sec. 6901(a)(1)(B)) Under the federal priority statute, a fiduciary paying any part of a debt of estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. (31 USC 3713(b)) Personal liability can attach, to the extent of the distribution, if the government establishes three elements: (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.

The court found that IRS established each of the requisite elements under the federal priority statute to hold Son and Ruch liable as fiduciaries of Tyler's estate. First, they conveyed the Cricket Lane Property to Son, who in turn sold the property to a third-party purchaser, without first satisfying the tax lien that continued to encumber Tyler's one-half interest in the property. Second, their conveyance of the Cricket Lane Property rendered Tyler's estate insolvent. Their conveyance of the Cricket Lane Property took place after they had actual knowledge of the federal tax lien. Accordingly, the court held that Son and Ruch were liable as fiduciaries of Tyler's 

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