A decedent died while owing over $340,000 in unpaid federal income tax liabilities. His estate was insolvent. The assets of his estate consisted almost entirely of a 100% interest in one corporation and 50% of another corporation. Each corporation owned a fishing vessel as its sole asset. Shortly after the decedent died, the decedent’s surviving spouse transferred the shares of the 100% owned company to herself. About six months later, she was appointed executrix of the decedent’s estate, and later transferred the shares of the second corporation to herself. At the time of these transfers, she knew of the unpaid tax liabilities.
The IRS sought to impose liability on the wife for the unpaid tax liabilities per the application of the federal claims statute for the value of the stock she distributed (31 U.S.C. Section 3713). The trial court concurred and entered a judgment against the wife, and the appellate court affirmed the judgment, even though some of the shares were distributed prior to the wife being appointed executrix.
31 U.S.C. Section 3713(a)(1)(B) provides that a claim of the United States government shall be paid first when the estate of a deceased debtor, in the custody of the executor or administrator, is not enough large enough to pay all debts of the debtor. Thus, via the Supremacy Clause of the U.S. Constitution, this federal statute gives the IRS a first priority in collecting taxes against a decedent’s estate (subject to some exceptions), regardless of the priorities provided under state law.
If the representatives of the estate fail to honor the priority claim, they become personally responsible to the government for the taxes. 31 U.S.C. Section 3713(b). For an executor to be responsible under 31 U.S.C. Section 3713(b), three requirements must be met. Interestingly, only the first requirement is statutory. The second and third requirements have evolved to soften what would otherwise be a strict liability regime. The first requirement is that the executor must have transferred assets of the estate before paying a claim of the U.S. The second requirement is that the estate is insolvent, and the third is that the executor have knowledge of the liability.
In the subject case, all three of these requirements were met. The spouse asserted, however, that since she had transferred stock of the first corporation prior to her appointment as executor, the statute should not apply to that transfer. Not a bad argument, given the language of 31 U.S.C. Section 3713(b) which reads: “[a] representative of a person or an estate (except a trustee acting under title 11) 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 (emphasis added).” If one paid out the estate assets before being an official representative, then perhaps the statute should not apply by its own wording.
The appellate court was unimpressed – it held that “whether the appellant had been appointed executrix at the time the assets were transferred is not determinative in the section 3713(b) analysis. What counts is whether the responsible party had control over the transferred assets … and it is nose-on-the-face plain that the appellant had such control from and after the date of Reitano's demise.” Technically, this was only dicta, since the court actually did not rule on this question because it was not raised at the trial court level – but the court provided that even if the issue had not been waived by failure to raise it at the lower court level, the appellate court would have ruled against the taxpayer. The court relied on the U.S. Supreme Court case of King v. U.S., 379 U.S. 329 (1964), which held under a predecessor statute “one need not be a personal representative to come within the coverage … it is the element of control over the assets which is decisive.” Since the wife had control of the stock before she was appointed executrix, that was enough to invoke the statute.
Should one have to deal with similar facts, that the pronouncement on the issue was only dicta still leaves open room to argue on this issue. Note that the statute addressed in King had a broader list of persons who could be held liable – that statute, former 31 U.S.C. Section 192, read: “[e]very executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid.” Contrast the language “executor, administrator, or assignee, or other person” (Section 192) with “a representative of a person or an estate” (Section 3713(b)) and ask yourself whether a finding of responsibility under the broader first statute of a non-fiduciary based on factual control should necessarily mean the same finding should be made under a more narrow Section 3713(b). At a minimum, the “or other person” language in Section 192 arguably appears to be broader than a “representative” under Section 3713(b), and thus might be grounds for King to not be strong precedent under these facts.
U.S. v. McNicol, 118 AFTR 2d 2016-5150 (CA1 2016))