A personal representative/executor for an estate granted a special estate tax lien under Code §6324A to the U.S. as part of a Section 6166 election to defer payment of federal estate tax. At the time, the executor had been paid only been part of his fees, leaving $486,265 unpaid. The IRS has the ability to demand a lien before allowing a Section 6166 election if adequate bond is not posted.
During the course of the lien period, the value of the liened property fell below the amounts still due to the IRS. The executor asserted his claim to fees was superior to the tax lien, and thus that he could use the liened property as a source of funds for his unpaid fee. The U.S. District Court granted the executor’s motion for summary judgment on this issue. Because the statute was silent as to priority of administrative expenses, the court gave priority to the administrative expenses based on a “first in time is first in right” theory. On review, the 11th Circuit Court of Appeals overturned the lower court and ruled that the IRS lien has priority. Since the executor’s claim for commissions was not a lien, the “first in time is first in right” common law theory was found not to apply.
Note that under the general estate tax lien of Code §6324, administrative expenses take priority over the government lien. This is due to the express exception under Code §6324(a) that excepts out “such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration.” The appellate court noted no such explicit exception under Code §6324A, and reasoned that if Congress had wanted one, it would have written one in.
The executor argued that his expenses should have superiority - otherwise, it may be difficult to obtain executors to serve. The appellate court rejected this. Their thought process was that the executor has the opportunity to make arrangements for payment of his fees before putting on the §6324A lien, and/or can leave other property for fee payment free of the lien (or not make the Section 6166 election).
The appellate court also noted that allowing the lien to be subject to administrative expenses could lead to partially unsecured deferred payment obligations. Also, since such administrative expenses would not take superiority in regard to any bond posted to secure the deferred tax, they likewise should not be granted superiority in regard to this alternate method for securing the tax.
Hopefully for the executor, he will be able to recoup his unpaid fees from distributions previously made to beneficiaries.
This decision is a trap for the unwary, and “make arrangement for payment of estate administrative expenses, including professional and executor fees outside of liened property” should be added to every practitioner’s checklist when making a Code §6166 election and related §6124A lien.
U.S. v. Spoor, 118 AFTR 2d 2016-xxxx (11th Cir 10/4/16)