Tax Liens, Tenancy By Entireties, And The Federal Claims Statute Combine To Produce Fiduciary Liability


A particular mixture of a federal tax lien, a transfer of tenancy by entireties property during lifetime, and the federal claims statute resulted in personal liability to the executors of the estate of a surviving spouse for the income tax liability of the predeceased spouse. Interesting in its own right, it also provides useful guidance and reminders to fiduciaries in dealing with tax liens and tenancy by entireties property.

FACTS: Father owed the IRS $436,849 in income tax. Father and mother owned real property in Pennsylvania, held as tenants by the entireties (TBE). While subject to the IRS liabilities, father transferred the real property to mother for one dollar. After the transfer, the IRS filed a notice of federal tax lien on the real property. Father then died, with no distributable assets, and presumably with no other assets to satisfy the IRS liability. Within a year, mother then passed away, leaving her property to her son as sole heir. The son, David Tyler, and a Louis Ruch, were named as executors for mother’s estate.

The IRS sent letters to the executors, asserting that a federal tax lien had attached to the real property before legal title had been transferred to mother. The letters provided that the executors were obligated to satisfy the lien out of the assets of mother’s estate. Despite these letters and the lien, the executors conveyed the property to David Tyler for one dollar a little over a year later. The son sold the property, and lost the proceeds in the stock market.

The government sought collection of one-half of the proceeds of the sale of the property from the executors under the federal claims statute, 31 USC §3713 (also referred to as the federal insolvency statute). The trial court granted the government’s summary judgment request. The Third Circuit Court of Appeals has now affirmed the trial court, thus imposing liability on the executors for the lien.

COMMENTS. The federal claims statute is not in the Internal Revenue Code, but is referenced in Code §6901(a)(1)(B). This provision is an exception to the normal rule that executors will not have personal liability for the debts and obligations of a decedent. Under the statute, a fiduciary that disposes of assets of an estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government if three elements are met:

(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.

In determining that the executors of mother’s estate are responsible for the tax lien of the predeceased father, the appellate decision produces a number of interesting conclusions and pronouncements for fiduciaries and their counsel. These include:

     (a) Generally, tax liabilities of a predeceased spouse can at times produce liabilities for the estate of a surviving spouse, and its fiduciaries. Normally, the fiduciaries would focus only on the liabilities of the estate of the surviving spouse. While it is fine to limit one’s focus to those liabilities, it is necessary to determine if the surviving spouse or the property of that surviving spouse was encumbered by or legally responsible for the taxes of the predeceased spouse.

     (b) The recipient of a gift of property encumbered by an unfiled tax lien takes the property subject to that lien. Here, the mother received the father’s interest in the TBE property while both of them were living and before a notice of Federal tax lien was filed. Thus, her interest in the property was nonetheless encumbered by the tax lien even though a notice of the lien was not filed at the time of the gift. There are exceptions to such transferee liability. One of these is under Code §6323(a) and applies to a purchaser who buys the subject property for adequate and full consideration. While the mother’s estate attempted to use that exception arguing that the mother acquired the property subject to obligations to pay all expenses relating to the property including mortgage debt, the court did not find a transfer for adequate and full consideration and thus the exception did not apply.

     (c) A federal tax lien imposed on the interest of one spouse in TBE property will be discharged at the death of that spouse, if the spouse predeceases the other spouse. However, if the TBE property is transferred from one spouse to the other during their joint lifetimes, that extinguishment of the lien does not occur. Thus, if father had retained ownership of the TBE real property until his death, mother (and eventually her estate) would have acquired the real property free of the IRS lien and all of the problems that arose relating to that lien.

     (d) The federal claims statute can apply to persons in possession of property of a deceased delinquent taxpayer even though they are not appointed executors of the estate of a delinquent taxpayer. Thus, mother’s executors were found liable under the claims statute even though they were not executors for the father’s estate.

     (e) Fiduciaries ignore the existence of tax liens and tax liabilities of the estate of the decedent they represent at their own peril, since the claims statute will impose personal liability on them if they distribute property that should have gone to satisfy tax liabilities. Thus, at a minimum, fiduciaries and their counsel should conduct a lien search against any properties that are to be distributed to beneficiaries to determine if a lien has been filed against them.

     (f) The federal claims statute will impose liability on a fiduciary, even if the fiduciary receive no personal benefit from the distribution of the property of the estate. This is an unfortunate lesson that Louis Ruch learned in this case.

     (g) Where there is more than one executor, liability under the federal claims statute is joint and several. This is another unfortunate lesson that Louis Ruch learned. Mr. Ruch’s co-executor received the subject real property and enjoyed the benefits of the proceeds of itself. If that co-executor does not have assets that are reachable by Mr. Ruch or the IRS, which seems to be the case, Mr. Ruch will have to bear the full liability.

US v. Tyler, 2013-1 USTC Para. 50,373

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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