In U.S. v. Ringling, (DC SD 2/21/2019), a district court found that beneficiaries were liable for an estate’s unpaid tax liability under Code Sec. 6324(a)(2). The undisputed facts showed the estate’s federal estate tax was not paid when due and each beneficiary received property includible in the gross estate. The ruling is as follows:
Background. If an imposed federal estate tax is not paid when due, a transferee, surviving tenant, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under Code Sec. 2034 to Code Sec. 2042, is personally liable for such tax. (Code Sec. 6324(a)(2))
To establish liability under Code Sec. 6324(a)(2), IRS must prove:
1. The estate tax was not paid when due and
2. The transferee, surviving tenant, or beneficiary received property included in the gross estate under under Code Sec. 2034 to Code Sec. 2042. Code Sec. 2035 to Code Sec. 2042 list the different types of property and how each type is included in the gross estate valuation.
Each person is liable based on the property each person received from the estate, to the extent of the property’s value measured at the time of the decedent’s death. (Code Sec. 6324(a)(2))
Facts. Donna Ringling, JoAnn Jandreau, and Kathryn Standy are the daughters of the late Harold and Margery Arshem. Margery predeceased Harold. Kory Standy is the son of Kathryn Standy and the grandson of Harold Arshem (Arshem).
Arshem bequeathed his estate (the Estate) in equal parts to his three daughters and also provided a specific bequest of real property to Ringling as part of her one-third portion of the Estate. Shortly before his death, Arshem also forgave Kory Standy a debt arising from the purchase of property; conveyed the family farm to Kory Standy (retaining a life estate and the right to receive the rent income and profits during his lifetime); paid to Kory Standy
proceeds from the redemption of a certificate of deposit; and gifted Kory Standy approximately 6,000 bushels of corn.
Letters of representative were issued to the daughters. A special administrator was appointed over the probate proceeding, and he filed a federal estate tax return and amended the state inheritance tax return to reflect the fair market values of the real property rather than the county assessed values (as had been previously reported).
On behalf of the Estate, Ringling signed Form 706, reporting a gross estate of $834,336 and a net estate tax due of $28,939. However, the Estate did not make any payments with the return. On the Form 706, the Estate reported its assets as: three pieces of real property, co-op shares, stocks, bonds, two contracts for deeds, cash, bank accounts, CDs, two life insurance policies, gifts of the corn crop to Kory, the pickup truck, the van, and other miscellaneous property. The Estate also reported the values of the assets the beneficiaries each received. Kathryn Standy and Jandreau each received $121,988, Ringling received $121,987, and Kory Standy received $416,116.
IRS made assessments against the Estate totaling $65,875. The estate tax owed was $28,939, the late filing penalty was $6,511, the failure to pay penalty was $7,235, and the interest was $23,190. IRS sent the Estate a notice of assessments and demanded payment. After the Estate failed to pay the tax liability, IRS sent the Estate a notice of intent to levy.
IRS filed this case against the beneficiaries seeking a judgment against each for personal liability for unpaid federal estate tax debt of Arshem’s Estate under Code Sec. 6324(a)(2). Jandreau, Kathryn Standy, and Kory Standy failed to respond to IRS’s motion for summary judgment. Ringling filed a response in opposition to the motion for summary judgment.
Court’s decision. Granting IRS’s summary judgment motion, the district court found that the beneficiaries were liable for the Estate’s unpaid tax liability under Code Sec. 6324(a)(2).
The undisputed facts showed:
1. Ringling, Jandreau, and Kathryn Standy each jointly owned property with Arshem at the time of his death. Under Code Sec. 2040, the gross estate includes all property the decedent and any other person held as joint tenants with right of survivorship except such property that has been shown to originally belong to the joint owner and never was received or acquired by the joint owner from the decedent for less than adequate and full consideration.
2. The daughters also owned various pieces of property jointly with Arshem, including a checking account (on which Kathryn Standy continued to write checks after Arshem’s death), bonds, and two vehicles.
3. Ringling, Jandreau, and Kathryn Standy received proceeds from two life insurance policies. The two life insurance policies that the decedent owned at his death were included in the gross estate under Code Sec. 2042.
4. Arshem made transfers of a corn crop and a certificate of deposit to Kory Standy, and forgave the balance due on a contract for a deed. These gifts were includible in the gross estate under Code Sec. 2035 because the transfers were made within within three years of Arshem’s death (i.e., actually within the last month of Arshem’s life).
5. Arshem retained a life estate in the family farm when he transferred it to Kory Standy. Because Arshem retained a life estate, the family farm was includible in the gross estate and was considered Code Sec. 6324(a)(2) property.
In her answer, Ringling asserted several affirmative defenses. She alleged that IRS’s claims were barred by the doctrines of accord and satisfaction, waiver, estoppel (alleging that an IRS employee made statements that led the beneficiaries to believe that the interest and penalties would be waived), statute of limitations (although she stated no argument or facts that supported this defense), and reasonable care (alleging that she exercised due care in engaging a tax attorney to advise her). The district court found that Ringling couldn’t resist IRS’s motion for summary judgment with her affirmative defenses because she failed to identify any specific facts in the record that supported these defenses.
References: For transferee liability for estate tax, see Federal Tax Coordinator 2d ¶V-9302; United States Tax Reporter Estate & Gift ¶63,244.