In an unpublished decision, a U.S. District Court in New Jersey granted the government summary judgment against the executors of two related estates for fiduciary liability claims for failure to pay federal estate tax. United States v. Estate of Lorraine Kelley, et. al has a detailed discussion of how an estate executor can become personally liable for the estate tax and is a good example of what an executor should not do.
Under 31 U.S.C. § 3713(a)(1)(B), a claim of the government must be paid first when the assets of the estate of a deceased debtor, in the custody of the executor or administrator, are not enough to pay all debts of the debtor. If the government debt is not paid first, Section 3713(b) states “[a] representative of a person or an estate …. 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.” Personal liability can attach 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 purpose of imposing personal liability on estate representatives “is to make those into whose hands control and possession of the debtor's assets are placed, responsible for seeing that the Government's priority is paid.” King v. United States, 379 U.S. 329, 337 (1964). For liability to attach, the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.
In Estate of Lorraine Kelley, Richard Saloom was a co-executor, and sole beneficiary, of his sister’s estate (“Kelley Estate”). In September 2004, the Kelley Estate filed a Form 706 showing an estate tax liability of $214,412. In October 2004, the IRS opened an examination of the estate tax return and Saloom, as co-executor of the Kelley Estate, ultimately agreed the estate liability should be increased to $662,780. The value of the Kelley Estate was over $2.6 million and included a residence ($490,000), an annuity ($1,000,000) and stocks and securities ($900,000). Unfortunately, Saloom did not pay the estate tax but instead liquidated the assets of the estate and distributed all the proceeds to himself as the sole beneficiary. According to the court, Saloom used the proceeds to run his business and buy and develop other property. By late 2007, the Kelley Estate had no property so Saloom entered into an installment agreement with the IRS and made several significant payments. In March 2008 Saloom died and although several installment payments had been made, the estate still owed over $400,000 to the IRS. Before he died, Saloom instructed his daughter Rose Saloom to continue making payments to the IRS for the Kelley Estate’s tax liability, which she did for several months.
However, the apple does not fall far from the tree. Rose Saloom was the executor and sole beneficiary of her father’s estate, which included property valued at over $1.1 million and a debt to the IRS for the Kelley Estate’s taxes. Although Rose was aware that the Kelley Estate still owed the IRS, she liquidated all the assets of the Richard Saloom Estate and distributed them to herself. She subsequently used up all the estate assets that were distributed to her.
In February 2017, the United States filed a complaint requesting, among other things, (1) reduction of estate tax assessment to judgment against the Kelley Estate, (2) fiduciary liability against the Richard Saloom Estate, and (3) fiduciary liability against Rose Saloom. Based on the facts, the court easily found in favor of the government. The lesson from Estate of Lorraine Kelley is that the risk of handling an estate’s tax issues can be very high and an executor who has any concerns should consult with or retain experienced counsel.
For questions related to this or any other civil tax or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or firstname.lastname@example.org.