Singer v. Comm’r, T.C. Memo. 2016-48
At the time of his death, Melvin Sacks was legally married to Alvia Sacks but had been estranged from her for 25 years. His “longtime companion” was Lucille Atwell, with whom he jointly owned a brokerage account worth some $2 million. Atwell was the beneficiary of Sacks’ life insurance policies. Sacks also had a relationship with Joan Parker, with whom he jointly owned a residence in Bayside, New York. The property was purchased in July 1990, for $500,000, and Sacks provided the entire purchase price. He died the
Sacks died with a substantial unpaid income tax from various years in the 1980s and 1990, well over $1 million. As there were limited assets in the probate estate, the executor obtained a restraining order over the brokerage account. In March 1991 he also disaffirmed transfer of the residence to Parker. In November 1991 an estate tax return was filed reporting a taxable estate of $3,208,103 and an estate tax liability of $1,011,279. No taxes were paid at that time. In 1994 the IRS assessed an estate tax deficiency of $831,313.
The income tax problem was resolved in December 1994, when the IRS accepted the executor’s offer in compromise to pay $1 million to cover tax years from 1978 through 1990. The Surrogate’s Court authorized a release from the brokerage account, $1 million for the IRS and $28,000 to pay executor’s fees.
In 1997 Parker contributed $87,500 to the estate to pay her share of the estate taxes, and two grandchildren contributed $25,000 each. These amounts were forwarded to the IRS, but, even so, in February 1999 the outstanding amount due was more than $3 million, including interest and penalties.
The executor asked the Surrogate’s Court in April 1999 to release additional funds from the brokerage account: (1) $251,107 to the Estate of Alvia Sacks; (2) $446,772 to the IRS; and (3) $171,587 to the New York Department of Taxation. These amounts were paid. The IRS believed that payment to anyone other than itself was improper, and so issued a notice of fiduciary liability for $422,694 to the executor.
The personal representative of an estate is personally liable for the unpaid claims of the United States to the extent of a distribution, “if the Government establishes the following: (1) The personal representative distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the personal representative had notice of the Government’s claim” [Allen v. Commissioner, T.C. Memo. 1999-385]. The Tax Court held that the Sacks estate was not insolvent at the time of the distribution, because it continued to have claims against the transferees of nonprobate property for contributions to pay the estate tax. Therefore, the executor was not personally liable for the tax.
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