Monday, March 13, 2017

829 F.3d 77 (1st Cir. 2016)
(cert. denied 1/9/2017)

Trusts and Estates practitioners often focus solely on the Tax Code found in Title 26 of the United States Code and ignore other parts of the United States Code (U.S.C.). However, it is a mistake to do so as Marci McNicol learned first-hand. In this case, the Federal Priority Statute found in 31 U.S.C. § 3713 came into play to impose liability on Marci for the decedent’s unpaid Federal income tax liability.

Here, at the time of his death, the decedent owed over $300,000 in Federal income taxes. As a result of this and other liabilities, the decedent’s estate, which consisted almost entirely of interests in two closely held companies, was insolvent. Marci, the decedent’s widow, transferred decedent’s interest in one of the companies to herself even before the court had appointed her as executrix of the decedent’s estate. Once she was appointed executrix of decedent’s estate, Marci transferred the other company to herself. Both transfers were without consideration at a time when Marci knew of her husband’s unpaid tax liability.

In October of 2003, the IRS filed a formal claim against the estate for the unpaid income taxes due. By November of 2006, however, the tax bill had not been paid, and the IRS again contacted Marci seeking payment. Marci informed the IRS in 2008 that she would no longer cooperate with them in the collection effort. At that point, the IRS served Marci with a formal notice of potential liability under the Federal Priority Statute, and ultimately filed suit against Marci in her capacity as executrix of the decedent’s estate to collect the decedent’s liability and also against her individually under the Federal Priority Statute for transferring assets to herself from the decedent’s estate without first paying the decedent’s Federal income tax liability.
The Federal Priority Statute provides that (1) a claim of the U.S. government against a decedent is to be paid first when the decedent’s estate or trust is insolvent, and (2) an executor or trustee who pays “any part of a debt” of an estate or trust prior to paying the government claim is personally liable for payment of such government claim. The trial court granted the government’s motion for summary judgment against Marci individually to the extent of the value of the property transferred to her from the estate.

Using such phrases as “it is clear beyond contradiction” and “the statute means what it says and says what it means”, the Appeals Court resoundingly affirmed the trial court’s order. The Federal Priority Statute creates a priority of payment outside the scope of the priority of payment provisions found in state probate codes, and outside the scope of Federal transferee liability provisions found in Title 26. Under the Federal Priority Statute, the executor or trustee is personally liable for the government’s claim as long as the following three requirements are present, with the burden of proof as to all three on the person seeking relief from such personal liability.

1. The executor or trustee transferred assets of the estate or trust prior to paying the government claim;
2. The estate or trust was insolvent at the time of such transfer; and
3. The executor or trustee had knowledge of the government’s claim or notice of facts that would cause “a reasonably prudent person to inquire” as to the existence of such a claim.

Interestingly, the Court did not limit personal liability to those transfers that occurred once the estate was opened and Marci was officially appointed executrix. This Court extended personal liability under the Federal Priority Statute to any person having control over the decedent’s property at the time it was transferred. Thus, this would extend personal liability under the Federal Priority Statute to any person having control over a decedent’s property that would be subject to the claims of the decedent’s creditors under applicable state law. This could include property held in any nonprobate transfer form, such as in a transfer on death account.

As a consequence of the potential personal liability under the Federal Priority Statute, an executor, trustee or person having control of the decedent’s property (referred to hereafter for convenience together as “executor”) should ascertain as quickly as possible the extent of the decedent’s debts and the value of the decedent’s property in whatever form held. If it is possible that the decedent was insolvent at the time of death, the executor should review the decedent’s income tax returns to determine whether all of the decedent’s income was reported and all the deductions were validly taken. The executor should review all of decedent’s gift tax returns and make sure that all taxable transfers were adequately disclosed on a gift tax return. Consider filing a Form 4810, Request for Prompt Assessment Under IRC § 6501(d) for all of the decedent’s open year income tax returns and gift tax returns, which will shorten the statute of limitations for such taxes to an 18 month period.

The Federal Priority Statute is not invoked to produce executor liability where estate assets were in fact used to pay expenses given priority under a state’s priority of payment provisions. If a determination is made that the decedent was insolvent at the time of death, or the estate could potentially become insolvent, close attention should be paid to the state priority of payment statute. The executor of a potentially insolvent estate should not make any disbursement or distribution, other than for those items given priority under the state priority of payment statute, until all Federal tax liabilities have been ascertained and paid.

Thursday, January 19, 2017

What he wants to accomplish vs. what he needs to accomplish…

As the United States rings in a New Year, it also welcomes a new president. All eyes are trained on Washington in anticipation of what President-elect Donald Trump will tackle in his first 100 days in office. Trump’s initial success will depend on how well he defines his own agenda and how he navigates the difference in details between his goals and the policy priorities of Congressional Republicans. Trump will also need to divide his political capital between the things his administration wants to do versus what it needs to do in the New Year.

Click here to read the Alert by David C. Russell and Miguel Rodriquez.

Tuesday, December 20, 2016

(This is an updated post from December 2015)

Need a New Year’s resolutions to kick start 2017? Here is an idea you probably hadn’t considered: review your estate planning documents.

If you are like most people, you are probably thinking that reading legal documents does not sound like an even remotely enjoyable way to start a new year. But, it doesn’t have to be as unpleasant as it sounds. Reviewing your documents does not mean you have to read them cover to cover. If you know what are the most important elements, it is easy to review your will, trust, and powers of attorney regularly to ensure they still comply with your wishes. These documents not only determine who will receive your property when you die, but also likely determine who has the right to make financial and major medical decisions during your lifetime. Needless to say, it is important that you are still comfortable with the designations you have made.

To get you started, below is a basic checklist of items we suggest you review annually (make it a New Year’s tradition!).

1. Assess the changes in your life since you last updated your estate planning documents.

Have you gotten married or divorced? Had a child or adopted a child? Moved to a different state? Had a death in the family? Had a major financial event? Any of these life changes may affect your estate planning, and your documents may need to be revised. (more…)

Thursday, October 6, 2016

Rev. Proc. 2016-49

The recent issuance of Rev. Proc. 2016-49, which modifies and supersedes Rev. Proc. 2001-38, now puts the taxpayer in the driver’s seat. Recall that in Rev. Proc. 2001-38, the Service was providing relief for the surviving spouse when an unnecessary QTIP election was made, by treating such a QTIP election as though it had not been made. Practitioners began to question whether Rev. Proc. 2001-38 would render a QTIP election a nullity when made in order to qualify for a state marital deduction where such an election was not needed to reduce the Federal estate tax liability to zero. Then when portability came into the picture, the enhanced concern about basis adjustment at death drove practitioners to want to make a QTIP election even though not needed to reduce the estate tax liability, to permit the surviving spouse to make larger gifts that would not be subject to gift tax or solely to obtain a basis adjustment at death. Yet in view of Rev. Proc. 2001-38, it was not clear whether a QTIP election that did not result in a reduction in estate tax was viable.

Now the Service has solved this dilemma with Rev. Proc. 2016-49. A QTIP election will only be void if ALL of the following are satisfied:

  1. The estate did not exceed the applicable exclusion amount in any event so that a QTIP election would not reduce the estate tax liability.
  2. No portability election was effectively made, either because not actually made or because of a late filed return.
  3. The taxpayer notifies the IRS on a supplemental return that such a QTIP election previously made should be treated as void.
  4. The taxpayer provides sufficient evidence, which could consist of the return on which the
    unnecessary QTIP election was made, that the QTIP election was not needed to reduce the estate tax liability to zero based on the values as finally determined for estate tax purposes.

A QTIP election will not be treated as void where ANY of the following are true:

  1. A partial QTIP election was required to eliminate estate tax and the executor made a
    larger QTIP election than was necessary to reduce the estate tax liability to zero.
  2. The QTIP election was stated as a formula designed to reduce the estate tax liability to zero.
  3. The executor made a protection QTIP election.
  4. The executory made a portability election.

The taxpayer did not request that the QTIP election be treated as void and follow the procedure for having the election treated as void.

Monday, October 3, 2016

In a recent Tax Court decision, Harry H. Falk, and Steven P. Heller, Co-Executors, v. Commissioner of the Internal Revenue, the United States Tax Court ruled that in the case of the Madoff Ponzi scheme, an estate which paid estate tax on Madoff assets which subsequently have become worthless can claim a theft deduction.

James Heller, a New York state decedent, died in January 2008 owning a 99% interest in James Heller Family, LLC (the “LLC”).  The only asset held by the LLC was an account with Bernard L. Madoff Investment Securities, LLC.  In November of 2008, the Executors of Mr. Heller’s estate withdrew some money from the LLC’s Madoff account in order to pay estate taxes and other administrative expenses.  Shortly thereafter, the news of the Madoff Ponzi scheme became public. Suddenly, the LLC’s interest and the estate’s interest in the LLC became worthless.

In April 2009, the Executors of the Estate filed an estate tax return which included the decedent’s 99% interest in the LLC – as valued at the date of his death – in his gross estate.  But the estate also claimed a theft loss deduction relating to the Ponzi scheme in an amount equal to the difference between the values of the estate’s interest in the LLC at death and the estate’s share of the amount withdrawn from the LLC’s Madoff account.  The Internal Revenue Service issued a notice of deficiency, claiming the estate was not entitled to the theft loss deduction because the estate did not incur a theft loss.

Internal Revenue Code Section 2054 allows a deduction from the value of a gross estate of “losses incurred during the settlement of estates arising from…theft.”  The Internal Revenue Service argued that the LLC incurred the loss, not the estate, and as such the theft deduction is not appropriate.  However, the Court determined that the loss suffered by the estate related directly to its LLC interest, the worthlessness of which arose from the theft.  The theft extinguished the value of the estate’s LLC interest, thereby diminishing the value of the property available to the decedent’s heirs.  As such, the Court determined a theft deduction appropriate.

Tuesday, September 27, 2016




Both presidential candidates have proposed changes to the estate tax regime.  Coming as a surprise to nobody, the proposals are quite different. (more…)

Thursday, September 22, 2016



Based on the Consumer Price Index for the 12-month period ending August 31, 2016, Thompson Reuters Checkpoint has released their projected inflation-adjusted Estate, Gift, GST tax, and other exclusion amounts for 2017, as follows: (more…)

Monday, September 19, 2016

One of the many requirements that a trust must meet in order for it to qualify as a Charitable Remainder Annuity Trust (“CRAT”) is the “Probability of Exhaustion Test”.  This test applies to CRATs whose annuity term is based on one or more lifetimes, and requires the likelihood that the charitable remainder beneficiary will not receive its interest in the trust be 5% or less.  If a trust fails the test, then the charitable remainder interest does not qualify for income, gift, or estate tax charitable deductions, and the trust is not exempt from income tax. (more…)

Wednesday, August 17, 2016


Divorce decree, gavel and folder shot on warm wooden surface


At a minimum, we recommend that our clients review their existing estate planning documents every few years, and also when big life changes are happening.  Going through a divorce is one of those times.  Here are some things to consider when you are considering divorce or separation, and after your divorce is final: (more…)

Monday, June 20, 2016

When the taxpayer in PLR 201547010 decided to invest his IRA assets in a partnership, he forgot to check whether his IRA provider was able to hold an interest in a partnership as an investment in the IRAs for which it served as custodian.  While all IRA accounts are able to hold investments in publicly traded securities, i.e. stocks, bonds and mutual funds, not all IRA custodians are set up to handle alternative investments, such as direct ownership of a business, real estate, partnership interests and LLC member interests, in their IRA accounts managed pursuant to their IRA account agreements.  In fact, some IRA account agreements specifically preclude ownership of such alternative assets in the IRA accounts covered by the IRA custodian’s account agreement.

In this PLR, Taxpayer A instructed the IRA Custodian to invest his IRA assets in a percentage partnership interest of Partnership C.  The IRA Custodian issued a check in November of 2012 payable to Partnership C for the amount required for purchase of that percentage partnership interest in Partnership C, and Partnership C indicated that the percentage interest was owned by “Taxpayer A IRA”.  However, since the IRA Custodian’s account agreement did not authorize the Custodian to hold the partnership interest in Taxpayer A’s IRA, the IRA Custodian issued a 1099-R reporting the payment to Partnership C as a distribution from Taxpayer A’s IRA.  When finalizing the preparation of his 2012 income tax return in October 2013, Taxpayer A finally came to a full appreciation of the significance of the IRA Custodian’s 1099-R, that a mistake had been made in the purchase of the percentage partnership interest.  Had he opened another IRA with another IRA Custodian whose account agreement would permit the ownership of a percentage interest in Partnership C in a new IRA account for Taxpayer A and had he directed the old IRA Custodian to transfer the amount for purchase of the Partnership C percentage partnership interest in a custodian to custodian transfer from Taxpayer A’s IRA B for a new IRA to use to purchase the Partnership C percentage partnership interest directly in a Taxpayer A IRA, there would have been no 2012 IRA distribution to report on his 2012 income tax return.

Since more than 60 days had elapsed following the purchase of the Partnership C percentage partnership interest with assets from Taxpayer A’s IRA B, the amount of the purchase price for this interest could no longer be rolled over to a new IRA without a waiver by the Service of the 60 day rollover requirement under § 408(d)(3).  The Service has the authority to waive the requirement that the rollover of funds to an IRA be completed within 60 days from the date on which the distributee received the property distributed “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” § 402(c)(3)(B).

As set forth in Rev. Proc. 2003-16, 2003-4 I.R.B. 359 (January 8, 2003), in determining whether to waive the 60 day requirement, the Service will “consider all relevant fact and circumstances,” including:

1.                  Errors committed by a financial institution;

2.                  Inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;

3.                  The use of the amount distributed; and

4.                  The time elapsed since the distribution occurred.

Taxpayer A attempted to convince the Service that his failure to purchase the Partnership C partnership interest in his IRA was due to financial institution error, to fall within one of the factors enumerated in Rev. Proc. 2003-16.  Instead, the Service stated that “Taxpayer A chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”  Apparently, the Service was focusing on the failure of Taxpayer A to open a new IRA with an IRA Custodian who was able to hold a partnership interest in Taxpayer A’s IRA, as a failure or error within the control of Taxpayer A.  All Taxpayer A had to do was read the IRA account agreement, or contact Custodian C directly about whether Custodian C was able to hold Partnership B partnership interests in Taxpayer A’s IRA.  Had he done that, he would have known that he needed a different IRA in order to do what he wanted to do, that is, own Partnership C partnership interests in his IRA.  This failure was, in the Service’s view, within the “reasonable control” of Taxpayer A, and was beyond the scope of the Service’s ability to waive the 60 day rollover requirement.