Recent Decisions on Fiduciary Liability Under Federal Priority Statute

An estate fiduciary may be held personally liable for the estate's unpaid taxes. IRC § 6901 provides that the government may collect a fiduciary's liability under the Federal Priority Statute (31 U.S.C. § 3713) for an unpaid claim of the Government. In three recent U.S. district court cases, the courts considered the personal liability of estate representatives...

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... Under IRC Section 6901, "[t]he fiduciary is personally liable for the payment of the trust or estate's income tax, as well as all penalties imposed for failure to file a return or pay the tax."

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Under 31 U.S.C. Section 3713(a), a claim of the United States Government is to be paid first under two set of circumstances:

  • First, a claim of the U.S. government is to be paid first when a person indebted to the government is insolvent and: (1) the debtor without enough property to pay all debts makes a voluntary assignment of property; (2) property of the debtor, if absent, is attached; or (3) an act of bankruptcy is committed.
  • Second, a claim of the U.S. government is to be paid first when the estate of the deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

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In order to have personal liability under 31 U.S.C. Section 3713(b), the fiduciary must have knowledge of the tax debt owed to the United States. IRM 5.17.14.3 (01-24-2012) explains that "[a] fiduciary is not liable unless the fiduciary knows of the debt or had information that would put the fiduciary on notice that an obligation was owed to the United States."

In addition, I.R.M. 5.17.14.7 (07-09-2012) explains that "[k]nowledge of the federal claim is a requirement of personal liability." I.R.M. 5.17.14.7 (07-09-2012) further explains that "[t]he Government must show that the fiduciary had either actual knowledge of such facts as would put a reasonably prudent person on notice as to the existence of the tax debt before making the challenged distribution or payment."

I.R.M. 5.17.14.3 (01-24-2012) further explains that "[p]ersonal liability is limited to the value of the assets that the fiduciary distributes in violation of the federal priority."

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Recent Cases

In United States v. Tyler, 2012 U.S. Dist. LEXIS 34093 (E.D. Pa. 2012), the United States District Court for the Eastern District of Pennsylvania found two co-executors, Mr. Tyler and Mr. Ruch (together "the defendants"), liable for the unpaid taxes of an estate under 31 U.S.C. Section 3713.

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The court explained that the government must establish three elements for a fiduciary to be liable under the statute "to the extent of the distribution": "(1) the fiduciary distributed assets to the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual knowledge of the liability for the unpaid taxes." [United States v. Tyler, 2012 U.S. Dist. LEXIS 34093 (E.D. Pa. 2012), quoting 9 Merten's Law of Fed Inc Taxation §26:189 (2011).]

The court concluded that the government had established each of the three elements...

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In United States v. Johnson, 2012 U.S. Dist. LEXIS 72194 (D. Utah 2012), the United States District Court for the District of Utah rejected the defendants' motion to dismiss the government's 31 U.S.C. Section 3713(b) claim against the defendants, holding that the government had established a cause of action under the statute.

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The court in United States v. Johnson, 2012 U.S. Dist. LEXIS 72194 (D. Utah 2012) concluded that:

"Thus, in the context of section 3713, insolvency or the inability to pay one's debt is not viewed from the perspective of straight accounting principles, but rather from the perspective of whether the estate has impermissibly attempted to delegate its tax obligations. Section 3731 does not recognize such shifts in liability. In other words, personal representatives cannot divest themselves of statutory liability through a contract with others.

One of section 3731's purposes is to provide a clear path for recourse when a representative distributes assets of an estate before paying estate taxes. Were courts to excuse personal representatives from liability when they secure contribution agreements, the Government would have to bring an action in contract, prove it is a third-party beneficiary of the agreement, and then establish its right of contribution...

In United States v. MacIntyre, 2012 U.S. Dist. LEXIS 87597 (S.D. Tex. 2012), the United States District Court for the Southern District of Texas held defendants, the executor of a decedent's estate and the trustee of the decedent's living trust, liable under 31 U.S.C. Section 3713 for unpaid gift taxes owed by the decedent.

In the case, the federal government brought suit against the defendants seeking to hold them personally liable under the Federal Priority Statute for distributions from the decedent's estate and trust to lesser priority credits and for defendants' failure to retain sufficient funds to pay the decedent's liability for gift tax on a gift received by the decedent from her husband when they were alive. Upon the government's motion for summary judgment, the district court found defendants liable under the Federal Priority Statute.

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Conclusion

... In the three recent United States district court cases discussed above, the courts found the representatives of the decedents' estates personally liable as fiduciaries for the unpaid federal tax liabilities of the estates. A review of the opinions in these cases is instructive in the issues raised in cases concerning the personal liability of an estate fiduciary under 31 U.S.C. Section 3713(b) and the elements that must be present to establish a fiduciary's liability under the statute.

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LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 22 pages)

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RELATED LINKS: For additional information on the filing requirement of an estate, see:

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