ESTATES TRUSTS & FEDERAL LIENS AND LEVIES

1. ESTATES TRUSTS & FEDERAL LIENS AND LEVIES By: Robert S. Barnett, CPA, JD, MS (Taxation) Capell Barnett Matalon & Schoenfeld LLP, ATTORNEYS AT LAW (516) 931-8100 rbarnett@cbmslaw.com

2. TAX ASSESSMENT • Tax assessment is made by a recording of tax liability of the Internal Revenue Service § 6203. • Notice of assessment and demand for payment is made within sixty (60) days; • The assessment may be made based upon the tax reported on the return, or after the taxpayer has had an opportunity to appeal or file a tax court petition (within 90 days of receipt of the statutory notice); and • If the taxpayer files a tax court petition, tax may be assessed within sixty (60) days of the final judgment.

3. FEDERAL TAX LIEN • The internal Revenue Service has a tax lien on all property and property rights if tax remains unpaid after demand; • Federal Tax Lien attaches automatically from the time of assessment to all property and rights to property; • Aquilino v. U.S., 363 U.S. 509 (1960). • Invalid without Notice; • Lien notification must include the amount of unpaid tax; • A right to a fair hearing is available; • Priority determined by time of filing.

4. FED TAX LIEN EXAMPLE • Lien filed May 1 • Stock sold May 20 to good faith purchaser without actual Notice or knowledge

5. FILING OF TAX LIEN • Notice of Lien shall be filed; • Real property; • Personal property; • Priority – Rules may be harsh U.S. v. Crestmark Bank, 412 F.3d 653, (6th Cir. 2005) • Court held that Bank did not perform a diligent search • An IRS lien need not perfectly identify the taxpayer! • Policy – not to unduly burden government tax collection.

6. REFILLING NOTICE OF TAX LIEN • Within ten (10) years after date of assessment plus thirty (30) days unless statute extended; • Re-filing needed to continue lien; • Relates back – effective as of the date on which the original Notice to which it relates was effective; • Made where prior lien filed; • Failure to re-file Notice of lien – lien is no longer effective after its expiration period; • Internal Revenue Service may bring an action to reduce lien to JUDGMENT.

7. SPECIAL LIEN FOR ESTATE TAX • § 6324(a) provides a special tax lien, which applies to estate taxes. • WARNING: The estate tax lien arises automatically at the moment of death! • Unlike a general tax lien under 6320, NO NOTICE is required to be provided to the taxpayer under 6324. • The lien continues for up to 10 years from the date of death. • Courts generally agree that estate tax liens may not be extended beyond 10 years.

8. SCOPE OF LIEN • All property in the decedent’s gross estate (this does not include charges and administrative expenses); • Whether probate or non-probate assets; • The beneficiary is personally liable for payment of the deficiency; • Lien will be divested of charges of the estate and costs of administration.

9. PRIORITY • Estate tax liens have priority over all security interests and liens attached after death; • Estate tax liens attach to all property transferred out of an estate except liens, transfers and property described in 6323(b), which includes: • Transfers to purchasers of estate securities and holders of security interests in securities from the estate without knowledge of the lien.

10. FIRST AMERICAN TITLE INSURANCE CO. vs. U.S. • 1001 A.F.T.R.2d 2008-622 (9th Cir. 2008) • Title co. held responsible for unpaid estate taxes • 3 houses sold w/estate in the chain of title; • No FORM 4422 was filed; • Estate taxes were unpaid – Executor was bankrupt; • If no title insurance, purchasers would have been liable.

11. DISCHARGE OF EXECUTOR • “Executor” – person appointed, acting or qualified as executor is “any person in actual or constructive possession of any property of the decedent.” § 2203. • Executor is personally liable when distributing estate assets. • Does not apply to genuine sales – proceeds are subject to the lien. • Trustees of revocable trusts and recipients of non-probate property may also be personally liable (§ 6324(a)(2)).

12. DISCHARGE OF EXECUTOR (continued) • The executor may be released by making written application § 2204; § 6905 • FILE FORM 4422 • If IRS does not respond within 9 months or grants discharge, executor is discharged. • Discharge of executor does not relieve the estate. • § 6905 regarding decedent’s income and gift taxes.

13. §6166 – LIEN ESTATE TAX DEFERRAL ELECTION FOR CLOSELY HELD BUSINESS • The closely held business must exceed 35% of the adjusted gross estate. • The maximum amount of estate tax which may be deferred in installments is the ratio of the value of the closely held business to the adjusted gross estate. • The executor must elect 6166 treatment on Form 706.

14. ADDITIONAL SECURITY • The IRS may require additional security from the estate. • The government is unsecured for the final four (4) years and nine (9) months. • When 6166 deferral is requested, the IRS may also require that the estate post a bond as additional security for payment of estate taxes. See § 6165.

15. Instead of posting a bond, the estate may elect, under § 6324A, to have a special estate tax lien attached to and be recorded against the business property. • Lien will discharge the executor from personal liability. • Lien must attach to property exceeding the tax plus interest. • Property useful life must exceed the installment period. • Agreement must be in writing and consented to by all persons having an interest in the property.

16. ESTATE OF ROSKI, 128 T.C. 10 (2007) • IRS may not automatically require an estate to post a bond (or special lien) as a prerequisite to granting § 6166. • IRS Notice 2007-90, 2007-46, IRB 1003, acknowledges the Roski decision. • IRS will determine bond requirement on a case by case basis.

17. SPECIAL LIEN FOR GIFT TAX • § 6324(b) – is the special lien for gift taxes. • Unpaid tax automatically becomes a lien upon the gifted property. • The donee is personally liable for the tax to the extent of the gift’s value. • Discharges from gift tax liability – Form 4810

18. ARMSTRONG V. COMMISSIONER • Armstrong v. Commissioner, 114 T.C. 94 (2000) • 1991 & 1992 – Taxpayer transferred stock within 3 years prior to death & paid gift tax of $4,680,283 rendering donor nearly insolvent. • After death in 1993 – estate tax deficiency of over $2 million was assessed because the gift tax was included in the gross estate. • Gift donees were held liable for estate taxes of decedent. • Transferee liability FMV at Death.

19. TRANSFEREE LIABILITY • Transferees are “personally liable” • The Code defines “transferee” as a “donee, heir, legatee, devisee, and distributee.” • Donee is a transferee for gift tax purposes. • Trustees will be held liable for receipt of gift in trust. • Trustee liability is limited to value of gift received by trust. • Trustee will be personally liable to the extent of assets paid out.

20. ESTATE OF UPCHURCH • Estate of Upchurch, TCM 2010-169 • Transferee liability – value of amount received not reduced by attorney fees. • Gumm v. U.S., 93 T.C. 475 (October 11, 1989). • Transferee of insolvent estate liable for unpaid estate taxes.

21. QUIET TITLE • In May v. A Parcel of Land, 458 F. Supp. 2d 1324 (S.D. Ala. 2006), wife brought Quiet Title action to residential property • Internal Revenue Service filed lien against husband’s debts • Property transferred to wife before lien arose • Husband retained state property rights to which lien attaches • Wife – “Nominee” – All house payments came from husband’s funds and husband continued to live there

22. RENUNCIATION FROM ESTATE • Will not be successful against federal tax lien. See Drye v. U.S. 528 U.S. 49 (1999); In Matter of Application of Adler, 869 F. Supp. 1021, (E.D.N.Y. 1994); (wrongful death proceeds allocated to surviving spouse were subject to her federal tax lien despite renunciation).

23. TRUSTS • Properly structured Irrevocable Trust may protect assets from IRS lien. • U.S. v. Evseroff, 98 A.F.T.R.2d 7034 (E.D.N.Y. 2006), vacated, 2008 U.S. App. LEXIS 5952 (2d Cir. March 21, 2008). • Solvency is not an issue if intent to hinder, delay or defraud. • U.S. v. Butler, 103 AFTR 2d 2009-729 (Dist. Ct. TX 2/12/2009). • Testamentary discretionary trust for son.

24. DECEDENT’S INCOME TAX LIEN • U.S. v. Guyton, Jr., 103 AFTR 2d 2009-2112 (aff’d 11th Cir. 3/26/2010). • Decedent sold poultry farm. • $ placed in joint account with one son. • Other son was the executor. • Decedent’s income tax was unpaid. • ESTATE LIABLE.