United States District Court, D. Utah, Central Division
May 23, 2012
On May 23, 2012 the United States District Court for the District of Utah, Central Division, released its Memorandum Decision and Order in United States v. Mary Carol S. Johnson et al, cited as Case No. 2:11-CV-00087 (from Department of Justice - Order dated May 23, 2012). This case involves, inter alia, transferee liability for payment of tax deferred under section 6166 and the definition of “transferee” under section 6324(a)(2).
The Court amended its opinion on July 29, 2013.
Anna S. Smith died September 2, 1991 as a resident of Utah. Her will directed that her debts, last illness, and funeral and burial expenses be paid as soon after her death as reasonably convenient. The will stated that claims against the estate could be settled and discharged with the absolute discretion of the executors, and that the “rest and residue” of her estate was to be distributed to an inter vivos trust she had established, to be administered by the trustees according to the terms of the trust.
The trustees timely filed the estate tax return on June 1, 1992 and attached a section 6166(a) election to defer payment of the tax attributable to the $11,508,400 value of the decedent’s stock in a Nevada hotel that was included in the gross estate of $15,958,765. The net estate tax was $6,631,448. [The amount of tax deferred under section 6166 is not stated.] The section 6166(a) deferral election was tentatively allowed by the IRS, subject to a final determination resulting from an examination or a review of the return.
Interest only was payable each June 2 from 1993 through 1996. The first installment of tax was due June 2, 1997 and the final installment was due June 2, 2006.
On December 31, 1992 the trustees distributed all of the trust assets to the 4 trust beneficiaries, including all of the decedent’s stock in the hotel. The beneficiaries signed an agreement whereby they would pay the deferred estate tax as it came due, as well as any Federal or Utah tax deficiency that might be assessed.
The IRS field examination resulted in a Statutory Notice of Deficiency on May 30, 1995, which the estate contested. The dispute was ultimately settled for a deficiency of $240,381 (for a total tax of $6,871,829). The section 6166 deferral was approved. It appears that interest payments were made timely for the first 4 years of the deferral period and that any tax and interest payable as a result of the agreed deficiency was also paid timely.
In January 2002 the hotel filed for Chapter 11 bankruptcy in the state of Nevada. The court approved a sale of all the hotel’s assets to a 3rd party free and clear of all liens, claims, and encumbrances. Each beneficiary received no value for their shares of stock, but each did receive $126,000 annually for signing a two-year non-compete agreement. Each beneficiary also reported losses in excess of $1,000,000 in connection with their ownership of the hotel stock.
After having paid a total of some $5,000,000 in tax, the estate defaulted on its section 6166 election by failing to pay the annual installment due on June 2, 2003. In 2005 the IRS sent the estate a notice and demand for payment of the unpaid balance of tax, plus interest. The estate did not pay.
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US v Johnson (2012), Comment 1: Current IRS procedures under section 6166(g)(3) shorten this notice and demand period to 6 months, from the date on which a missed 6166 installment payment or interest payment was due to the date the final notice and demand for payment is sent. See Campus Procedures IRM 4.25.2.1.11. After the final notice and demand is sent, the section 6166 account is accelerated and the entire balance is immediately due. Interest at the regular underpayment rate (R% interest) begins accruing on the total balance as of the date the final notice and demand is sent. In cases like the instant situation where, for whatever reason, the final notice and demand for payment is not issued until long after the 6-month delinquency date, the section 6166 election continues until the date notice and demand is sent. The special interest rates on deferred tax continue in effect until the final demand and notice is sent. The author has seen cases where 2 years or more had passed before the final notice and demand was sent. |
The IRS then sought to collect the balance due through levies against the estate, the trust, and the 4 beneficiaries without success. It then brought this action against the distributees of the estate, but not against the estate itself.
The complaint asserted the 4 beneficiaries were personally liable for payment of the tax as transferees under Utah law and as beneficiaries under section 6324(a)(2). The beneficiaries conceded they were transferees and beneficiaries of certain life insurance proceeds they received, but not of the hotel stock. Taxes were not individually assessed against the 4 beneficiaries.
The court held that, while state law generally determines the tax liability of beneficiaries and distributes, only Federal law determines the nature and effects of section 6324(a)(2) liability. Under Utah law the trust beneficiaries were transferees, but under section 6324(a)(2) they were not transferees; the immediate right to the trust corpus at the decedent’s death belonged to the trustees, not the beneficiaries, and personal liability for the tax was on the trustees. The 4 beneficiaries were liable only for the tax on the life insurance proceeds they received.
(The court also treated arguments that were made involving section 6901 and section 6503, and fiduciary liability under 31 U.S.C. section 3713.)