DocketNumber: Docket No. 24170-91
Citation Numbers: 67 T.C.M. 1968, 1994 Tax Ct. Memo LEXIS 16, 1994 T.C. Memo. 17
Judges: JACOBS
Filed Date: 1/12/1994
Status: Non-Precedential
Modified Date: 11/21/2020
*16 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS,
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are (1) Whether petitioners Frank J. O'Sullivan, Anne Marie O'Sullivan, and Nancy C. O'Sullivan are liable as transferees for the unpaid 1983 Federal income tax liability of decedent, and, if so, the amount of such liability, including the amount of interest thereon; and (2) whether petitioner Shirley O'Sullivan is liable in her capacity as a fiduciary of the estate of decedent for all or part of the 1983 Federal income tax liability*17 of decedent, and, if so, the amount of such liability, including the amount of interest thereon.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
At the time the petition in this case was filed, all petitioners resided in California.
Shirley O'Sullivan (Shirley) and decedent were divorced in 1969. They had three children together, Anne Marie O'Sullivan, Nancy C. O'Sullivan, and Frank J. O'Sullivan (children).
Decedent did not file Federal income tax returns for 1983, 1984, or 1985. Decedent died on April 23, 1986. At the time of decedent's death, each of the children had reached the age of majority.
Shirley was executrix of decedent's estate. She hired an attorney and an accountant to help her. Decedent's records consisted primarily of shoeboxes of receipts and mail, much of it unopened. Upon examining decedent's records, Shirley became aware of decedent's failure to file Federal income tax returns for 1984 and 1985. She was not aware that decedent did not file for 1983 because his records contained a photocopy of a 1983 Federal income tax return*18 that was filled out and signed, but not dated, by decedent.
Shirley, her attorney, her accountant, and James Clerf (Clerf), an IRS representative, conferred several times in order to settle the estate and satisfy the IRS. On June 30, 1987, Clerf sent a letter to Shirley's attorney stating that decedent owed a total of $ 3,995 for taxable year 1984 and $ 3,223 for taxable year 1985. No mention was made in the letter of taxable year 1983. After settling the liabilities for taxable years 1984 and 1985, the estate was closed on August 28, 1987.
Pursuant to an "Order Settling Final Account and for Distribution Under Will", issued by the Superior Court of the State of California, County of Los Angeles, Shirley distributed the following amounts on the following dates in her capacity as executrix of decedent's estate:
Dates of Distributions | Amounts | |
Anne Marie O'Sullivan: | 7/28/87 | $ 700 |
8/25/87 | 400 | |
9/11/87 | 515 | |
$ 1,615 | ||
Nancy C. O'Sullivan: | 7/28/87 | $ 700 |
8/25/87 | 400 | |
9/11/87 | 515 | |
$ 1,615 | ||
Frank J. O'Sullivan: | 7/28/87 | $ 700 |
9/10/87 | 915 | |
$ 1,615 | ||
Shirley O'Sullivan: | 8/12/87 | $ 700 |
8/25/87 | 1,100 | |
9/10/87 | 2,510 | |
$ 4,310 |
The*19 $ 4,310 paid to Shirley represented statutory executrix commissions, including preventing foreclosure of decedent's home by arranging for a sale of the premises shortly before a foreclosure sale. Although decedent bequeathed Shirley a share of his estate, she did not accept her share, preferring to let it pass to the children.
After the distributions of the funds identified above, the estate had no remaining assets. On September 1, 1987, Shirley received a letter from the IRS stating that the IRS had never received a 1983 Federal income tax return from decedent. She mailed the IRS a copy of decedent's 1983 Federal income tax return. The IRS did not allow any of the expenses reflected on Schedule A of decedent's 1983 Federal income tax return, and determined a deficiency in excess of the full amount transferred to petitioners. Consequently, the IRS asserted against petitioners the full amounts transferred to them, plus interest as provided by law, as
The parties have since agreed that $ 18,522 of the expenses reflected on Schedule A of decedent's 1983 Federal income tax return is to be allowed. By allowing the foregoing $ 18,522 of expenses, *20 decedent's corrected 1983 Federal income tax liability is as follows:
Additions to Tax | |||
Deficiency | Sec. 6651(a)(1) | Sec. 6651(a)(2) | Sec. 6654 |
$ 3,628 | $ 816 | $ 907 | $ 120 |
OPINION
I.
Pursuant to (a) METHOD OF COLLECTION. -- The amounts of the following liabilities shall * * * be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred: (1) INCOME, ESTATE, AND GIFT TAXES. -- (A) TRANSFEREES. -- The liability, at law or in equity, of a transferee*21 of property -- (i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes), * * * (b) LIABILITY. -- Any liability referred to in subsection (a) may be either as to the amount of tax shown on a return or as to any deficiency or underpayment of tax.
Respondent has the burden of proving all of the elements necessary to establish petitioners' liability as transferees, but not to show that decedent was liable for the tax.
The determination as to the transferee's liability for the transferor's obligation, and the extent of that liability, depends upon State law.
The applicable California law here is A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the*23 obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Thus, in order to establish that the children are liable as transferees for the amounts they received from decedent's estate, respondent must prove that: (1) Decedent owed a debt to the IRS; (2) the IRS' claim against decedent arose before the transfer was made; (3) decedent (or decedent's estate) made the transfer without receiving a reasonably equivalent value in exchange for the transfer; and (4) decedent was insolvent at the time of, or became insolvent as a result of, the transfer.
Addressing the first element,
As for the second requirement, the IRS is a creditor whose claim against decedent arose before the transfer was made. Assessment of the tax before the transfer is not necessary; the tax is ascertainable when *24 the tax period ends, and if the tax is not paid when due, the IRS is considered to be a creditor as of the close of the applicable tax year. See
Regarding the third requirement, decedent (and decedent's estate) did not receive a "reasonably equivalent value" in exchange for the transferred assets. The children did not provide any consideration in return for their shares. Thus, the third requirement has been met.
With regard to the fourth requirement, decedent's estate was rendered insolvent as a result of the transfers. We have held that the transferee is liable irrespective of the particular moment at which the transferor lapsed into insolvency, if such insolvency results no later than at the end of a series of transfers.
Because all four requirements have been met, each of the children is severally liable as a transferee for the amount each received from decedent's estate.
In cases like the one at bar -- where the value of the assets transferred is less than the Federal tax liability of the transferor and the transferee liability arises under State law -- the interest liability of the transferee from the date of transfer to the date of the notice of transferee liability is determined by State law.
2.
Under
Courts have departed from a literal interpretation of this statute by holding that the fiduciary is liable only if, at the time of distribution, such fiduciary had either (1) actual knowledge of the liability to the Government, or (2) notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States. See, e.g.,
Shirley was a credible witness. She testified that she was not aware of the 1983 Federal income tax liability until after she made the distributions. We are satisfied that Shirley did not know of decedent's 1983 Federal income tax liability when she made the distributions. Further, in light of the photocopy of decedent's 1983 Federal income tax return she possessed and her contacts with the IRS, we are satisfied that she was not on notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States. In any event, expenses of administering an estate -- a category that includes the executrix commissions to Shirley -- ordinarily enjoy priority over nonlien Federal tax claims despite the insolvency statute (formerly Revised Statutes Section 3466 (1988), now
To reflect the foregoing,
united-states-v-mrs-sybil-mae-floersch-formerly-mrs-sybil-m-benton , 276 F.2d 714 ( 1960 )
Kennebec Box Co. v. OS Richards Corporation , 5 F.2d 951 ( 1925 )
Morgan (Carol) v. Barsky (Marvin J.) , 933 F.2d 1014 ( 1991 )
Stein v. Southern California Edison Co. , 8 Cal. Rptr. 2d 907 ( 1992 )
Albert E. Goring, Jr., Trustee in Bankruptcy v. United ... , 330 F.2d 960 ( 1964 )
george-d-patterson-district-director-of-internal-revenue-for-district-of , 281 F.2d 577 ( 1960 )
Phillips v. Commissioner , 51 S. Ct. 608 ( 1931 )
Commissioner v. Stern , 78 S. Ct. 1047 ( 1958 )
In Re Serignese , 214 F. Supp. 917 ( 1963 )