Transferee and Fiduciary Liability for Estate Tax Applied to Second Level Transferee and Fiduciary. United States v. Estate of Kelley, et al., No. 3:17-CV-965-BRM-DEA (D.N.J. Oct. 22, 2020)

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By: Ryan Tompkins, Sullivan & Worcester

Background:

Lorraine M. Kelley (“Kelley”) died on December 30, 2003.  Kelley’s brother, Richard Saloom (“Saloom”) and Richard J. Lecky were appointed as co-executors of Kelley’s estate.  The executors filed a federal estate tax return for Kelley’s estate reporting a gross estate of approximately $1.7 million, which was adjusted to roughly $2.6 million upon examination by the IRS resulting in an additional tax liability.  Saloom consented to the assessment in June of 2006.  In late 2007, Saloom began making payments toward the tax liability.

Saloom was the sole beneficiary of Kelley’s estate.  By January of 2008, Saloom had distributed the entire estate to himself, although more than $450,000 remained outstanding in federal estate tax due.  Saloom died on March 21, 2008.  The gross value of Saloom’s estate totaled approximately $1.1 million.

Saloom’s daughter, Rose Saloom (“Rose”), was the sole beneficiary and executor of Saloom’s estate.  After Saloom’s death, Rose filed a New Jersey inheritance tax return for Saloom’s estate listing a $456,406 debt for “federal tax” and she made several payments toward the outstanding estate tax liability for Kelley’s estate.  Rose did not, however, retire the entire balance.  Rose instead distributed the remaining assets of Saloom’s estate to herself leaving the estate insolvent.  As of September 2, 2019, the unpaid balance of Kelley’s estate tax liability with accrued penalties and interest was $688,644.

Analysis:

Attorneys from the Tax Division of the United States Department of Justice filed a complaint in federal district court asserting transferee liability and fiduciary liability for the estate tax against Rose, as executor of Saloom’s estate and individually, among other claims and requests for relief.

Section 6324(a)(2) of the Internal Revenue Code imposes personal liability on certain transferees of the decedent’s gross taxable estate when the estate itself fails to pay any estate tax.  The transferee’s liability is limited to the value of property received from the estate.

The federal insolvency statute, 31 U.S.C. § 3713, places personal liability on the executor of an estate who pays the debts of the estate or distributes assets of the estate, before paying a claim of the United States.  This rule is intended to preserve the priority of debts due to the United States.  Personal liability can attach, to the extent of the distribution, if the government establishes that (1) the fiduciary distributed the assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.  See United States v. Tyler, No. 10-1239, 2012 U.S. Dist. LEXIS 34093, at *10 (E.D. Pa. Mar. 13, 2012), aff’d 528 F. App’x 193 (3d Cir. 2013).  Fiduciaries can be deemed to have had constructive knowledge if they had “notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.”  528 F. App’x at 201 (quoting United States v. Coppola, 85 F.3d 1015, 1020 (2d Cir. 1996)).

Liability of Saloom’s Estate

The court concluded that there was no material dispute of fact as to whether Saloom had knowledge of the tax liability for Kelley’s estate when he intentionally distributed assets from the estate to himself rendering the estate insolvent.  Saloom was therefore personally liable for the estate tax liability of Kelley’s estate.  Thus, the Kelley estate tax liability was a debt due to the United States from Saloom’s estate

Liability of Rose Individually

The court then found that Rose was personally liable as the fiduciary of Saloom’s estate based upon her failure to pay the Kelley estate tax liability out of the assets of Saloom’s estate prior to distributing the estate assets to herself.  In arriving at this conclusion, the court noted that Rose clearly had actual knowledge of the federal estate tax owed by her father, which she listed as “indebtedness” for “federal tax” on the New Jersey inheritance tax return she filed for Saloom’s estate.  Rose also made several payments toward the debt after Saloom’s death.

Takeaway:

While the result of this case is not entirely surprising on the facts, it serves as a reminder to practitioners that transferee and fiduciary liability can operate in tandem to extend the reach of the federal insolvency statute beyond the fiduciaries and first order transferees of the estate that generates the tax.  After all, Rose was neither a fiduciary nor a direct transferee of Kelley’s estate and yet the court found her to be personally liable for the entire estate tax due.