Paying state death taxes before paying the IRS does not render an executor personally liable for estate taxes, provided the estate is not insolvent.

Singer v. Comm’r, T.C. Memo. 2016-48

At the time of his death, Melvin Sacks was legally married to Alvia Sacks but had been estranged from her for 25 years. His “longtime companion” was Lucille Atwell, with whom he jointly owned a brokerage account worth some $2 million. Atwell was the beneficiary of Sacks’ life insurance policies. Sacks also had a relationship with Joan Parker, with whom he jointly owned a residence in Bayside, New York. The property was purchased in July 1990, for $500,000, and Sacks provided the entire purchase price. He died the
next month.

Sacks died with a substantial unpaid income tax from various years in the 1980s and 1990, well over $1 million. As there were limited assets in the probate estate, the executor obtained a restraining order over the brokerage account. In March 1991 he also disaffirmed transfer of the residence to Parker. In November 1991 an estate tax return was filed reporting a taxable estate of $3,208,103 and an estate tax liability of $1,011,279. No taxes were paid at that time. In 1994 the IRS assessed an estate tax deficiency of $831,313.

The income tax problem was resolved in December 1994, when the IRS accepted the executor’s offer in compromise to pay $1 million to cover tax years from 1978 through 1990. The Surrogate’s Court authorized a release from the brokerage account, $1 million for the IRS and $28,000 to pay executor’s fees.

In 1997 Parker contributed $87,500 to the estate to pay her share of the estate taxes, and two grandchildren contributed $25,000 each. These amounts were forwarded to the IRS, but, even so, in February 1999 the outstanding amount due was more than $3 million, including interest and penalties.

The executor asked the Surrogate’s Court in April 1999 to release additional funds from the brokerage account: (1) $251,107 to the Estate of Alvia Sacks; (2) $446,772 to the IRS; and (3) $171,587 to the New York Department of Taxation. These amounts were paid. The IRS believed that payment to anyone other than itself was improper, and so issued a notice of fiduciary liability for $422,694 to the executor.

The personal representative of an estate is personally liable for the unpaid claims of the United States to the extent of a distribution, “if the Government establishes the following: (1) The personal representative distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the personal representative had notice of the Government’s claim” [Allen v. Commissioner, T.C. Memo. 1999-385]. The Tax Court held that the Sacks estate was not insolvent at the time of the distribution, because it continued to have claims against the transferees of nonprobate property for contributions to pay the estate tax. Therefore, the executor was not personally liable for the tax.



(June 2016)

© 2016 M.A. Co.  All rights reserved.

Settlement of gift tax dispute does not waive interest due on unpaid taxes.

Estate of Anthony La Sala v. Comm’r, T.C. Memo. 2016-42 

When he was 93, Anthony La Sala created ALS Family LLC to own and manage his wealth. He sold a 99% interest in the company to his daughter when he was 95 for a lifetime annuity of $913,986. In the exchange, the retained 1% was valued at $28,100, and the 99% at $2,781,900. The figures were arrived at by applying discounts to some of the fractional shares of closely held companies owned by ALSF. Anthony died after receiving one annuity payment.

On the estate tax return, the sale was treated as bona fide, so only the retained 1% was listed as an asset. The IRS felt that the discounts were too high, which meant that Anthony had overpaid for his annuity, and the Service also wanted to include the entire value of ALSF in the taxable estate under IRC §2036. The estate took the matter to the Tax Court, but a settlement was reached before trial began. The estate conceded that the discounts were too high, and the IRS conceded the legitimacy of the sale of the annuity. The excess value would be a taxable gift to the daughter. However, the stipulations did not identify the correct discounts or the amount of the taxable gift.

There was a change of personnel at the IRS, and negotiations resumed to finalize the numbers. Ultimately, the estate conceded a taxable gift of more than $1 million, triggering a gift tax of $235,207, and an estate tax obligation of $160,176. The executed decision document was silent on the matter of interest. Gift and estate tax returns were filed. On November 15 the estate sent the IRS a check for $230,838, covering the estate tax and interest. On November 18 a check was sent for the full amount of the gift tax, but without interest.

When the IRS processed the gift tax payment in January 2011, a late filing penalty of $52,922 was imposed; a late payment penalty of $58,802 was applied; and total interest due of $137,752 was calculated. A notice was sent to the executors, who no doubt thought that the IRS was reneging on their compromise. The estate asked for a hearing. The settlement officer abated the late filing and late payment penalties, and the interest on them, but refused to abate the interest on the gift tax itself.

The estate argued before the Tax Court that the amount of the gift tax was simply a “notational amount” that had been used in the settlement negotiations, and the gift tax return was filed at the request of the IRS to create an account to which the payment could be posted. As such, no interest should be required. The Tax Court was not convinced. By filing the gift tax return, the estate conceded that a taxable gift had taken place on a specific date, which created a due date for payment of the gift and the date for statutory interest to begin to run. The settlement officer did not abuse her discretion in making this determination.

© 2016 M.A. Co.  All rights reserved.

Failure to report a taxable gift does not create a cascade of problems in subsequent gift tax re-turns.

ECC 201614036

Taxpayer made a substantial taxable gift in Year 1, but never filed a gift tax return. The IRS can assess a gift tax at any time, in any subsequent year, because the statute of limitations never begins to run. Sumner Redstone recently learned this lesson the hard way, when he had to pay a gift tax on a transfer made 40 years earlier. Normally, the IRS has only three years in which to challenge a gift tax return.

Now say that in Year 2 Taxpayer reported a large taxable gift. In calculating the amount of gift tax due, he omitted the Year 1 transfers and, therefore, paid less gift tax than he should have. Is that a substantial omission, which would double the limitations period to six years? It is not, the IRS ruled recently. The substantial omission must be with respect to transfers made for the period covered by the gift tax return. It would take a legislative fix to close this gap, the IRS concluded.

© 2016 M.A. Co.  All rights reserved.

The IRS attempts to measure the “tax gap”

For the first time in ten years, the IRS has attempted to measure the “tax gap,” the difference between what taxpayers are paying and what they should be paying under the tax law. The gap hasn’t changed much over the years, according to information from IRS Commissioner Koskinen at an April press conference. The net tax gap was $385 billion in 2006, and it was $406 billion over the period from 2008 to 2010. Most of the gap is attributed to underreporting for the federal income tax. In 2006 the voluntary compliance rate was estimated by the IRS at 83.1%, and the rate fell to 81.7% four years later.

Koskinen expressed concern that, given the declines in IRS taxpayer services and the reduction in enforcement actions as a result of budget cuts, the gap may be widening. He concluded with a plea for more IRS funding.

© 2016 M.A. Co.  All rights reserved.

Charities Helping Americans Regularly Throughout the Year (CHARITY) Act

To the applause of the nonprofit community, Senate Finance Committee member John Thune (R-S.D.), and Committee ranking minority member Ron Wyden (D-Ore.), in April introduced Charities Helping Americans Regularly Throughout the Year (CHARITY) Act (S. 2750). Important elements of the bill include:

  • allowing donor-advised funds to receive charitable IRA distributions;
  • simplifying the standard mileage rate for using a personal vehicle for volunteer work;
  • replacing the two-tiered excise tax on the net investment income of private foundations with a single 1% rate; and
  • expressing the sense of the Senate that promoting charitable giving be a goal of tax reform.

Despite the bipartisan support, no action is expected this year, given the presidential nominating conventions in July, followed by the August recess and the fall campaigning.

© 2016 M.A. Co.  All rights reserved.


Health care reform task force

In February House Speaker Paul Ryan (R-Wisc.) appointed six task forces to study health care reform and ways to make the tax code reward work better. An early report was released April 29. Targets include eliminating the marriage tax penalty and bringing down the corporate tax rate, which is among the highest in the developed world.

Health insurance reform would follow the path established by the American Health Care Reform Act (H.R. 2653), introduced last year by Rep. David P. Roe (R-Tenn.). That bill allows a standard deduction for individually purchased health insurance, and it would modify health savings accounts.

The goal of tax reform would be a top individual tax rate of 25%, coupled with the elimination of special interest “tax expenditures.” The IRS would be dissolved, with responsibility for collecting revenue transferred to a new and smaller department at Treasury. The study calls for dynamic scoring of tax proposals and the creation of a tax-free “Universal Savings Account.”

Few observers expect action on these proposals during an election year.

© 2016 M.A. Co.  All rights reserved.

Sensible Estate Tax Act of 2016

Democrats on the Ways and Means Committee are supporting H.R. 4996, the “Sensible Estate Tax Act of 2016,” introduced by ranking minority member Sander M. Levin (D-Mich). Key elements of the bill include:

  • reducing the federal estate tax exempt amount to $3.5 million;
  • chopping the federal gift tax lifetime exemption to $1 million;
  • capping the Deceased Spouse’s Unused Exemption at $1 million;
  • boosting the estate tax rate to 45%.

The bill isn’t expected to get much traction this year, but could be a preview of coming attractions should the Congress change hands next year.

© 2016 M.A. Co.  All rights reserved.

2016 Filing snapshot

In early March the Treasury Inspector General for Tax Administration (TIGTA) took a snapshot of how this year’s filing season is going. The report was released on March 31. Among the observations:

  • 93.9% of returns were filed electronically. Only 4 million returns came in on paper, to that point.
  • 53.5 million refunds, totaling more than $160 billion, had been issued.
  • More than 2.7 million taxpayers admitted that they had no health insurance in 2015. As a consequence, they paid more than $1 billion in “shared responsibility payments” (or, in the words of Chief Justice Roberts, a “tax”).
  • 1.4 million returns claimed a total of $4.4 billion Premium Tax Credits for their health insurance.
  • 194 tax returns claimed unreasonably large Advance Premium Tax Credits, totaling more than $7.9 billion. Those returns are being investigated.
  • 42,148 fraudulent returns were identified, and more than $180 million in fraudulent refunds was blocked.
  • 31,578 fraudulent returns involved identity theft.

Recommendations have been slated for a future report.

© 2016 M.A. Co.  All rights reserved.

Low interest rates

Dear Garden State Trust Company:

I am so tired of these low interest rates.  Can we expect an uptick sometime soon?  Earlier this year there was talk of a June increase, as I recall.—Cautious Saver

Dear Cautious:

I am afraid that you may have to get used to disappointment. Your memory is correct. A June interest rate hike was predicted by many early in the year, but new developments have made that very unlikely.

Specifically, there was a very poor jobs report for May. The consensus forecast was for 160,000 new jobs, and the reality missed that by a mile, as only 38,000 jobs were added, the worst report since September 2010. Unpacking the data, one finds even more ominous information:

  • The labor force participation rate bottomed at a 35-year low last October. The low participation rate explains why so many Americans don’t believe that the economy truly has recovered from the last recession. Improvement in the participation rate since October was almost entirely erased with the May jobs report, as 664,000 people dropped out. There are now over 102 million Americans either unemployed or not looking for work.
  • According to the household survey, during April and May 312,000 full-time jobs were lost, offset partially by the creation of 118,000 part-time jobs. The reasons for the increased reliance on part-timers are unclear.

These signs suggest that the economy is not strong enough for an interest rate hike soon. Perhaps the May report was an anomaly and will be offset by much better news in June.  If so, we may hope for higher interest rates in the fall.

Do you have a question concerning wealth management or trusts?  Send your inquiry to

(June 2016)

© 2016 M.A. Co.  All rights reserved.


Estate planning for collections

It seems that everybody collects something these days. Many collectors have spent a lifetime gathering the items in their collection. The collector’s sentimental attachment to the collection is often greater than any other assets that he or she owns. A careful discussion of a collection’s disposition is critical. Among the issues to be resolved:

  • The owner should be encouraged to create files or notebooks containing detailed information, including documents on loans of parts of the collections to third parties, insurance policies and receipts for the objects in the collection.
  • A skilled collector of unusual objects often will have a better understanding of the value of his or her collection than anyone else. Be careful, though, the sentimental attachments tend to distort the perceived value.
  • The skilled collector generally knows who the other collectors are in the field. They will often serve as the best people to value the collection, particularly collections that have no recognized market and few collectors (e.g., tax memorabilia).
  • It is important to maintain any reference materials that the collector has on the collection. Such works can prove invaluable to the Personal Representative in deciding how to handle, store and dispose of the collection.

Perhaps the most difficult issue is the collection’s ultimate disposition. The documents should specifically address how the collection will be handled after the collector’s death. If the collection is to be transferred to a museum or other charity, arrangements for such a disposition should be made by the collector prior to death.

If the collection is to be passed to family members, the collector must decide whether the collection should remain intact by giving it to one family member or to divide it among a group of heirs. If a group of heirs will receive the collection, the manner in which the collection will be divided up should be addressed. For example, are specific items to be passed to specific heirs, or does the Personal Representative have the authority to decide how to make the dispositions?

If the collection is to be sold, other issues arise. For example, if the sale is by a private sale, what assurance does the Personal Representative have that the price is appropriate? In most cases an independent appraisal should be obtained before the sale to protect the Personal Representative from fiduciary liability. If the sale is through a dealer, the Personal Representative should make sure to check the dealer’s background and reputation and confirm that the sale price is in the range of any independent appraisal.

If the collection has value, the time and expense of an estate plan for it will be entirely worthwhile.


 (June 2016)

© 2016 M.A. Co. All rights reserved.