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.

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.

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.

Taxes come first

George Thompson owed substantial back taxes and penalties to the IRS, over $100,000.  He proposed a program of monthly payments of $3,000 to meet his obligation, but the IRS believed that he could pay much more.  George’s counsel filed Form 433-A showing monthly income of $27,633 ($331,596 annually) and monthly expenses of $24,416.  The difference was the amount that George offered to pay.  The Service challenged two specific items of expense as not allowable in this computation.


As a member of the Church of Jesus Christ of Latter-day Saints, George was required to tithe, paying $2,110 to the Church each month.  He felt that this payment was not discretionary, citing the Bible, and the Tax Court responded in kind in its opinion.

Petitioner introduced evidence, including a biblical passage from the Old Testament, to support his position. See Malachi 3:8-10. This brings to mind another biblical passage suggesting an answer to this type of dilemma: “Render therefore to Caesar the things that are Caesar’s, and to God the things that are God’s.” Matthew 22:21. However, even this formulation presents the dilemma of determining which things fall into the two respective categories.

George advanced three arguments that his tithing was not a conditional expense, and so it needed to be allowed by the IRS. First, George held a number of offices in the Church, and his tithing was a prerequisite to holding those offices. The IRS Manual does allow for considering tithing an allowable expense, but only when it is pursuant to paid employment, the Tax Court held, not volunteer offices.

Next, George protested that his spiritual health and welfare would be adversely affected if he could not tithe.  The IRS Manual does include an allowance for health and welfare, but that does not extend to spiritual health. Indeed, ‘it would generally be inappropriate for the Commissioner or this Court to make determinations concerning what is or is not necessary for a particular person’s religious or ‘spiritual’ health or welfare.”

Finally, George claimed that interfering with his tithing violated his religious freedoms under the First Amendment.  If he cannot tithe, he will lose the various offices he holds in the Church. That is the Church’s decision to make, the Court held, not the government’s.  Indeed, the First Amendment forbids the government to participate in the decision as to what offices Church members may hold.  But it does not forbid the government from insisting that taxes be paid before charitable contributions are made.

College expenses

George also had monthly college expenses of $2,952. He believed that the IRS should have allowed this expense also as necessary.

The IRS Manual does address this situation. It provides that if the plan for paying off the tax debt will be completed within five years, the college expense will be allowable; otherwise it will not be. George’s plan to pay just $3,000 per month would not have paid off his back taxes and penalties within a five-year period, so the Tax Court rejected his plea.

The better course

On the one hand, it is good to know that the IRS will allow taxpayers to satisfy their debts over time.  On the other hand, how could a taxpayer, even one with so large an income, fall so far behind on paying his taxes?

See your tax advisors to make sure that this situation doesn’t happen to you.


(June 2016)

© 2016 M.A. Co. All rights reserved.

Washington Talk

Deadline deferred. On July 31, 2015, the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. One minor component of the legislation implemented an idea that had been included in the President’s earlier budget messages: requiring consistent basis reporting for income and estate tax purposes. To this end, executors of estates large enough to be required to file a federal estate tax return will have additional paperwork requirements. They have to inform both the IRS and beneficiaries of the tax basis of all bequests.

The law requires such filing within 30 days of the due date for the estate tax filing or 30 days after the actual filing. There was no transition rule, so the IRS created one with Notice 2015-57, 2015-36 IRB 294, which provided that no such filings would be due before February 29, 2016. Next the IRS further extended the deadline to March 31, 2016. Proposed Regs. had not yet been issued, and the Service suggested that executors wait for the Regs. before filing.

Temporary Regulations (T.D. 9757) were published codifying the delayed deadline to March 31, with an effective date of March 4, 2016.

Regulations proposed. On the same day as the temporary Regs. on the transition rule was published, the IRS issued the anxiously awaited Proposed Regs. on consistent basis reporting (REG-127923-15). The new rules apply only to property that increases the federal estate tax obligation. The proposed Regs. confirm that property that qualifies for the marital or charitable estate tax deduction is exempt from basis reporting, because it does not generate a federal estate tax

The Regs. cover the situation is which additional estate property is discovered after the time for submitting basis reports, as well as the application of the rules to property that is sold during the period of estate administration.

Early reactions to the proposed Regs. have been positive, and practitioners have found them helpful. However, some called for an additional extension of time for these filings. Form 8971 for reporting “Information Regarding Beneficiaries Acquiring Property From a Decedent” to the IRS was only released in January. The IRS has allowed less than a month for the filings, following release of the proposed Regs., and it comes at the height of the tax filing season to boot.

According to the preamble to the newly proposed Regs. on consistent basis reporting, only about 10,000 taxpayers are expected to be affected by the information reporting per year. According to the analysis of the fiscal effects of the new law created by the Joint Committee on Taxation (JCX-105-15), the change will raise $117 million this year alone. That comes to $11,700 per taxable estate. The increased revenue grows each year, reaching $173 million in 2025.

As seen on Craigslist. The following ad really appeared on Craigslist: “Wanted: kids to claim on income taxes — $750 (Springfield, MO)[.] If you have some kids you aren’t claiming, I will pay you $750 each to claim them on my income tax. If interested, reply to this ad.”

The poster of that ad has now been indicted for filing false tax returns using real Social Security numbers for persons who were not his dependents.

While the candidates vying for the Republican presidential nomination have proposed a variety of tax reduction plans for promoting economic growth, Hillary Clinton has called for a wide range of tax increases. Among them:

  • Implementing a 4% “millionaire’s surcharge” on adjusted gross income above $5 million.
  • Requiring a 30% minimum tax on individuals making more than $1 million, the so-called Buffett rule named after billionaire investor Warren Buffett, who contends many of the wealthy are not taxed enough.
  • Limiting the value of deductions and exclusions to 28%. While this would limit the home mortgage interest deduction, it would not apply to the deduction for charitable contributions.
  • Requiring the wealthy to hold assets for six years to benefit from the preferential 23.8% capital gains tax rate—20% plus the 3.8% net investment income tax enacted under the Affordable Care Act. Assets held less than six years would be taxed on a sliding scale that goes upward from 23.8%. Those holding assets less than one year, for instance, would face a capital gains rate of 43.4%.

Reducing the tax threshold on estates to $3.5 million ($7 million for married couples), along with increasing the top estate tax rate to 45% from the current 40% and setting a lifetime limit on the gift tax exemption at $1 million.

The entire Clinton tax proposal was projected by the Urban-Brookings Tax Policy Center to increase tax revenue by $1.1 trillion over the first decade of implementation. The current proposal does not include the elimination of stepped-up basis at death, which the President had proposed and sources in the Clinton campaign said will be forthcoming.

The Tax Foundation’s analysis came to a different conclusion, finding that just $498 billion would be raised. They use a dynamic scoring model. As the tax increases would be likely to slow economic growth, that development gets factored into their tax math.

Harper Lee’s will remains a mystery. The author of To Kill a Mockingbird and, more recently, To Set a Watchman, Lee died in February. Her estate is estimated to be worth tens of millions of dollars, and there is considerable interest in what will happen to her personal papers. Lee never married and had no children, so her only living relatives are nieces and nephews. However, we may never know the terms of her will because, at the request of the attorneys for her estate, the Alabama probate judge ordered it sealed. He ruled: “The court finds by clear and convincing evidence that information contained in the will and associated court filings pertains to wholly private family matters; poses a serious threat of harassment, exploitation, physical intrusion, or other particularized harm to persons identified in those documents or otherwise entitled to notice of this proceeding; and poses potential for harm to third persons not entitled to notice of this proceeding.” reported that Lee had apparently taken steps to prevent Hollywood from ever remaking To Kill a Mockingbird.

Scorecard. According to the Congressional Budget Office, the federal budget deficit through February 2016 was $352 billion. That’s $34 billion less than the year earlier period. Individual income and payroll tax collections were up 6%, and spending was up 2%. Spending on Social Security was up 4%, primarily due to an increase in the number of beneficiaries.

(April 2016)
© 2016 M.A. Co. All rights reserved.