[WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

Fri Nov 16 15:26:55 PST 2018

I am late to this discussion, but Diane is correct.  To add to her comments:  A fiduciary must take care to ensure that all of the tax obligations of the estate or trust are satisfied.  If a fiduciary were to distribute assets of a trust or estate without completely satisfying those obligations, and the estate was then insolvent and unable to pay those taxes, then two forms of liability are created.  First, the fiduciary will become personally liable for those tax obligations, to the extent assets were distributed by the fiduciary.  Second, the beneficiaries will be liable for those tax obligations to the extent the beneficiaries received assets.  §6901(a); Reg. §20.2002-1; Rev. Rul. 80-112, 1980-1 C.B. 306.  The former is known as fiduciary liability, while the latter is known as transferee liability.  Transferee liability not only applies to initial transferees, but also to successive transferees.  Hawk v. Commissioner, T.C. Memo 2017-217.  In general, these two types of liability are created by state law, but enforced by federal procedural law; §6901(a) is merely a federal procedural statute.  Sawyer v. Commissioner, T.C. Memo 2011-298; Julia R. Swords Trust v. Commissioner; 142 T.C. 317 (2014); Feldman v. Commissioner, 779 F3d 448 (7th Cir. 2015).  The determinations of liability under state law and of transferee status under federal law are separate and independent determinations.  Hawk v. Commissioner, T.C. Memo 2017-217.  In most cases, the state law is the Uniform Fraudulent Transfer Act, also known as the Uniform Voidable Transactions Act.  In Oregon, see ORS chapter 95.  In Washington, see RCW chapter 19.40.  In some situations, state law might even govern the calculation of interest on the transferee tax liability.  Schussel v. Commissioner, 758 F.3d 82, 114 AFTR2d ¶2014-5038 (1st Cir. 2014).  For a discussion of what constitutes insolvency of an estate, see Singer v. Commissioner, T.C. Memo 2016-48.  An additional year is tacked on to the normal statute of limitations if the IRS finds it necessary to enforce fiduciary liability or transferee liability.  §6901(c); see also Reg. §1.641(b)-2; 31 U.S.C. §3713(b); United States v. Coppola, 85 F.3d 1015, 1020 (2d Cir. 1996); U.S. v. McNicol, 829 F.3d 77, 118 AFTR 2d ¶2016-5038<https://checkpoint.riag.com/app/main/docLinkNew?DocID=i9199c0034397481e88c7949252a63f3a&SrcDocId=T0NEWSLTR%3A791966.1-1&feature=tnews&lastCpReqId=2127406> (1st Cir. 2016; cert. den. 1/9/17).  In some cases, the IRS may be able to collect against a fiduciary or a transferee without having made an assessment against the fiduciary or transferee.  U.S. v. Geniviva, 16 F.3d 522 (3rd Cir. 1994); U.S. v. Botefuhr, 309 F.3d 1263 (10th Cir. 2002); U.S. v. Russell, 532 F.2d 175 (10th Cir. 1976).  The statute of limitations does not even begin to run if no return has been filed, and the tax can be assessed at any time.  §6501(c)(3).  The obligation for an estate or trust to pay taxes includes the obligation to pay the tax liabilities of the decedent.  United States v. Shriner, 113 AFTR 2d ¶2014-616 (D.C. Md. 2014).  In a transferee liability case or a fiduciary liability case, the IRS has the burden to prove the liability, but the transferee or fiduciary has the burden to disprove the amount of tax.  §6902(a).  These rules apply to income taxes, estate taxes, and gift taxes.  For an example of an estate, two marital trusts, and a surviving spouse all being held responsible for transferee liability, see Hawk v. Commissioner, T.C. Memo 2017-217.  Regarding estate and gift taxes, see also §6324(a)(2) (which imposes fiduciary liability even without a conveyance) and ORS 118.210, and see ORS 316.382 and OAR 150-316-0445 regarding the decedent’s Oregon income taxes.  See also ORS 314.310 and ORS 116.063(3)(c).  In Washington, see RCW 83.100.120.  Finally, keep in mind that the claims limitation period (four months in Oregon) does not apply to the federal government.  U.S. v. Summerlin, 310 US 414 (1940).  The moral of this story:  Don’t risk the personal assets of the fiduciary in order to save the beneficiaries a few dollars of tax.
Phil Jones
Portland, OR

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of James W. Spencer
Sent: Friday, November 16, 2018 12:57 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

All:
Excellent feedback. The prevailing opinion was also mine, though I appreciate the citations which are very helpful. Thank you everyone that responded.

I hope everyone has a wonderful Thanksgiving.

Best wishes,

James W. Spencer
Brothers & Henderson, P.S.
2722 Eastlake Avenue East, Suite 200
Seattle, Washington 98102
Phone: (206) 324-4300 x106
e-mail:  jamess at brothershenderson.com<mailto:jamess at brothershenderson.com>
www.brothershenderson.com<http://www.brothershenderson.com/>

The information transmitted in this e-mail message and attachments is attorney-client information, is privileged or confidential material and is intended only for the use of the individual or entity named above. If you have received this transmission in error, immediately notify the sender by reply e-mail and permanently delete this transmission and all copies including attachments.

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Chris Moore
Sent: Friday, November 16, 2018 11:26 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

A PR can AVOID taxes in any legal manner.  “Anyone may so arrange his affairs so that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.” Judge Learned Hand.  However, failing to file a tax return that is legally required would be EVADING taxes, or close to it, which is a federal crime.  Does the PR want to take a chance on being charged with a felony?

Sincerely,

Chris J. Moore
Christopher J. Moore, JD, CPA - Inactive, AEP®, EPLS*
Creason, Moore, Dokken & Geidl, PLLC
Lawyers
1219 Idaho Street,<https://www.google.com/maps/place/1219+Idaho+St,+Lewiston,+ID+83501/@46.4170263,-117.0192992,17z/data=!3m1!4b1!4m5!3m4!1s0x54a0354b7ccf3e63:0xfee7451c99c186e8!8m2!3d46.4170263!4d-117.0171105>
Lewiston, Idaho 83501<https://www.google.com/maps/place/1219+Idaho+St,+Lewiston,+ID+83501/@46.4170263,-117.0192992,17z/data=!3m1!4b1!4m5!3m4!1s0x54a0354b7ccf3e63:0xfee7451c99c186e8!8m2!3d46.4170263!4d-117.0171105>
Phone: 208-743-1516; Fax: 208-746-2231
Website: www.cmd-law.com<http://www.cmd-law.com/>

*Certified as an Estate Planning Law Specialist by the Estate Law Specialist Board, Inc., the only estate planning certification entity approved by the ABA and the Idaho State Bar Association.
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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>] On Behalf Of Josh Grant
Sent: Friday, November 16, 2018 10:52 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

I have thought that a PR can avoid taxes if there is a legal way to do that, but if not, the obligation of a PR is to pay all debts before assets are distributed, but certainly to pay them out of available assets.

Joshua F. Grant
[advocates]
P. O. Box 619
Wilbur, WA 99185
509 647 5578

From: James W. Spencer<mailto:jamess at brothershenderson.com>
Sent: Friday, November 16, 2018 10:35 AM
To: WSBA Probate & Trust Listserv<mailto:wsbapt at lists.wsbarppt.com>
Subject: [WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

Greetings Listmates:

I have a… um, theoretical… situation.

The facts are pretty simple (and likely quite common): Decedent dies in 2018. During the administration of Decedent’s estate, it is discovered that Decedent hasn’t filed annual income tax returns, likely for a decade or two. This is probably not really an issue, as Decedent apparently didn’t work and had no W-2 income. However, in 2016, Decedent sold a home, and the proceeds are well outside of the $250,000 individual capital gains tax exemption for the sale of a primary residence. Unpaid capital gains taxes are likely in the $75,000 - $100,000 range (depending on the final determination of the tax basis in the residence). Estate accountant is advising PR that the PR should file a tax return for 2016 and pay the capital gains tax. While beneficiaries have already received some notable portion of the estate, this will (more than) eat up all remaining funds in the estate, leaving nothing else for the beneficiaries.

I would love some opinions on the nexus between the PR’s fiduciary duties to the estate’s beneficiaries and the PR’s responsibility to properly administer the estate, including dealing with taxes. The underlying questions is whether it a breach of fiduciary duty for the PR to file a tax return that will deny the beneficiaries significant funds where there is a very real possibility that the IRS will never come after those taxes if no return is filed.

I have some opinions on this, but would really appreciate some feedback from the hivemind.

Thanks,
James

James W. Spencer
Attorney at Law
Brothers & Henderson, P.S.
2722 Eastlake Avenue East, Suite 200
Seattle, Washington 98102
Phone: (206) 324-4300 x106
Fax: (206) 324-3106
e-mail:  jamess at brothershenderson.com<mailto:jamess at brothershenderson.com>
www.brothershenderson.com<http://www.brothershenderson.com/>
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The information transmitted in this e-mail message and attachments is attorney-client information, is privileged or confidential material and is intended only for the use of the individual or entity named above. You are hereby notified that any disclosure, copying, distribution, review by or taking of any action in reliance on the contents of this e-mail information by unauthorized persons is strictly prohibited. All personal messages are solely the views of the sender and are not to be attributed to Brothers & Henderson, P.S. If you have received this transmission in error, immediately notify the sender by reply e-mail and permanently delete this transmission and all copies including attachments.

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