According to Procedurally Taxing, in United States v. Paulson, 68 F.4th 528 (9th Cir. 2023) the Ninth Circuit reverses the district court and holds the beneficiaries and trustees personally liable for unpaid estate taxes.
The Paulson estate had about $200 million in assets. So, it’s well above the threshold for being a taxable estate, and this case involves unpaid estate taxes.
Prior to this collection suit, the estate had petitioned the Tax Court, which determined an increased deficiency of $6,669,477 in estate taxes on top of the estate tax liability of $4,459,051 reported on the estate tax return. Mr. Paulson passed away in July 2000. The Tax Court entered the stipulated decision in December 2005. The estate elected to pay the additional amount through installments as well.
If the estate taxes are unpaid, trustees, transferees, or beneficiaries become liable for the unpaid estate taxes through IRC §6324(a)(2). Here, the estate failed to keep up with the installment payments causing the IRS to terminate the §6166 election and issue a notice of final determination under 26 U.S.C. §7479. This triggered the immediate need for the estate to pay the entire liability. As you might expect, with an estate of this size, the beneficiaries did not all get along with each other or with the trustee of the living trust.
By the time the IRS filed suit in 2015 to recover the unpaid estate taxes, the liability had exceeded $10 million. The beneficiaries, trustees, and former trustees pointed at each other as the person(s) responsible for failing to pay the estate taxes, while each disclaimed their own responsibility.
The district court concluded that James Paulson, Vikki Paulson, and Crystal Christensen were not liable for the unpaid estate taxes as transferees or trustees because they were not in possession of estate property at the time of Allen Paulson’s death.
The timing argument is critical in this case, and it relates to the language of the applicable statute. The circuit court states:
The statutory provision at issue here, §6324(a)(2), as stated in its title, imposes personal liability on “transferees and others” who receive or have property from an estate. The statute provides that:
If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent’s death, of such property, shall be personally liable for such tax.
The question before us is whether the phrase “on the date of the decedent’s death” modifies only the immediately preceding verb “has,” or if it also modifies the more remote verb, “receives.”
The IRS argued that the language imposes personal liability on individuals who have estate property at the time of death but also on those who receive estate property anytime thereafter, covering successor trustees and beneficiaries of the living trust. The circuit court agrees with the IRS reading of the statute.