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
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
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.
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.