Charles Rubin summarized the case of U.S. vs. McNicol, in which at the time that an individual died, he owed more than $300,000 in federal income tax liabilities and had an insolvent estate. Rubin explains,
A decedent died while owing over $340,000 in unpaid federal income tax liabilities. His estate was insolvent. The assets of his estate consisted almost entirely of a 100% interest in one corporation and 50% of another corporation. Each corporation owned a fishing vessel as its sole asset. Shortly after the decedent died, the decedent’s surviving spouse transferred the shares of the 100% owned company to herself. About six months later, she was appointed executrix of the decedent’s estate, and later transferred the shares of the second corporation to herself. At the time of these transfers, she knew of the unpaid tax liabilities.
The IRS sought to impose liability on the wife for the unpaid tax liabilities per the application of the federal claims statute for the value of the stock she distributed (31 U.S.C. Section 3713). The trial court concurred and entered a judgment against the wife, and the appellate court affirmed the judgment, even though some of the shares were distributed prior to the wife being appointed executrix.
31 U.S.C. Section 3713(a)(1)(B) provides that a claim of the United States government shall be paid first when the estate of a deceased debtor, in the custody of the executor or administrator, is not enough large enough to pay all debts of the debtor. Thus, via the Supremacy Clause of the U.S. Constitution, this federal statute gives the IRS a first priority in collecting taxes against a decedent’s estate (subject to some exceptions), regardless of the priorities provided under state law.
If the representatives of the estate fail to honor the priority claim, they become personally responsible to the government for the taxes. 31 U.S.C. Section 3713(b). For an executor to be responsible under 31 U.S.C. Section 3713(b), three requirements must be met. Interestingly, only the first requirement is statutory. The second and third requirements have evolved to soften what would otherwise be a strict liability regime. The first requirement is that the executor must have transferred assets of the estate before paying a claim of the U.S. The second requirement is that the estate is insolvent, and the third is that the executor have knowledge of the liability.
In the subject case, all three of these requirements were met. The spouse asserted, however, that since she had transferred stock of the first corporation prior to her appointment as executor, the statute should not apply to that transfer. Not a bad argument, given the language of 31 U.S.C. Section 3713(b) which reads: “[a] representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government (emphasis added).” If one paid out the estate assets before being an official representative, then perhaps the statute should not apply by its own wording.
Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal