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Jan 1992

Tax liens or statute of limitations. (Estates & Trusts)

by Lo, Edward Y.

    Abstract- The US v Susan Knudsen Schneider case explored questions pertaining to the operation of the 10-year period contained in Sec 6324(a) of the Internal Revenue Code as a statute of limitations or as a representation of the lien, and the liability of beneficiaries for taxes not assessed during the limitation period. The court decided that the government should treat the beneficiary's obligation as a primary obligation for only one purpose, specifically personal liability, so that there is no need for the beneficiary to be assessed separately from the estate.

In U.S. v. Susan Knudsen Schneider (91-1 USTC, CCH para. 60,068), the surviving spouse was sued by the IRS 10 years after decedent's death. The government sought to 1) foreclose a lien upon property currently held by the surviving spouse, and 2) hold the surviving spouse personally liable for the unpaid taxes of the estate, and moved for summary judgment on both grounds. The spouse was not a personal representative of the estate.

The decedent died in 1979, and an estate return was timely filed. Two years later the IRS served the estate with a notice of deficiency, previously made based in part on an erroneous refund, and in part on certain valuations made in the estate tax return. The estate's attorney filed an action in tax court to determine the amount of tax due. The tax court action concluded in 1984 with a settlement agreement, in which the surviving spouse did not participate. Although the IRS collected monies from the surviving spouse and also from the estate, there remained a balance of tax, interest, and penalties.

IRS Never Forgets

In November 1988, the IRS contacted the surviving spouse and announced that she owed estate taxes on her former husband's estate, but never heard from them again until October 1989, the tenth anniversary of decedent's death, when she received the summons and complaint initiating court action.

First, the government sought to foreclose upon the statutory tax lien under Sec. 6324(a)(1) which reads as follows:

"(a) Liens for Estate Tax--Except as otherwise provided in subsection (c)-(1) UPON GROSS ESTATE--Unless the estate tax imposed by Chapter 11 is sooner paid in full, or becomes unenforceable by reason of lapse of time, it shall be a lien upon the gross estate of the decedent for 10 years from the date of death, except as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof, shall be divested of such lien."

The action was filed September 27, 1989, just days before the tenth anniversary of decedent's death. The surviving spouse argued that the lien had now expired as the statute on its face suggests, while the government argued it need only file a foreclosure action within the 10- year period.

The court decided that "the 10-year period in Sec. 6324 does not operate as a statute of limitation on a foreclosure action, but is the duration of the tax lien itself," reasoning that the language of the statute on its face is plain. The lien is to have an absolute duration of 10 years. The court also found similar examples in other areas of lien law.

Second, the govvernment sought to hold the surviving spouse personally liable for the taxes of the estate pursuant to Sec. 6324(a)(2), that reads in part as follows:

"(2) LIABILITY OF TRANSFEREES AND OTHERS--If the estate tax imposed by Chapter 11 is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession of the property by reason of the exercise, non-exercise 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 Secs. 2034 to 2042, inclusive, to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax."

No assessment was ever made against the surviving spouse as a transferee of the estate.

The court reviewed the statute providing that an assessment against an estate (transferor in this case) has a three-year statute of limitations. Sec. 6901(c)(1) concerning a transferee beneficiary (the surviving spouse in this case) adds a year to that time. The estate tax return was filed on January 2, 1981. The time for an assessment against the surviving spouse would have expired four years later, on January 2, 1985. In this case, the period of limitations was suspended for about a year because of the estate's tax court proceeding, meaning that the time for an assessment against surviving spouse expired sometime in early 1986.

The government argued that it need not make an assessment against surviving spouse as a transferee.

The court found that the practical effect of that would be that the government treat her obligation as a primary obligation for one purpose (personal liability, no need to exhaust remedies against the estate), but not for another purpose, (government need not assess her separately). Besides being troubled with that logic, the court also found it significant that she had no part in the earlier settlement negotiated.

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