In a previous writing, I discussed the potential of an executor to be personally liable for a decedent’s tax obligations.[1] That discussion was based on lessons learned from a Tax Court opinion,[2] outlining certain steps for executors to consider in minimizing exposure to such personal liability. In 2023, in a split decision, the Ninth Circuit Court of Appeals addressed another statutory ground through which persons may be held personally liable for unpaid estate taxes in the Paulson decision.[3] The Paulson decision was the first to ever hold a successor trustee liable for payment of estate tax liabilities unpaid by the prior trustee.
Facts[4]
Allen Paulson[5] died in 2000 having previously funded most of his assets into a revocable trust. The executors of Allen’s estate filed an estate tax return reporting an estate tax liability of $4,459,051, increased in 2005 by an additional $6,669,477 following litigation with the IRS in Tax Court. Following resolution of the Tax Court proceedings, the IRS assessed the final tax liability in January 2006. The estate paid part of its estate tax liability upon the filing of its estate tax return, electing to pay the remainder to pay the IRS in installments.[6] Certain interest payments were made and a one-year extension was granted to make the first tax payment. Ultimately, no other payments were made to the IRS in satisfaction of this liability.
As a result of disputes among the Paulson family, the original trustee of Allen Paulson’s revocable trust, his son John Michael Paulson, was removed. He was succeeded by Vikki Paulson (Allen’s daughter-in-law) and James Paulson (Allen’s son) as co-trustees, with James Paulson later being replaced by Crystal Christensen (Allen’s granddaughter).
Due to the default in payments, the IRS terminated the installment payment election in May 2020 which termination was later sustained by the Tax Court in 2011. Vikki and Crystal asserted that Allen’s revocable trust was “completely depleted” by that time and unable to satisfy Allen’s estate tax liabilities. In order to collect the outstanding balance, the U.S. filed suit in September 2015 against the beneficiaries of Allen’s revocable trust, Allen’s executor, and the current co-trustees of Allen’s revocable trust. The defendants consisted of Allen’s widow, children, and a grandchild, each being sued by the U.S. in various capacities. The ability of the U.S. to collect against the successor co-trustees of Allen’s revocable trust is the primary subject of this writing.
Analysis
The trial court held that James, Vikki, and Crystal were not liable for unpaid estate taxes as transferees or trustees. This is because John was trustee of Allen’s revocable trust at the time of Allen’s death. The U.S. appealed to the Ninth Circuit Court of Appeals which reversed and remanded.
The Ninth Circuit’s analysis of the issue revolved around interpretation of the statute on which the U.S. relied in seeking to recover against the defendants, IRC § 6324(a)(2). That statute states as follows:
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. (emphasis added)
The emphasized language resulted in two different interpretations. The defendants argued that the language should be interpreted to limit liability to those who either: (1) receive the decedent’s relevant property[7] on the decedent’s date of death, or (2) have the decedent’s relevant property on the date of death. Read this way, there would be no right to recover against the successor co-trustees, in their capacity as such[8], because they nether held nor received property included in Allen’s estate on his date of death.
The U.S. argued for a different interpretation. Under that interpretation, the phrase “on the date of decedent’s death” would only modify the phrase “has on the date of decedent’s death” such that receipt of assets included in the decedent’s gross estate could trigger liability at any time, whether before or after the decedent’s date of death. Read this way, the successor co-trustees, in their capacity as such, would be liable under IRC § 6324(a)(2) because they received Allen’s property prior to payment of his estate tax liability while the statute of limitations on collection remained open.
In resolving this dispute over interpretation of the statute, the court engaged in a lengthy discussion regarding statutory construction (much of which focused on the placement of a comma). Although that discussion is beyond the scope of this writing, it is an interesting discussion and worth reading. The discussion quoted multiple times to a text on statutory interpretation co-authored by former Justice Antonin Scalia.[9] After that analysis, a two-judge majority of the Ninth Circuit’s panel sided with the U.S., allowing collection against co-trustees who received property many years after Allen’s death. The third judge strongly dissented, finding the majority’s interpretation was a “hypertechnical reading” of the statute that was not “the most logical reading” of Congressional intent which is what the court should have been seeking to determine.[10]
Each of the majority and dissent discussed a concerning effect of this result. This issue deals with the amount by which a person may be held liable under IRC § 6324(a)(2). The majority states that “the liability of each of these defendants cannot exceed the value of the estate property at the death, or the value of that property at the time they receive it.”[11] Certainly, it may be comforting to see the court place this cap on liability. However, there are reasons why this may be false comfort. The court simply made up this limitation on the IRS. There is nothing other than this dicta which contains any such limitation. The U.S. made “avowals in its briefing and at oral argument that estate tax liability cannot exceed the value of the property received.”[12] This limitation is nowhere in the statute or other controlling legal precedent. As such, while it may be the practice of the IRS not to seek more, the IRS is not bound by this. Also, even if this limitation is applied, especially given the 10-year statute of limitations from the date of assessment that applies to collections[13] which may be extended (for example, through an IRC § 6166 installment payment election), property may decline in value before the IRS seeks collection, leaving the liable party forced to satisfy the tax liability with their personal assets.
Vikki and Crystal petitioned the Unites States Supreme Court for certiorari.[14] On March 4, 2024, the U.S. Supreme Court denied their petition.[15] As such, at least in the Ninth Circuit, the decision in Paulson stands. We will have to wait and see whether other circuits agree.
Conclusion
Paulson is the first case to find successor trustees liable when they were appointed after the decedent’s death. The case is of heightened significance due to the fact that it comes from a circuit court of appeals and also applied to co-trustees taking office many years after the decedent’s death. All prior case law under IRC § 6324(a)(2) and its predecessor statutes only applied this outcome to trustees who received the decedent’s property, or held the decedent’s property, on the date of death. While successor trustees may feel some comfort that their liability should not exceed the value of assets coming into their hands as trustee, there is no guarantee that the IRS will be limited to that value. In that case, the successor trustee could find themselves facing personal liability in excess of the value of assets upon their appointment. Even if the IRS limits its collection efforts (or is limited by law) to the value of assets as of the date those assets are received by the successor trustee, assets may lose value after the trustee receives trust property.
Any trustee accepting appointment to hold assets having passed through the estate of a decedent where the statute of limitations on collection remains open, should be cautious. Considering the long period of time the IRS has to seek collection of estate taxes (without extension, up to 13 years after death, but possibly many more years than that depending on the circumstances), this liability can extend for many years. Further, this liability is not contingent upon the relevant property having generated the estate tax liability. As such, a trustee accepting marital or charitable deduction property may still be liable.[16] Beyond IRC § 6324(a)(2), there also are other personal liability provisions that can apply to hold persons liable for unpaid estate tax. As such, successor trustees would be well served by engaging competent counsel to analyze potential exposure prior to receiving assets of a decedent, even one whose death was many years ago. Careful planning may help avoid personal liability in excess of the value of assets received or otherwise provide protection in that unfortunate event.
[1] Edmondson, Gray, “Executor Liability for Decedent’s Tax Obligations,” Aug. 12, 2021, https://www.esapllc.com/executor-liability-for-decedents-tax-obligations-lee2021/#:~:text=Requirements%20for%20Liability&text=The%20executor’s%20liability%20is%20limited,existence%20of%20the%20government’s%20claim.
[2] Estate of Lee, T.C. Memo 2021-92.
[3] U.S. v. Paulson, 68 F.4th 528 (9th Cir. 2023).
[4] These facts are simplified for the purpose of brevity and to limit this discussion to the more relevant items.
[5] As an interesting sidenote, Allen Paulson was the creator of the Gulfstream jet airplane.
[6] This was the result of an election available under IRC § 6166 for estates where more than 35% of the estate’s value consists of interests in closely held businesses.
[7] Although not discussed by the court, there may be some question about whether revocable trust assets should be included in assets recoverable under IRC § 6324(a)(2) since this statute is limited to assets included in the gross estate under IRC §§ 2034-2042 whereas revocable trust assets are included under IRC § 2033. See Rev. Rul. 75-553.
[8] For purposes of this writing, I am addressing only the liability of successor trustees. The parties also argued different interpretations of the term “beneficiary” under IRC § 6324(a)(2) with the majority taking the broader interpretation to include beneficiaries of Allen’s revocable trust.
[9] Scalia, Antonin and Bryan A. Garner, Reading the Law: The Interpretation of Legal Texts (2012).
[10] Paulson, 68 F.4th 528, 557.
[11] Id. at 556.
[12] Id. at 546.
[13] IRC §§ 6501 and 6502.
[14] https://www.supremecourt.gov/DocketPDF/23/23-436/285884/20231023174908405_23-%20Petition.pdf.
[15] https://www.supremecourt.gov/docket/docketfiles/html/public/23-436.html.
[16] Note that anyone held liable in this situation may be able to use estate tax apportionment provisions of the relevant document or under state law to seek recovery from beneficiaries receiving assets subject to estate tax. Of course, however, there is no guarantee of recovery even if successful.
