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IRS Action for Unpaid Estate Taxes Not Barred by State Statute of Limitations

(Parker Tax Publishing April 2019)

The Tenth Circuit reversed a district court and held that an IRS state-law claim, as a third-party beneficiary of an agreement to distribute stock held by an estate in which the recipients of the stock agreed to pay the estate taxes, was not limited by the state's six-year statute of limitations; rather, the ten-year limitations period in Code Sec. 6502(a) applied because the government was proceeding in its sovereign capacity. The Tenth Circuit also upheld the district court's finding that two estate beneficiaries were liable as transferees under Code Sec. 6234(a)(2) and reversed the district court's award of attorney's fees to the taxpayers because it found that the government's litigation position was substantially justified. U.S. v. Johnson, 2019 PTC 112 (10th Cir. 2019).


During her lifetime, Hazel Anna S. Smith created The Anna Smith Family Trust and funded it with shares of stock in State Line Hotel, Inc. The hotel held a Nevada gaming license. When Smith died in September 1991, she was the sole trustee of the trust, and two of her children, Mary Johnson and James Smith, were named as successor trustees. Smith's will named Johnson and Smith as personal representatives of Smith's estate.

The successor trustees filed a federal estate tax return reporting an estate tax liability of $6.6 million. Of that total, only $4 million was paid to the IRS at the time the return was filed. The successor trustees elected under Code Sec. 6166(a) to defer payment of the balance because the hotel stock accounted for more than 35 percent the adjusted gross estate. The ten annual installment payments would begin in June 1997 and end in June 2006. The IRS assessed the estate for the unpaid estate taxes in July 1992.

Although the assessed estate taxes remained unpaid, the successor trustees distributed the hotel stock from the trust to the trust beneficiaries in December 1992 due to Nevada restrictions on casino ownership by a trust. Cognizant of the outstanding estate tax liability, the successor trustees and the trust beneficiaries entered an agreement (distribution agreement) providing that the beneficiaries were liable for any outstanding estate taxes. The beneficiaries identified in the distribution agreement were Smith's four children: Johnson, Smith, Marian Barnwell, and Billie Ann Devine.

The hotel went bankrupt in January 2002, and the estate stopped making payments of the deferred estate taxes. The IRS declared the installment agreement to be in default as of December 2003. In June 2005, the IRS learned of the existence of the distribution agreement. In 2011, the government sued the beneficiaries to recover around $1.5 million in unpaid estate taxes. The government said that all four children were liable as transferees under Code Sec. 6324(a)(2) to the extent they received property included in the gross estate. A Utah district court determined that the government's Code Sec. 6324(a)(2) claim could be asserted only as to life insurance proceeds received by Johnson and Smith and entered judgment in the government's favor to the extent of those distributions. The government then filed an amended complaint to enforce its rights as a third-party beneficiary of the distribution agreement, but the district court concluded that the third-party beneficiary claim was untimely under Utah's six-year statute of limitations. The district court also awarded attorney's fees to Smith and Johnson as to that issue. The government appealed to the Tenth Circuit.


Smith's children conceded the government's third-party beneficiary status but argued that the Utah limitations period, rather than the ten-year period in Code Sec. 6502(a), applied. As to transferee liability, Smith and Johnson argued that the statute of limitations was not suspended under Code Sec. 6503(d), even if a valid Code Sec. 6166 election suspended the limitations period for the estate. They argued that under Code Sec. 6901(a), an assessment against a transferee must be made within one year after the expiration of the period of limitation for assessment against the transferor.

The Tenth Circuit reversed the district court's judgment on the third-party beneficiary claim, affirmed the judgment entered against Johnson and Smith as transferees, and reversed the award of attorney's fees. The Tenth Circuit found that under U.S. v. Summerlin, 310 U.S. 414 (1940), the United States is not bound by state statutes of limitation in enforcing its rights. The court also found that in U.S. v. Holmes, 727 F.3d 1230 (10th Cir. 2013), the Tenth Circuit applied Summerlin and held that, in a proceeding to collect a tax, the government is always acting in its sovereign capacity, even if its claim arises under state law. The court reasoned that in this case, the government's lawsuit, if successful, would result in the liability to pay federal taxes; therefore, the federal statute of limitations applied.

The Tenth Circuit also rejected Johnson's and Smith's argument that the government's Code Sec. 6324(a)(2) claim was untimely filed. The court found that Code Sec. 6901 provides an alternative collection procedure applicable to transferees who receive property from an estate and did not apply in this case. The Tenth Circuit also found that under U.S. v. Botefuhr, 309 F.3d. 1263 (10th Cir. 2002), the limitations period applicable to a decedent's estate governs the limitations period applicable to transferees. The court stated that, under Botefuhr, once the limitations period for the estate is determined, a Code Sec. 6324(a)(2) claim could be brought against a transferee within that same period.

The Tenth Circuit rejected the district court's award of attorney's fees, finding that the district court improperly focused on the correctness of the government's argument on each claim for relief, rather than focusing on whether there was a reasonable basis for its overall litigation position. The court noted that, even though the government raised multiple claims for relief, it sought to recover only a single tax liability. The government's litigation position was substantially justified, the court said, because it obtained a judgment for the full amount sought.

For a discussion of the IRS's collection authority under Code Sec. 6502, see Parker Tax ¶260,510. For a discussion of recovering attorney's fees in a lawsuit, see Parker Tax ¶263,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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