Trusts and Estates

United States v. Paulson

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Cite as No. 21-55197
Filed May 17, 2023
U.S. Court of Appeals, Ninth Circuit

By Jaime B. Herren
Holland & Knight LLP
www.hklaw.com

Headnote: Federal estate taxes – Distributee liability

Summary: Persons who hold estate property or receive it on or after the date of death are personally liable for unpaid estate taxes on that property.

Allen died with a $200 million trust estate and over $10 million in unpaid estate taxes were owed.  After entering into an installment payment plan with the IRS, the trustee was removed and after an installment payment was missed the IRS terminated the installment payment plan.  Distributions were made (by multiple trustees) before and after the termination.  Under federal law, the United States sued heirs that were trustees and heirs who had received estate property.  It also sued some heirs under the California Probate Code.  The District Court granted motions to dismiss under federal law as to trustees and those defendants not in possession of estate property on date of death, and denied motions to dismiss on state law claims.

The Ninth Circuit Court of Appeals reversed and remanded as to the federal claims, without reaching state law claims.  The Internal Revenue Code requires an executor to pay the tax liabilities of a decedent’s taxable estate.  It further imposes a lien on the gross estate and imposes personal liability on six listed categories of persons “who receive or have estate property.”  The six categories are (i) spouses, (ii) transferees (not including bona fide purchasers), (iii) trustees, (iv) surviving tenants, (v) persons in possession by way of exercise of power of appointment, and (vi) beneficiaries.  The Circuit Court interpreted the statute to impose personal liability on persons who have estate property on date of death, and who receive estate property on or after date of death, for the amount of unpaid estate tax on such property.

Judge Ikuta dissented, noting that it is illogical to accept a statutory interpretation wherein a distributee’s personal liability for estate taxes could exceed the current value of the property received, such as in the instance of later-received depreciated property.  Thus, the statute should be limited to imposing personal liability only on those persons who receive or hold estate property on the date of death.

https://cdn.ca9.uscourts.gov/datastore/opinions/2023/05/17/21-55197.pdf


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