In the recent case, United States v. John Michael Paulson, 2000 WL 1821022 (3.23.2020), a California Federal District ruled in favor of an executor of an estate for release from PERSONAL liability for estate taxes.
John Michael Paulson (“Mike”) became an initial co-executor of Allen Paulson’s estate, and co-trustee of Allen Paulson’s trust after Allen Paulson’s death in 2000. While there was certain stock owned in the probate estate, the value was zero. The taxable estate of approximately $200 million was held by the trust.
When filing the estate tax return in 2001, Michael requested a release from personal liability pursuant to Section 2204 of the Internal Revenue Code (the “Code”). The court specifically noted that the law firm used a form letter and in the letter referred to a discharge of liability for the “fiduciaries“.
Section 2204 of the Code permits an “executor” to make a written application to be discharged for personal liability for estate taxes. The request is normally made on or shortly after the estate tax return is filed. Upon receipt of the written application the Internal Revenue Service (the “Service”) has 9 months after the return is filed to notify the executor of the amount of estate tax due. Once the estate tax is paid, then the executor “shall” be discharged from personal liability for any tax thereafter found to be due.
The Treasury regulations define an executor as an executor or administrator of the decedent’s ESTATE. IF there is no executor or administrator, then any person in actual or constructive possession of the property is the executor. This latter definition includes a trustee.
There was much dissension and controversy in this administration and the probate court removed Mike as co-executor in 2013 pursuant to a settlement agreement. In 2009, the court removed Mike as co-Trustee.
The estate entered into an installment payment agreement with the Service for payment of the estate taxes. AFTER Mike was removed as a co-trustee, the estate defaulted on their payments. The Service argued that Mike was personally liable for those taxes as he requested release from personal liability as an EXECUTOR not as a trustee. If he was not released from personal liability as a co-TRUSTEE, then Mike would be personally liable for those estate taxes thereafter found to be due.
The Service never notified Mike in 2001 of any confusion over the letter. The Service was to notify Mike of any amount of tax to be due or that it determined that the fiduciary was not liable for any such tax.
Fortunately, the California federal court determined that Mike was discharged from personal liability as co-trustee. The Service could not produce any case law or authority requiring a certain form or format for the request of his signature or that he was required to submit 2 letters, one in each capacity. The court also pointed out that the Service should not have waited 12 years to raise the issue in litigation.
ADVICE: This case highlights that one must read the statute very carefully and not “assume”. The statute makes clear that the personal discharge is effective for an executor. However, if there is no executor, then the statute can apply to those in “possession of property”, such as the truste. In an abundance of caution, in the written letter to the Service requesting personal release for liability for estate taxes, indicate the capacity of the discharge: personal representative (otherwise known as an executor), trustee, holder of joint bank accounts, etc. or in ALL fiduciary capacities.
WORD OF THE WEEK: Exempt assets are those assets that people own that are generally not subject to creditor claims. For example, assume Paul borrows $10,000 from Sam and the loan is not secured (such as by a mortgage). Paul does not pay Sam back. Sam sues Paul. Florida law provides that certain assets owned by Paul are exempt from Sam’s lawsuit. Those assets include, but are not limited to, a retirement account, an annuity, homestead, cash surrender value of life insurance, certain wages, and disability benefits. These Florida exemptions can be found in Chapter 222 of the Florida Statutes. If, however, these exempt assets are obtained fraudulently, then Sam may have recourse against such assets.
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