In summary judgment, a district court has found an executor and trustee liable under the federal priority statute for distributions and disbursements they made while gift taxes owed by the decedent had remained unpaid.

Source: Thomson Reuters / RIA

RIA observation: The decedent was a donee of a gift made by another individual who had died after failing to pay gift taxes on the gift to the decedent and other donees. The gift to the decedent was made to a trust. The same court previously determined that the decedent, as income beneficiary of a trust, was the donee liable for the unpaid gift taxes (see Weekly Alert ¶ 22 04/05/2012). In yet another decision, the same court found the donees liable for interest on the unpaid gift taxes (see Weekly Alert ¶ 16 06/21/2012).

Facts. In '95, J. Howard Marshall, II made an indirect gift to certain members of his family. He died shortly thereafter.

IRS assessed gift taxes against the Marshall Estate, which the Estate challenged in the Tax Court. As part of an entry of judgment, the Tax Court set the amount of the Gift to the Eleanor Pierce Stevens' Grantor Retained Income Trust (GRIT) at $35,939,316 (the Gift). The Marshall Estate never paid the tax on the Gift. By operation of law, liability for the donor's unpaid gift tax shifted to the donee, Eleanor Pierce Stevens (Stevens).

In April of 2007, Stevens died. E. Pierce Marshall, Jr. (Marshall) became the sole Executor of her Estate. Finley L. Hilliard (Hilliard) was the Trustee for the Eleanor Pierce (Marshall) Stevens Living Trust (the Trust). Shortly after Stevens's death, Marshall was informed that IRS might assert donee liability against Stevens's Estate because the Marshall Estate had failed to pay gift taxes on the Gift.

Marshall, in his capacity as Executor, made distributions from Stevens' Estate of personal property and proceeds from the sale of Stevens' car in the aggregate amount of $14,791. He also caused the Trust to pay $4,872 per month rent on Stevens' vacant apartment for 12 months.

The Trust was liable for all Stevens' debts, taxes and expenses directly due or occasioned by her death. As early as 2002, Hilliard was aware that the Trust might be liable for the unpaid gift taxes on the Gift. However, Hilliard used Trust funds to pay $29,300 to for accounting services, and $7,952 in legal fees for charitable organizations.

The Trust and the Estate filed joint federal income tax returns. Marshall and Hilliard claimed offsets for charitable deductions for the periods ending March 2008, March 2010, and March 2011 in the aggregate amount of $1,119,127 for money permanently set aside pursuant to Code Sec. 642(c). These funds had not been distributed to any charities, nor segregated in a separate account. Instead they were earmarked for charity.

Background. Personal liability may be imposed upon a fiduciary of an estate in accordance with the federal priority statute, 31 USC 3713(b). (Code Sec. 6901(a)(1)(B)) Under the federal priority statute, a fiduciary paying any part of a debt of an estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. (31 USC 3713(b)) Personal liability can attach, to the extent of the distribution, if the government establishes three elements: (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.