William D. Little v. Commissioner , 113 T.C. No. 31 ( 1999 )

113 T.C. No. 31
UNITED STATES TAX COURT
WILLIAM D. LITTLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24598-97. Filed December 29, 1999.
P was the personal representative of D’s estate.
During administration of the estate, P received
information indicating possible income tax liabilities
of the estate. P gave this information to the estate’s
lawyer, who erroneously and repeatedly advised P that
the estate had no tax liabilities and advised P to make
disbursements and distributions. P, acting in good
faith, followed this advice and eventually closed the
estate without paying the estate’s income tax
liabilities. R determined that P is liable for the
estate’s unpaid income tax liabilities under 31 U.S.C.
sec. 3713(b) (1994), which generally imposes personal
liability on a fiduciary who pays others before paying
claims of the United States. Liability under 31 U.S.C.
sec. 3713(b) has been judicially limited to situations
where a fiduciary knowingly disregards debts due to the
United States.
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Held: A fiduciary who reasonably and in good
faith relies on an attorney’s legal advice that there
are no debts due to the United States before paying
other claims has not knowingly disregarded debts of the
United States. P is not liable for the income tax
liabilities of the estate under 31 U.S.C. sec. 3713(b).
Michael M. Sayers, Michael W. Newport, and Brian K. Rull,
for petitioner.
Robert J. Burbank, for respondent.
RUWE, Judge: Respondent determined that petitioner, in his
capacity as a fiduciary of the estate of Jerry J. Calton, is
personally liable under 31 U.S.C. section 3713(b) (1994) for the
estate's unpaid income tax liabilities in the amount of
$63,734.53, plus interest1. The amounts of the unpaid income tax
liabilities of the estate are not in dispute.
Petitioner acknowledges that he permitted all the estate’s
assets to be paid out to creditors and beneficiaries before the
estate's income tax liabilities had been paid. Petitioner
disputes personal liability for these income tax liabilities on
the ground that he did not have knowledge of the estate's unpaid
taxes prior to disbursing the estate's assets.
1
The income tax liabilities of the estate are as follows:
Additions to Tax
Year Tax I.R.C. sec. 6651
1989 $4,658.50 $2,071.03
1990 41,080.00 15,815.80
1991 52.00 57.20
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by this
reference. Petitioner resided in St. Louis, Missouri, at the
time he filed his petition.
Jerry J. Calton (decedent) died intestate on October 1,
1989. Petitioner and decedent had been personal friends. Upon
being told of decedent's death, petitioner contacted Attorney
Michael Cady, who advised him to identify decedent's body and
suggested that petitioner act as personal representative. Since
decedent had no close family members, and out of respect for
decedent, who had been his personal friend, petitioner agreed to
act as personal representative. Petitioner is not a college
graduate and has had no prior experience in the administration of
an estate. Petitioner was neither related to nor an heir of
decedent.
Petitioner was appointed by the Probate Court of the City of
St. Louis to be personal representative of the estate on October
27, 1989. On the advice of Mr. Cady, the estate engaged the
services of Roger Lahr, an attorney licenced in Missouri, to
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provide legal services regarding the administration of the
estate.
From November 2, 1989, to January 14, 1990, debts of the
estate in the total amount of $11,748.52 were paid by the estate.
These debts did not have priority over claims of the United
States. During the period from June 13 to October 22, 1990,
additional nonpriority claims in the total amount of $5,460.51
were paid by the estate. From February 22 to May 24, 1991, the
estate paid additional nonpriority claims of $8,830.30.
Petitioner made a distribution from the estate to beneficiaries
in the aggregate amount of $186,666.64 on June 6, 1991. On
November 9, 1991, petitioner made a second distribution to
beneficiaries in the aggregate amount of $35,000. On March 22,
1992, petitioner made a further distribution to beneficiaries
also in the aggregate amount of $35,000. From November 1, 1989,
until August 25, 1995, the estate made various disbursements
totaling $48,732.02 to satisfy obligations that had priority over
the claims of the United States. Petitioner disbursed a total of
$139.89 to the Internal Revenue Service in response to a notice
from respondent regarding an adjustment to decedent’s 1988 income
tax year. The total of all disbursements and distributions by
the estate was $331,577.88. All the disbursements and
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distributions from the estate were made on the advice of Mr.
Lahr. Petitioner and Mr. Lahr had no actual knowledge of the
estate’s income tax liabilities at the time these disbursements
and distributions were made.2
In January 1990, petitioner, in his capacity as personal
representative of the estate, received Forms W-2 and Forms 1099
for decedent which indicated that decedent had income in 1989.
In January 1991, petitioner also received Forms 1099 indicating
2
Both petitioner and Mr. Lahr were credible when they
testified to their ignorance of the tax liabilities in question.
Indeed, respondent had no objection to petitioner’s requested
findings of fact, which stated:
Mr. Lahr was unaware of and ignorant of the debts due
the Government at the time distributions were made to
beneficiaries.
Petitioner was unaware of and ignorant of the debts due
the Government at the time distributions were made to
beneficiaries.
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income of the estate in 1990.3 Petitioner timely forwarded these
forms to Mr. Lahr, who repeatedly advised petitioner that,
because of the size of the estate, no taxes were due.
In February 1992, respondent’s Kansas City Service Center
mailed a letter addressed to decedent proposing an income tax
liability for 1989. In February 1993, the Kansas City Service
Center sent a notice of deficiency for 1989 that was addressed to
decedent. A form letter proposing an income tax liability for
1990 was mailed addressed to decedent on March 1, 1993. On June
7, 1993, a notice of deficiency for 1990 was mailed addressed to
3
In petitioner's capacity as personal representative of the
estate, he received the following Forms W-2 and Forms 1099 for
taxable years 1989 and 1990:
Documents/Forms
Received Jan. 1990 Payor Amount
Form W-2 Federal Reserve Bank $54,137
Form W-2P Boatman's Nat. Bank 3,040
Form 1099-G Missouri Dept. of Revenue 647
Form 1099-INT Boatman's Nat. Bank 237
Form 1099-INT United Missouri Bank 76
Form 1099-R Thrift Plan for Employees 5,000
Form 1099-R Boatman's Bank 2,055
Form 1099-R Boatman's Bank 6,611
Form 1099-R Boatman's Bank 2,117
Form 1099-R Boatman's Bank 2,309
Form 1099-R Boatman's Bank 3,103
Documents/Forms
Received Jan. 1991 Payor Amount
Form 1099-R Thrift Plan for Employees 96,485
Form 1099-R Retirement Plan, Federal 56,000
Form 1099-INT United Missouri Bank 2,072
Form 1099-INT United Missouri Bank 1,991
Form 1099-INT United Missouri Bank 1,990
Form 1099-INT United Missouri Bank 3,535
Form 1099-INT United Missouri Bank 3,347
Form 1099-INT United Missouri Bank 3,531
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decedent. These letters and notices were sent to petitioner’s
address, and petitioner received them. When petitioner received
these items, he gave them to Mr. Lahr, who continued to advise
petitioner that the estate was not liable for any Federal taxes.
Prior to closing the estate, in approximately May 1993, Mr.
Lahr engaged the services of Norman Dilg, a certified public
accountant, to review the administration of the estate. Upon
review of the estate records, Mr. Dilg discovered that certain
income tax returns had not been prepared and filed for decedent
and the estate. Mr. Dilg reconstructed the available financial
information and prepared and filed income tax returns in
September 1993 for decedent for the year 1989 and for the estate
for the years 1989, 1990, and 1991. Each of these returns
reflected an unpaid balance due. No payments accompanied the
returns.4
Mr. Lahr and petitioner became aware of the estate’s unpaid
income tax liabilities for 1989, 1990, and 1991 when Mr. Dilg
informed them, sometime after May 1993 and before the returns
were filed in September 1993. The only disbursements made after
4
The returns filed for the estate showed the following
unpaid taxes:
1989 $4,654
1990 41,080
1991 52
The 1989 return for decedent showed an unpaid tax of $2,798.
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petitioner became aware of the estate’s income tax liabilities
were to pay debts that had priority over those due to the United
States.
In November 1993, petitioner submitted a Form 656, Offer in
Compromise, to respondent. The offer concerned both decedent’s
and the estate’s income tax liabilities and was accompanied by a
check drawn on the estate's checking account in the amount of
$17,586.07, which was the amount petitioner proposed to
compromise the liabilities for decedent’s 1989 income tax
liability and the estate’s income tax liabilities for 1989, 1990,
and 1991. The Form 656 contained the following statement: "This
offer in compromise of $17,586.07 represents the remaining value
of the estate. There are no future sources of funds available."
Respondent did not accept the Offer in Compromise. Several
months later, respondent returned the Offer in Compromise and the
uncashed check without any explanation.
After petitioner informed Mr. Lahr and Mr. Dilg of the
returned offer and the uncashed check, they had a series of
meetings and conversations with representatives of respondent,
including a meeting with supervisory personnel of respondent. As
a result of these conversations and meetings, Mr. Lahr and Mr.
Dilg believed they had negotiated a final resolution with
respondent. Mr. Dilg and Mr. Lahr informed petitioner that the
matter had been resolved with respondent, resulting in the case
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being closed. Petitioner was then advised by Mr. Lahr that there
was no tax liability to be paid by the estate and that it was
appropriate to pay out the remaining funds in the estate and to
close the probate case. After receiving Mr. Dilg's and Mr.
Lahr's advice, petitioner used the remaining assets of the estate
to pay priority claims against the estate, and the estate was
closed. In October 1995, a Statement of Account and Proposed
Final Distribution, signed by petitioner and Mr. Lahr, was filed
in the Probate Court of the Circuit Court, State of Missouri,
which showed that all assets of the estate had been distributed
and stated: "All claims, expenses of administration and taxes
have been paid in full."
On September 23, 1997, respondent determined that petitioner
was liable for income taxes and additions to tax due from the
estate and mailed a notice of liability to petitioner.
OPINION
Respondent argues that under 31 U.S.C. section 3713(b),
petitioner is personally liable for the estate’s unpaid income
tax liabilities. Title 31 U.S.C. section 3713 provides:
Section 3713. Priority of Government claims
(a)(1) A claim of the United States Government
shall be paid first when–
* * * * * * *
(B) the estate of a deceased debtor, in
the custody of the executor or administrator,
is not enough to pay all debts of the debtor.
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* * * * * * *
(b) A representative of a person or an estate
* * * paying any part of a debt of the person or estate
before paying a claim of the Government is liable to
the extent of the payment for unpaid claims of the
Government.
This section appears to impose strict liability on a
fiduciary who makes a disbursement which leaves the estate with
insufficient funds with which to pay a debt owed to the United
States. However, courts have long departed from such a rigid
interpretation. "[I]t has long been held that a fiduciary is
liable only if it had notice of the claim of the United States
before making the distribution." Want v. Commissioner, 280 F.2d
777, 783 (2d Cir. 1960); see also Leigh v. Commissioner, 72 T.C.
1105, 1109 (1979). Whether the fiduciary had notice is
determined by whether the executor knew or was chargeable with
knowledge of the debt. "The knowledge requirement of 31 U.S.C.
sec. 192 [now 31 U.S.C. sec. 3713] may be satisfied by either
actual knowledge of the liability or notice of such facts as
would put a reasonably prudent person on inquiry as to the
existence of the unpaid claim of the United States." Leigh v.
Commissioner, supra at 1110 (citing Irving Trust Co. v.
Commissioner, 36 B.T.A. 146 (1937); Livingston v. Becker, 40 F.2d
673 (E.D. Mo. 1929)). To be chargeable with knowledge of such a
debt, the executor must be in possession of such facts as to "put
him on inquiry." New v. Commissioner, 48 T.C. 671, 676 (1967).
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"It is this knowing disregard of the debts due to the United
States that imposes liability on the fiduciary". Leigh v.
Commissioner, supra at 1109-1110 (citing United States v.
Crocker, 313 F.2d 946 (9th Cir. 1963)).
It is clear that petitioner had no actual knowledge of the
estate’s income tax liabilities at the time that he made
disbursements and distributions from the estate. However,
respondent argues that petitioner's receipt of Forms W-2 and 1099
and subsequent notices would have put a reasonably prudent person
in petitioner's position on inquiry as to the existence of the
debts due to the United States for unpaid income taxes.
We agree that the receipt of the tax information forms in
January 1990 and 1991 was sufficient to put petitioner on
inquiry. However, petitioner, having been put on inquiry, acted
in a prudent and reasonable manner consistent with his fiduciary
duties. Petitioner forwarded the forms to the estate’s attorney,
Mr. Lahr, and sought his advice. Mr. Lahr informed petitioner
that because of the estate's size, the estate had no income tax
liabilities. Mr. Lahr's legal advice was wrong.
Petitioner continued to receive the same advice from Mr.
Lahr after giving him other notices from respondent that
indicated there might be unpaid income taxes for which the estate
might be liable. It was not until the summer of 1993 when Mr.
Dilg was brought in and prepared and filed delinquent returns
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that the tax liabilities in issue were discovered by Mr. Lahr.
But almost all the estate’s assets had already been distributed
by then. As a result, on November 30, 1993, petitioner submitted
an Offer in Compromise and sent a check for $17,586.07, the
balance of the estate’s assets, to respondent. The offer was not
accepted, and several months later respondent returned the check
to petitioner without explanation. Petitioner immediately
informed Mr. Lahr. Thereafter, Mr. Lahr and Mr. Dilg met with
representatives of respondent and erroneously concluded that
respondent would drop the tax claims against the estate. They
informed petitioner of this, and Mr. Lahr advised petitioner to
make the final disbursements and to close the estate. Relying on
the advice of the estate’s attorney and the certified public
accountant, petitioner closed the estate.
A fiduciary who knows of a debt due to the United States
cannot delegate his responsibility to pay such a debt. The act
of payment requires no legal expertise. If a fiduciary delegates
to an attorney responsibility to make payment, he assumes the
responsibility for the attorney’s actions. Under such
circumstances, failure to pay a debt due to the United States
gives rise to personal liability under 31 U.S.C. section 3713(b).
See Leigh v. Commissioner, supra at 1112-1113. The question
presented here is different; the question is whether petitioner
had the requisite knowledge at the time that he was disbursing
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funds to have knowingly disregarded debts due to the United
States. It is this knowing disregard of the debts due to the
United States that gives rise to liability under 31 U.S.C.
section 3713(b). See Leigh v. Commissioner, supra at 1109-1110.
No cases involving 31 U.S.C. section 3713(b) have been
brought to our attention where the fiduciary was put on notice of
possible debts due to the United States, made reasonable inquiry
of legal counsel, and then relied in good faith on erroneous
legal advice that there were no such debts. Respondent relies on
New v. Commissioner, supra at 679, where we stated:
If a fiduciary is put on inquiry, the fact that he
inquires wrongly or haphazardly is not enough and is no
defense. To absolve petitioner because his inquiry
turned out to be inadequate would be to reward the
careless fiduciary and to put a premium on rapid
cursory investigations. Once a fiduciary is put on
notice sufficient to put a reasonably prudent person on
inquiry, he thereafter pursues a unilateral inquiry at
his peril. Any other conclusion would make the
fiduciary the final arbiter of what the estate owed in
tax, a result entirely nullifying all effect of 31
U.S.C. sec. 192.
The situation described in the above quotation is clearly
different from the situation in the instant case. The actual
facts in New are also distinguishable in that the fiduciary in
that case was himself an attorney with experience in the
administration of estates, and his unilateral inquiries regarding
tax liabilities were found to be severely flawed.
Here, petitioner had no prior experience with the
administration of estates when he was put on notice of potential
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income tax liabilities of the estate. Had he determined on his
own that there were no tax liabilities or simply ignored this
notice and made no further inquiry, he would probably be
chargeable with notice of the tax liabilities. However,
petitioner did not ignore the information about potential tax
liabilities. Petitioner recognized that he did not have the
knowledge or experience to determine whether the estate owed tax.
He therefore gave the information to the estate’s licensed
attorney, who had been retained to advise petitioner in the
administration of the estate, and asked for advice. Petitioner’s
inquiry was neither haphazard nor careless; rather it was the
prudent and reasonable thing to do. Unfortunately, the attorney
came up with the wrong advice when he repeatedly told petitioner
that there was no tax liability. But what more should petitioner
have done? As the Supreme Court observed in United States v.
Boyle, 469 U.S. 241, 251 (1985):
When an accountant or attorney advises a taxpayer on a
matter of tax law, such as whether a liability exists,
it is reasonable for the taxpayer to rely on that
advice. Most taxpayers are not competent to discern
error in the substantive advice of an accountant or
attorney. To require the taxpayer to challenge the
attorney, to seek a "second opinion," or to try to
monitor counsel on the provisions of the Code himself
would nullify the very purpose of seeking the advice of
a presumed expert in the first place. See Haywood
Lumber, [178 F.2d] supra, at 771. "Ordinary business
care and prudence" do not demand such actions.
Regardless of the culpability of the estate’s attorney in
failing to ascertain the estate’s income tax liabilities, the
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facts before us support a conclusion that petitioner fulfilled
his duty of inquiry and was reasonable and acted in good faith in
following the attorney’s advice that no tax was due from the
estate. In the unique circumstances of this case, we find that
petitioner lacked knowledge of the estate’s income tax
liabilities at the time he made payments from the estate’s assets
and did not knowingly disregard debts due to the United States.
We therefore hold that petitioner is not liable under 31 U.S.C.
section 3713(b) for the unpaid tax liabilities in question.
Decision will be entered
for petitioner.