CCA 1212020: IRS addresses executor liability for estate tax penalties

Plain-English summary

The Office of Chief Counsel analyzed when an executor could be personally liable for an estate's penalties after estate assets were distributed. The advice explains that a fiduciary of an estate with insufficient property must pay the federal tax claim before other claims, and may be personally liable for payments to other creditors made after notice of the government's claim. It also discusses possible transferee liability under section 6901 if the executor or another beneficiary received estate or foreign-trust assets. The advice states that additional facts about control of the trust, notice, assessments, and later payments were needed to determine liability.

Ruling snapshot

• Question: When could an executor or beneficiary be personally liable for an estate's penalties after distributions from an estate or foreign trust?
• Outcome: Advice given, with liability dependent on the facts and additional information.
• Key authorities: 31 U.S.C. § 3713; IRC § 6901; United States v. Coppola, 85 F.3d 1015 (2d Cir. 1996); Little v. Commissioner, 113 T.C. 474 (1999); Want v. Commissioner, 280 F.2d 777 (2d Cir. 1960)

Full text (IRS public release)

ID: CCA_2012031407171036 Number: 201212020
Release Date: 3/23/2012
Office: -----
UILC: 6901.00-00, 6901.02-00

From: --------------------
Sent: Wednesday, November 16, 2011 8:14 AM
To: --------------------
Cc: ------------------------------------------------------------------
Subject: RE: Appeals question re: third party liability ---------

Hello ----, this is in response to your 11/7/2011 question about the personal
liability of the executor of the ----- estate:

Your question was whether the executor is personally liable for the estate's
liabilities if the estate's assets have been depleted by being distributed to
the beneficiaries.

The executor will be personally liable only to the extent of payments that he
has made to persons other than the government since the time that he was
notified of the government's claim for the penalties, and then, only to the
extent that there is not enough money in the foreign trust from which the
government may collect.

A fiduciary of an estate without enough property to pay all claims of the
estate must pay the federal tax claim before other claims. 31 U.S.C. § 3713.
If the fiduciary pays other creditors prior to paying the government, the
fiduciary may be held personally liable to the extent of the payments that he
turned over to creditors other than the United States. 31 U.S.C. § 3713(b);
United States v. Coppola, 85 F.3d 1015, 1020 (2nd Cir. 1996); IRM 5.5.3.9
(03-26-2010) Fiduciary or Transferee Liability. The executor is only liable
if he had notice of the claim of the government before making a distribution
to another creditor. Little v. Commissioner, 113 T.C. 474 (1999)("'[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.'"(citing Want v.
Commissioner, 280 F.2d 777, 783 (2d Cir. 1960))). Section 6901(a)(1)(B)
provides that the government may collect the tax liabilities from the liable
fiduciary in the same manner as it could have from the taxpayer.

Here, the entire ----- estate passed outside of probate. The only asset in
the estate was the foreign trust. The executor filed the estate tax form and
paid the estate tax out of the foreign trust on -----. The penalties were not
assessed against the estate until -------and ------. The estate is liable for
the penalties against the decedent for the decedent's failure to file the
information returns. If there is still money in the foreign trust, the estate
is not insolvent and the penalties should come out of that money.

The executor, however, will only be personally liable for the penalties if
subsequent to the assessment of the penalties, the executor paid off other
creditors instead of paying the IRS, and there is not enough money left in
the estate to pay the penalties. Unless we discover additional facts showing
that there was not enough money in the estate to pay off all creditors, and
the executor chose to pay other creditors instead of the government, the
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executor will not be personally liable for the penalties against the
decedent. Based on the facts that you have shared with me thus far, we do not
know of the executor making any payments out of the estate since --------.
Once we have more information about what has occurred with the foreign trust
since ----, we will know whether the executor is personally liable for the
penalties. The letter from the attorney claims that the executor did not have
control over the foreign trust; however, you indicated that the executor must
have control over the foreign trust because the ---- estate tax payments came
out of the trust. If someone other than the executor made payments from the
foreign trust to creditors other than the government, the executor may not be
personally liable. If the executor received money from the foreign trust as a
beneficiary, he may be personally liable for the penalties under section 6901
as a transferee. In addition, if any of the money from the estate (i.e., from
the foreign trust) is/was transferred to a person from whom the Service may
collect (e.g., a US beneficiary), other than the executor, then such person
may also be liable as a transferee and may be assessed under section 6901.

Please let me know if we can help with anything else.
Thanks,

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