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Articles From Lumsden McCormick

Beneficiaries Learn a Lesson About Paying Estate Taxes

Beneficiaries of a South Dakota estate failed to make a payment when submitting a federal estate tax return — and again failed to pay when the IRS subsequently notified them of additional assessments. The IRS sued. In U.S. v. Ringling (2017), a district court reviewed the facts and ultimately granted the IRS's summary judgment motion.

Beneficiaries of a South Dakota estate failed to make a payment when submitting a federal estate tax return — and again failed to pay when the IRS subsequently notified them of additional assessments. This landed the three daughters and grandson of the deceased estate's owner in legal trouble. In U.S. v. Ringling (2017), the South Dakota Southern District Court weighed the facts to decide between the IRS and the beneficiaries.

Father Divides Estate

Donna Ringling, JoAnn Jandreau, and Kathryn Standy are the daughters of the late Harold and Margery Arshem. Margery predeceased her husband. Kory Standy is the son of Kathryn Standy and grandson of Harold Arshem.

Arshem bequeathed his estate in equal parts to his three daughters, providing a specific bequest of real property to Ringling as part of her one-third portion of the estate. Shortly before his death, Arshem also:

   - Forgave Kory Standy a debt arising from the purchase of the property.
   - Conveyed the family farm to Standy (retaining a life estate and the right to receive the rental income and profits during his lifetime),
   - Paid Standy proceeds from the redemption of a certificate of deposit, and
   - Gifted Standy approximately 6,000 bushels of corn.

Letters of representative were issued to the daughters. A special administrator who was appointed over the probate proceeding filed a federal estate tax return and amended the state inheritance tax return to reflect the fair market values of the real property. The fair market values were different from the county assessed values that had been previously reported.

Ringling signed Form 706 on behalf of the estate, reporting a gross estate of $834,336 and net estate tax due of $28,939. However, the estate didn't make any payments with the return. On the form, the estate reported its assets as three pieces of real property, co-op shares, stocks, bonds, two contracts for deeds, cash, bank accounts, CDs, two life insurance policies, gifts of the corn crop to Kory, a pickup truck, a van, and other miscellaneous property. The estate also reported the values of the assets the beneficiaries each received. Ringling received $121,987, Kathryn Standy and Jandreau each received $121,988, and Kory Standy received $416,116.

IRS Makes Assessments

The IRS made assessments against the estate totaling $65,875. This total included:

   - The $28,939 estate tax,
   - A late filing penalty of $6,511,
   - A failure to pay the penalty of $7,235, and
   - Interest of $23,190.

The agency sent the estate a notice of assessments and demanded payment. After the estate failed to pay the tax liability, the IRS sent it a notice of intent to levy.

The IRS then filed suit against the estate's beneficiaries, seeking a judgment against each for personal liability for unpaid federal estate tax debt. Jandreau, Kathryn Standy, and Kory Standy failed to respond to the IRS's motion for summary judgment. Ringling filed a response in opposition to the summary judgment motion.

What the Law Requires

If an imposed federal estate tax isn't paid when due, a transferee, surviving tenant or beneficiary who receives property included in the gross estate is personally liable for the tax. So, to establish liability, the IRS must prove that the 1) estate tax wasn't paid when due, and 2) beneficiary received property included in the gross estate.

The tax code lists different types of property and how each type is included in a gross estate valuation. Each beneficiary is liable based on the property he or she receives from the estate to the extent of the property's value measured at the time of the decedent's death.

Court's Decision

The district court granted the IRS's summary judgment motion, finding that the beneficiaries were liable for the estate's unpaid tax liability.

It came to its decision after reviewing several undisputed facts:

  1. Ringling, Jandreau and Kathryn Standy each jointly owned property with Arshem at the time of his death. Under the law, the gross estate includes all property the decedent and any other person held as joint tenants with right of survivorship. The exception is property that has been shown to originally belong to the joint owner and wasn't received or acquired by the joint owner from the decedent for less than adequate and full consideration.
  2. The daughters owned various pieces of property jointly with Arshem, including a checking account (on which Kathryn Standy continued to write checks after Arshem's death), bonds and two vehicles. 
  3. The daughters received proceeds from two life insurance policies. Both policies were owned by the decedent at his death and were included in the gross estate.
  4. Arshem transferred a corn crop and certificate of deposit to Kory Standy and forgave the balance due on a contract for a deed. These gifts were includible in the gross estate because the transfers were made within three years of Arshem's death.
  5. Arshem retained a life estate in the family farm when he transferred it to Kory Standy. Because Arshem retained a life estate, the farm was includible in the gross estate.

During the summary judgment hearing, Ringling asserted several affirmative defenses. She alleged that the IRS's claims were barred by the doctrines of accord and satisfaction; waiver; estoppel (asserting that an IRS employee made statements that led the beneficiaries to believe the interest and penalties would be waived); statute of limitations; and reasonable care (stating that she exercised due care in engaging a tax attorney to advise her).

But the district court found that Ringling couldn't resist the IRS's motion for summary judgment with her affirmative defenses. In the end, it decided that she failed to identify any specific facts in the record that supported her affirmative defenses.

Avoid Legal Hassles

If you're the beneficiary of an estate and are unsure about your tax liability, consult an experienced and reputable CPA. Ignorance of tax law — or worse, failure to respond to IRS communications — won't protect you if you don't pay what you owe.

Beneficiaries Learn a Lesson About Paying Estate Taxes

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D’Marie is a tax principal with experience in all areas of U.S. Federal and New York State taxation. While specializing in performing tax services for individuals, trusts, and estates, she also provides tax services to commercial businesses, real estate-related businesses, privately held businesses, and private foundations.  

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