Leigh v. Comm'r of Internal Revenue
| Decision Date | 17 September 1979 |
| Docket Number | Docket No. 10951-76. |
| Citation | 72 T.C. 1105 |
| Parties | KENNETH LEIGH, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner was administrator of an estate and employed an attorney to represent the estate in the probate proceedings and tax matters. A few days before petitioner's final accounting was filed and approved by the probate court, the attorney asked petitioner to sign an amended estate tax return reporting additional tax due as a result of after-discovered assets. Petitioner was apparently not told by the attorney to pay the additional tax, and petitioner distributed all of the assets of the estate without paying the additional tax. Held: Under 31 U.S.C. sec. 192, petitioner is personally liable for the additional tax. He had knowledge or notice that the tax was due the United States at a time when he had possession of sufficient assets of the estate to pay the tax, and it was his nondelegable duty to see that the tax was paid. Anthony M. Vienna, for the petitioner.
Kenneth G. Gordon, for the respondent.
Respondent determined that petitioner in his capacity as fiduciary of the Estate of Charles W. Cooper, deceased, is personally liable for the undischarged estate tax owed by the estate in the amount of $27,061.
Due to a concession by respondent,1 the only issue presented for our resolution is whether petitioner can be held personally liable in his capacity as administrator of the Estate of Charles W. Cooper, under R.S. sec. 3467 (1878), 31 U.S.C. sec. 192 (1970 ed.).
Some of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by reference.
Petitioner Kenneth Leigh is an individual who, at the time of filing his petition in this case, resided in Los Angeles, Calif.
On July 22, 1969, Charles W. Cooper (hereinafter decedent) died intestate. On July 24, 1969, Simon Shankin (hereinafter Shankin) was appointed special administrator of the Estate of Charles W. Cooper, deceased (hereinafter estate).
For 8 years prior to decedent's death, petitioner was employed by decedent's corporation, Charles W. Cooper, Inc., a dress manufacturer. Petitioner served the corporation as production manager, and in this capacity was involved in every aspect of the decedent's business, with the exception of the sales and bookkeeping departments.
Due to petitioner's familiarity with the business and the heirs' desire to continue the operation of decedent's business, petitioner was asked by Shankin and decedent's two brothers to replace Shankin as administrator of the estate. Petitioner accepted and on September 3, 1969, he was appointed administrator of the estate in place of Shankin.
Subsequent to becoming administrator, petitioner assumed the duties of president of Charles W. Cooper, Inc. In this capacity, he made all major decisions for the corporation including those involving financial matters.
Petitioner had no prior experience with the administration of any estate or the affairs of a deceased person, and, therefore, shortly after his appointment he retained Bernard W. Minsky (hereinafter Minsky) of the firm of Minsky & Garber to represent the estate. Petitioner had previously used this firm in personal legal matters and was entirely satisfied with its work.
Subsequent to the retention of Minsky, petitioner followed a course of blindly relying on Minsky's competence to administer the estate. When petitioner met with Minsky, it was usually for the purpose of signing checks or documents. It was petitioner's practice to attempt to read these documents before signing. If, however, the documents were long and legalistic, petitioner would sign them without reading them. Petitioner never questioned Minsky as to the nature or contents of the documents he was signing; it was his feeling that Minsky was doing whatever was necessary to protect him and the heirs.
In addition to signing checks and estate documents, petitioner aided in the sale of decedent's house, a piece of property, and decedent's car. He also attended the probate proceedings with Minsky on at least two occasions.
On April 21, 1971, an estate tax return (Form 706) was filed with the District Director of Internal Revenue, Los Angeles, Calif. Petitioner was aware at this time that estates paid taxes, and had previously had discussions with Minsky about the general obligation of estates to pay tax, and about the tax liabilities of this estate.
On October 13, 1972, petitioner accompanied Minsky to State court where his “Petition for Order Settling Final Account of Administrator and for Distribution” was heard.
On October 16, 1972, an amended estate tax return was presented to petitioner by Minsky for his signature. The return listed as estate assets certain Totten Trusts 2 maintained by decedent which had not been included in the original estate tax return. Due to the inclusion of these trusts, the return reflected an additional estate tax due of $27,061. Appearing clearly on the first page of this return was the caption “Amended Estate Tax Return,” the amount of tax paid with the original return, and the amount of $27,061, signifying the net estate tax payable. Petitioner looked at this page, but signed the return without questioning Minsky as to its significance.
Minsky forwarded the amended return to Special Procedures, Internal Revenue Service in Los Angeles, with a letter of transmittal dated October 17, 1972, which contained the following paragraph:
You will note that the reason for the Amended Return is the joint tenancy accounts that were discovered very recently. As indicated to you heretofore, each of these accounts has approximately $3,000.00 in it for the payment of taxes. Please levy on these sums as soon as possible in that the estate does not have any more funds available for the payment of taxes.
On October 20, 1972, petitioner filed a proposed “Order Settling Final Account of Administrator and Decree of Distribution.” The order recited that the assets in the possession of the estate on that date amounted to $177,043, of which $63,302 was in cash. The accounting did not reflect the additional estate tax either as having been paid or as a liability. This order was entered on October 24, 1972, and distribution of all the assets to the beneficiaries was made at that time.
On November 6, 1972, petitioner was discharged as administrator of the estate. Petitioner at no time had a beneficial interest in the estate, outside of the statutory fees he was awarded for serving as administrator. The order of October 24, 1972, allowed the administrator a statutory commission of $4,516 and an extraordinary commission of $1,500, based on allegations in the report that he had spent 81 hours rendering extraordinary services in administering the estate, including conferences with real estate brokers, bank executives, accountants, attorneys, and a revenue agent, concerning affairs of the estate.
Respondent, in his statutory notice of deficiency, determined a personal liability against petitioner in his fiduciary capacity as executor (administrator) of the estate for the unpaid estate tax of $27,061.
OPINIONThe ultimate issue for our resolution is whether petitioner is personally liable for the unpaid estate tax owing by the estate. Respondent, in determining that petitioner is liable for the tax in his own person, relies principally on section 2002, I.R.C. 1954,3 which provides, “The tax imposed by this chapter shall be paid by the executor.” Section 20.2002-1, Estate Tax Regs., makes it clear that this duty applies to the entire tax, regardless of the fact that the gross estate consists in part of property which does not come within the possession of the executor or administrator. The regulation also clarifies that this obligation is enforceable only in a fiduciary's representative capacity and not personally, unless section 3467 of the Revised Statutes of the United States, 31 U.S.C. sec. 192, also applies. 4
The personal liability of the fiduciary for estate tax is described in 31 U.S.C. sec. 192, which provides:
Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid.
Section 192, 31 U.S.C., must be read in conjunction with R.S., sec. 3466 (1878), 31 U.S.C. sec. 191 (1970 ed.); King v. United States, 379 U.S. 329 (1964); United States v. Lutz, 295 F.2d 736 (5th Cir. 1961). Section 191, 31 U.S.C., establishes the priority of debts due to the United States and provides in part:
Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; * * *
See New v. Commissioner, 48 T.C. 671 (1967).
Though a literal reading of 31 U.S.C. sec. 191 and sec. 192 seems to impose strict liability on a fiduciary when he makes a distribution which leaves the estate with insufficient funds from which to pay a debt owing to the United States, courts have long departed from such a rigid interpretation. It has been long held that in order to render a fiduciary personally liable under 31 U.S.C. sec. 192, he must first be chargeable with knowledge or notice of the debt due to the United States, at a time when the estate had sufficient assets from which to pay this debt. Want v. Commissioner, 280 F.2d 777 (2d Cir. 1960); Irving Trust Co. v. Commissioner, 36 B.T.A. 146 (1937); United States v. Vibradamp Corp., 257 F.Supp. 931 (S.D. Cal. 1966).
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...facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.” Leigh v. Comm'r, 72 T.C. 1105, 1110 (1979) (citations omitted). We hold that Hilliard and E. Pierce Jr. knew of the potential liability to the Government, and thus, the F......
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United States v. Marshall
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