Estate of Lorraine M. Kelley – Important Lessons for Paying Estate Taxes on Time!
The Estate of Lorraine M. Kelley never paid the estate taxes due despite many years elapsing and those funds passing through a second estate and multiple executors. U.S. v. Estate of Kelley, et al., 126 AFTR 2d 2020-6605, (DC NJ), 10/22/2020.
Lorraine M. Kelley died on December 30, 2003. The Estate of Lorraine M. Kelley’s Co-Executors were Kelley’s brother, Richard Saloom and Richard Lecky. The Co-Executor’s filed an estate tax return, Form 706, in September of 2004. The return reported an estate tax liability of $214,412 and a gross estate of over $1.7 million.
However, these figures proved to be inaccurate. In October of 2004, the IRS opened an examination of the estate return. Additional tax liability was imposed because the corrected gross estate was over $2.6 million with a taxable estate of approximately $2.3 million. As a result, the total estate tax due was actually $662,780. In June of 2006, Richard Saloom as Co-Executor consented to the IRS assessment of additional tax liability, which provided for an additional tax of $448,367.
Richard Saloom knew of the tax liability because he had consented to the assessment as the Co-Executor. However, without paying the assessment in full, he transferred the entire estate to himself as the sole beneficiary. Richard Saloom completed a series of transfers between 2004 and 2007, which resulted in depleting the Estate until there were no remaining funds. During this time, Richard Saloom also made substantial payments to the IRS for the tax liability, but a majority of the tax due was still due and outstanding at the time of his death in 2008. It is not clear why from Richard Saloon made installment payments in lieu of payment of the full amount due.
Just prior to his death, Richard Saloom directed his daughter Rose Saloom to continue making installment payments. After Richard Saloom’s death, Rose Saloom was appointed as the Executor of his Estate. Rose Saloom was also the sole beneficiary. However, Rose Saloom, as Executrix, transferred the funds to herself without paying the prior estate tax due from the Estate of Lorraine Kelley.
On October 22, 2020, the United States District Court in Trenton, New Jersey, held that personal liability attached to the Estate of Lorraine M. Kelley for estate taxes due and owing under two different lines of reasoning to both Richard Saloom and to Rose Saloom. Personal liability means that taxes may now be recovered from the individual’s assets rather than just the Estate.
One line of reasoning hinged on the fiduciary responsibilities of the personal representative while another line of reasoning followed the obligations of the person who received the money. These concepts are known respectively as fiduciary liability and transferee liability. However, the amount of recovery by the IRS will be always be limited to the amount actually distributed or received. Internal Revenue Code § 6324(a)(2).
The standard for fiduciary liability was previously established in United States v. Tyler, relying upon Internal Revenue Code § 3713(b), which directs that an executor is liable who pays debts or distributes assets before paying a debt owed to the United States government. 528 F. App’x 193 (3d Cir. 2013). United States v. Tyler provided that a fiduciary is liable if (1) the fiduciary distributed the assets; (2) the distribution resulted in an insolvent estate; and (3) the distribution took place after the fiduciary had knowledge of the unpaid taxes.
As such, Richard Saloom was personally liable as a fiduciary under the test set out in United States v. Tyler because he distributed the assets of Kelley’s Estate that rendered the estate insolvent to pay the IRS when he knew of the tax due. Richard Saloom’s knowledge of the tax due was established by the fact that he consented to the assessment and made partial payments. Also, Richard Saloom was liable as a transferee up to the amount received because he knew of the tax due.
The district court found that Rose Saloom was personally liable as a fiduciary under United States v. Tyler because she distributed all of the assets to herself while the estate was insolvent and while knowing of the tax due. Rose Saloom’s knowledge of the tax due was established by her prior filing of a New Jersey inheritance tax return which listed the outstanding debt for estate tax. Also, Rose Saloom was personally liable as a transferee up to the amount received because she knew of the tax due.
Where the funds are in the possession and control of Rose Saloom, the IRS will now collect those funds from any of Rose Saloom’s individually owned assets regardless of whether those assets were derived from Estate assets. Although the final figure with interest and penalties has not yet been determined, given that seventeen years have passed, the final figure will be a significant amount compared to having paid the tax on time.