USA v. Johnson et al
Filing
193
MEMORANDUM DECISION AND ORDER-granting in part and denying in part 117 Motion for Summary Judgment ; granting 119 Motion to Reconsider, Vacating its previous grant of summary judgment on the governments Motionfor Summary Judgmen t 87 and Grants summary judgment on defendants Motionfor Partial Summary Judgment 86 . Also, the court Grants defendants Motion for Summary Judgment 122 . See Order for additional details. Signed by Judge Clark Waddoups on 12/1/16. (jmr)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
UNITED STATES OF AMERICA,
MEMORANDUM DECISION AND
ORDER
Plaintiffs.
v.
Case No. 2:11-cv-00087
MARY CAROL S. JOHNSON; JAMES W.
SMITH; MARIAN S. BARNWELL; BILLIE
ANN S. DEVINE; and EVE H. SMITH
Judge Clark Waddoups
Defendants.
This is a tax case filed by the United States to collect unpaid federal estate taxes owed by
the Estate of Hazel Anna S. Smith (“Estate”). This matter is before the court on the plaintiff’s
Second Motion for Summary Judgment (Dkt. No. 117), defendants’ Motion for Reconsideration
of the court’s prior order granting partial summary judgment in favor of the government (Dkt.
No. 119), and defendants’ Motion for Summary Judgment (Dkt. No. 122).
FACTUAL BACKGROUND
The defendants in this action include the four children of Anna S. Smith (the
“Decedent”), namely Mary Carol S. Johnson, James W. Smith, Marian S. Barnwell, and Billie
Ann S. Devine. During the course of this litigation, Marian S. Barnwell and Billie Ann S. Devine
passed away, and their estates have not been substituted as defendants. Eve H. Smith, who was
named as a fifth defendant, is the wife of James W. Smith. In its prior order in this case, the court
dismissed Mrs. Smith as a party to the litigation. (Am. Mem. Decision and Order, Dkt. No. 75.)
1
During her lifetime, Decedent and two of her children, defendants Mary Carol S. Johnson
(“Johnson”) and James W. Smith (“Smith”), executed a trust agreement dated February 8, 1982
for the creation of The Anna Smith Family Trust (the “Trust”), in which Decedent, Johnson and
Smith were named as co-trustees. The Trust was funded on February 9, 1982 by 11,466 shares of
stock in State Line Hotel, Inc. (“Hotel”). The Hotel was the holder of a Nevada gaming license.
Nearly one year later, on February 1, 1990, Decedent, Johnson and Smith executed an amended
trust agreement, which removed Smith and Johnson as co-trustees and left Decedent as the sole
trustee of Trust.
On May 1, 1990, Decedent executed the Second Amended Trust Agreement (“Trust
Agreement”) as both grantor and sole trustee, which was the agreement in effect at the time of
Decedent’s death on September 2, 1991. It is undisputed that the Decedent had an unlimited
power to modify, alter, amend, revoke, or terminate the trust at any time during her life. It is also
undisputed that the Decedent, as grantor, had the right to withdraw principal and income from
the Trust as she directed during her lifetime, and that no Trust beneficiaries had an enforceable
right to any distributions from the Trust during Decedent’s life. The Trust Agreement named
Johnson and Smith as successor trustees. Johnson and Smith were also named in the Decedent’s
will as personal representatives of Decedent’s Estate. Neither Decedent’s Estate nor the Trust
have been named as defendants in this lawsuit.
Upon Decedent’s death, her will directed the personal representatives to ensure that the
Decedent’s “debts, last illness, and funeral and burial expenses be paid as soon after [her] death
as reasonably convenient.” (Will ¶ II; Dkt. No. 32, Ex. A.) It further directed the personal
representatives that “claims against [the] estate” may be settled and discharged in the “absolute
discretion of [the] Personal Representatives,” although it did not expressly direct the personal
2
representatives to pay any federal estate tax levied against the Estate. (Id.) The “rest and residue”
of the Estate was to be delivered to the successor trustees and added by them to the principal of
the Trust to be administered as directed by the trustees. (Id. at ¶ IV.)
The Trust Agreement provided for the successor trustees to make specific distributions,
as soon as possible after the Decedent’s death, from the principal of the Trust to individuals who
are not parties to this suit. (Trust Agreement, 2; Dkt. No. 32, Ex. B.) The successor trustees were
then directed to
pay any and all debts and obligations of the GRANTOR, the last illness, funeral,
and burial expenses of the GRANTOR and any State and Federal income,
inheritance and estate taxes which may then be owing or which may become due
and owing as a result of the GRANTOR’s death.
(Id.) (Emphasis added.) After these expenses were paid by the successor trustees, one third of
the remaining Trust corpus (not to exceed $1,000,000) was to be divided into four equal parts to
be distributed to one of the four family limited partnerships that had been established for each of
the heirs. (Id. at 4.) Finally, the remaining principal and undistributed income of the Trust was to
be distributed equally between the heirs by the successor trustees. (Id. at 4-5.) The heirs also
received benefits valued at $369,878 from several life insurance policies belonging to the
Decedent. (Dkt. No. 86-3, p. 8.)
As directed by the Trust Agreement, the successor trustees filed a federal estate tax return
with the Internal Revenue Service (“IRS”) on June 1, 1992. The Decedent’s gross estate was
valued on the return at $15,958,765, resulting in a federal estate tax liability of $6,631,448, of
which $4,000,000 was paid at the time of filing. (See United States Estate Tax Return, Dkt. No.
86-3.) The majority of the Decedent’s gross estate consisted of 9,994 shares of stock in the
Hotel, valued by a valuation expert on the return at $11,508,400. Because the Hotel was a closely
held business and its value constituted more than thirty-five percent of the Decedent’s adjusted
3
gross estate, the successor trustees validly elected to defer payment of the remainder of the
federal estate tax liability pursuant to 26 U.S.C. § 6166(a). Consistent with Section 6166, the
election provided that the remaining balance of the tax liability would be deferred for five years,
at which time the successor trustees would pay it in ten annual installments beginning on June 2,
1997 and ending on June 2, 2006. (See Election, Dkt. No. 32-5.) After receiving the estate tax
return, the IRS properly assessed the Estate for unpaid estate taxes on July 13, 1992.
It is undisputed that Nevada gambling law limited the ability of a Trust to own stock in a
casino. The Trust and the successor trustees had received special permission for ownership in the
Hotel that was set to expire in January 1993. (Ltr. from Nevada Gaming Ctrl. Bd. dated July 23,
1992; Dkt. No. 139, p. 220.) The parties do not dispute that because the application process to
gain permanent approval for such ownership was extensive, expensive, and ultimately uncertain,
the successor trustees decided to distribute the Hotel stock from the Trust to the beneficiaries.
Accordingly, on December 31, 1992, the successor trustees and the heirs executed an agreement
(the “Distribution Agreement”) distributing the remaining Trust assets to the heirs. (See
Agreement; Dkt. No. 32, Ex. G.) The Distribution Agreement indicated the following regarding
the outstanding estate tax liability:
6. Liability for Taxes. Each of the BENEFICIARIES acknowledges that the assets
distributed to him or her will accomplish a complete distribution of the assets of
the Trust. A portion of the total federal estate tax upon the Estate of Anna Smith
is being deferred and is the equal obligation of the BENEFICIARIES to pay as the
same becomes due. Likewise, if, upon audit, additional federal estate taxes or
Utah inheritance taxes are found to be owing, the responsibility for any such
additional taxes, interest or penalties will be borne equally by the
BENEFICIARIES.
(Id.) On December 28, 1992, a few days prior to signing this agreement, the Estate paid the IRS
an additional $1,000,000 on the deferred tax owed. Defendants assert, and the government has
provided no contrary evidence, that at the time the Distribution Agreement was signed, their
4
combined net worth was approximately $21.1 million, whereas the estate tax liability at that time
was approximately $1.46 million. From the date the Distribution Agreement was signed until
2001, it is undisputed that additional payments on the deferred tax totaling $1,399,221.87 were
made to the IRS by the Hotel on behalf of the defendants, who held the majority of the
ownership of the Hotel from 1992 to 2001.
On May 30, 1995, approximately two years prior to the start date of the Section 6166(a)
deferred tax installment payments, the IRS issued a Notice of Deficiency against the Estate. The
IRS claimed that the 9,994 shares of Hotel stock were worth $15,500,000 rather than
$11,508,400 at the time of Decedent’s death. (See Notice of Deficiency; Dkt. No. 32, Ex. E.)
According to the IRS, this adjusted valuation resulted in an alleged additional estate tax of
$2,444,367. The Estate contested the Notice of Deficiency, and a settlement was ultimately
reached where the Estate agreed to pay additional federal estate taxes in the amount of $240,381.
The IRS assessed the Estate for the second time pursuant to that settlement on December 30,
1996.
On May 27, 1997, about a week prior to the due date of the first estate tax installment
payment, Colleen Girard, an agent from the IRS, sent a letter to Johnson in her capacity as
executor of the Estate, informing her “of an alternative to your continued personal liability for
the unpaid estate tax . . . deferred under 26 U.S.C. Section 6166.” One of the alternatives offered
was for Johnson “to furnish a Special Lien for Estate Tax Deferred Under Section 6166, as
described in 26 U.S.C. Section 6324A.” (Ltr. from Colleen Girard dated May 27, 1997; Dkt. No.
122-2, pp. 3-4.) Accordingly, on August 4, 1997, after obtaining additional information from the
IRS about the information required to submit the Section 6324A special lien, Johnson and Smith,
through counsel, provided the IRS with an executed Agreement to Special Lien Under Section
5
6324A signed by all four children of the Decedent, an agreement restricting the sale of the Hotel
stock while the lien on the stock was in effect, and the additional information about the Hotel
stock requested by the IRS. (Ltr. from David Salisbury dated Aug. 4, 1997; Dkt. No. 122-2, p. 7.)
It is undisputed that at no point during this exchange of information did Ms. Girard mention or
attach a “notice of election” or other application form required to furnish the IRS with a special
lien.
Although unknown to the defendants at the time, Ms. Girard then sought guidance from
IRS District Counsel regarding the use of stock in a closely held corporation as security for a
special lien under Section 6324A. (Aug. 21, 1997 IRS Memo.; Dkt. No. 122-2, p. 13.) Ms.
Girard informed District Counsel that the Estate had consented to the lien and offered 4,768
shares of stock which, based on the 1996 Tax Court settlement, had a value of $1,273 per share,
or a total value of $6,092,578. Given that the unpaid balance of the tax assessment was
$1,899,970 and the amount of security needed was $2,192,365.20, Ms. Girard stated that “I have
analyzed the security and feel a lien under IRC 6324A against the stock will adequately secure
the liability for the remainder of the IRC 6166 election.” (Id.)
Notwithstanding the foregoing, in a letter dated November 6, 1997, Ms. Girard
subsequently notified Smith and Johnson that District Counsel had “advised our office that
closely held stock should not be accepted as collateral by the Internal Revenue Service because
the IRS cannot sell stock at a public auction as it violates securities regulations.” (Ltr. from
Colleen Girard dated Nov. 6, 1997; Dkt. No. 122-2, p. 15.) Through counsel, Smith and Johnson
responded that if there were securities law problems with the stock held by the IRS in its Section
6324A Special Lien, “it would appear that they belong to the IRS, not to the taxpayer,” and that
it was their position that “if an election is made under Section 6324A and the identified property
6
can be expected to survive the period of deferral, the requirements of the statute have been met
and the application of the special lien is mandatory.” (Ltr. from David Salisbury dated Jan. 13,
1998; Dkt. No. 122-2, pp. 17-18.) In any event, Ms. Girard, Smith, and Johnson all agreed to
wait two years to revisit the matter in 2000. (Ltr. from Ms. Girard dated Jan. 20, 1998; Dkt. No.
122-2, pp. 19-20.) It is undisputed that neither Ms. Girard, nor anyone else at the IRS, ever
contacted Smith, Johnson, or their attorneys again with respect to the Section 6324A special lien.
In January 2002, the Hotel filed for Chapter 11 bankruptcy in the state of Nevada. It is
undisputed that as a result of the bankruptcy proceedings, the beneficiaries were instructed to
stop making any more distributions to pay the estate tax. The defendants did apply for an
extension of time to pay the next installment due under Section 6166 and notified the IRS that
the Hotel was in bankruptcy proceedings. (Dkt. No. 139, pp. 164-166.) By May 2002, the
bankruptcy court approved the sale of all Hotel assets free of liens, claims, and encumbrances.
As shareholders, the heirs received no value for their Hotel ownership interests in the
bankruptcy.
Over a year after the conclusion of the Hotel bankruptcy, the IRS sent Smith and Johnson
delinquent billing notices for the outstanding estate taxes dated August 28 and December 2,
2003. The latter notice stated that if the payment due was not received by the IRS by December
15, 2003, the “installment agreement will be in danger of defaulting. If this occurs, the whole
balance due on the account will be due immediately and turned over for collection.” (2nd
Delinquent Installment Billing-2003, Dkt. No. 139, p. 163.) The installment payment was not
made in 2003. In 2005, the Estate, through counsel, communicated with Byron Broda at the IRS
about the inability of the Estate to pay its outstanding estate taxes. Counsel sent Mr. Broda an
explanation of the Estate’s distribution of assets in 1992, the financial difficulties of the Hotel
7
and the bankruptcy, as well as a copy of the Distribution Agreement. (Dkt. No. 139, pp. 168183.) The parties agree that the IRS then sent Smith and Johnson notices of their intent to levy
unspecified assets in approximately July 2005. (Gov. Opp. Mem. to Second Mot. Summ. J.; Dkt.
No. 138, p. 14.) On July 8, 2005, the IRS sent the Estate a Notice of Federal Tax Lien, and
indicated it had been filed with the County Recorder of Salt Lake and Tooele counties in Utah.
The notice included a statement that said:
IMPORTANT RELEASE INFORMATION: For each assessment listed below, unless
notice of the lien is refiled by the date given in column (e), this notice shall, on the day
following such date, operate as a certificate of release as defined in IRC 6325(a).
The last refiling date listed in column (e) of this notice listed “N/A” with respect to the 1992
estate tax assessment, and January 29, 2007 with respect to the 1996 estate tax assessment. (2005
Notice of Federal Tax Lien; Dkt. No. 139, pp. 197-199.) The assessment was for a total of
$1,569,9671.67 which appeared to be attributable in full to the 1996 tax assessment. (Id.)
On or about September 12, 2005, the IRS sent a Notice of Levy to each of the individual
defendant children, Smith, Johnson, Bille Ann S. Devine, and Marian S. Barnwell. The notices
stated, “This levy attaches assets includible in the gross estate of Hazel Anna S. Smith, which
were distributed or transferred to you, including but not limited to cash and life insurance
proceeds.” (Notices of Levy; Dkt. No. 139, pp. 206-209.) Thereafter, on November 15, 2005,
Mr. Broda recommended that the government pursue a civil suit against the Estate, Johnson, and
Smith for transferee liability for the estate tax. This lawsuit was not filed until January 21, 2011.
On or about January 9, 2007, the IRS sent the Estate a corrected Notice of Federal Tax
Lien, which was also filed in Salt Lake and Tooele counties. This notice claimed it was “filed to
correct the amount due on the original lien,” but that otherwise the “information on the original
notice filed is correct and that instrument remains in full force and effect.” (2007 Notice of
8
Federal Tax Lien; Dkt. No. 139, pp. 200-202.) This notice apportioned the tax owed between the
1992 assessment ($1,164,490.94) and the 1996 assessment ($405,220.73). (Id.) The IRS did not
re-file their Notice of Federal Tax Lien by January 29, 2007, the deadline identified on the
original and corrected notices. Rather, the IRS issued Certificates of Release for both the 2005
and 2007 liens on February 18, 2007, which stated that “the lien provided by Code section 6321
for these taxes and additions has been released.” (Certificate of Release of Federal Tax Lien;
Dkt. No. 139, pp. 210-213.) These certificates were filed in both Salt Lake and Tooele counties.
(Id.)
Several months later on March 27, 2007, the IRS mailed the Estate a Revocation of
Certificate of Release of Federal Tax Lien with respect to both the 1992 and 1996 assessments
filed in both Salt Lake and Tooele counties, stating that “we mistakenly allowed Notices of
Federal Tax Lien filed against Hazel Anna S. Smith Estate to be released” and that the releases
“are revoked and the liens are reinstated, as provided under Internal Revenue Code, Section
6325(f)(2).” (Revocations, Dkt. No. 139, pp. 214-217.) The IRS admits that the revocation
notice was not filed with the Salt Lake county recorder’s office as required by statute. (Decl. of
Jennifer Graham ¶ 3, Dkt. No. 148.) Similarly, the IRS admits that on October 12, 2012 it again
filed Certificates of Release of Federal Tax Lien with respect to both the 1992 and 1996
assessments in Salt Lake county. (Id. at ¶ 4.) However, on May 15, 2015, the IRS finally filed its
Revocation of those releases with the Salt Lake county recorder’s office, along with a new
Notice of Federal Tax Lien against the Estate, stating that the government now has until August
12, 2025 to refile its lien for the 1992 assessment and until December 30, 2025 to refile its lien
for the 1996 assessment. (Id. at Ex. 8, Dkt. No. 148-2.)
9
PROCEDURAL BACKGROUND
The government filed this action on January 21, 2011 in an effort to collect the estate’s
outstanding tax liability, asserting a cause of action against all defendants for trustee, transferee,
and beneficiary liability under 26 U.S.C. § 6324(a)(2), and against the personal representatives
under 31 U.S.C. § 3713. (Compl., Dkt. No. 2.) Defendants filed a motion to dismiss the
complaint. (Dkt. No. 31.) Following a hearing on that motion, the court determined that the
government had adequately stated a claim that the trustees of the Trust may be personally liable
for the unpaid estate tax to the extent of the value of the property in the Trust at the time of
Decedent’s death pursuant to 26 U.S.C. § 6324(a)(2). (See Am. Mem. and Decision, Dkt. No.
75.) The court dismissed the government’s claim, on the other hand, that each heir should be
individually liable for the unpaid estate taxes as a transferee of Trust assets pursuant to that
statute. (Id.) Similarly, the court determined that the government’s claim regarding each heir’s
potential individual liability for the estate’s taxes as a beneficiary of Trust assets under Section
6324(a)(2) should be limited to the extent of the distributions they received from the Decedent’s
life insurance policies. (Id.) Finally, the court determined that the government had adequately
stated a claim that the personal representatives may have individual fiduciary liability for the
estate taxes under 31 U.S.C. § 3713, although it revised its reasoning as to why after resolving
defendants’ first motion to reconsider. (Id.)
After the court ruled on defendants’ motion to dismiss, the defendants answered the
government’s Amended Complaint, which was filed on July 31, 2013 and included for the first
time causes of action related to the Distribution Agreement. (Dkt. No. 79.) Subsequently, the
parties filed cross motions for partial summary judgment on the government’s first cause of
action, namely whether Johnson and Smith, as successor trustees of the Trust, were personally
10
liable for unpaid estate taxes under 26 U.S.C. § 6324(a)(2) because that section only makes
trustees liable up to the value of assets included in decedent’s gross estate under 26 U.S.C. §§
2034 to 2042, inclusive. 1 Oral argument was heard on these motions on October 1, 2014, after
which the court ruled on the record in favor of the government that the successor trustees were
personally liable for the estate tax because the Trust assets were included in the Decedent’s gross
estate under a relevant section, namely 26 U.S.C. § 2036(a). Defendants have challenged this
ruling in a Motion to Reconsider, which is now before the court. (Dkt. No. 119.)
At the October 1 hearing, the court also granted defendants’ motion for leave to amend
their answer to include the affirmative defense that the government’s claims against Smith and
Johnson as personal representatives and fiduciaries are barred because they were effectively
discharged from personal liability in August 1997 as a result of their tender of a special lien
under 26 U.S.C. § 6324A. Shortly before the deadline for dispositive motions, defendants moved
for an extension of time to submit an expert report from Jeffrey S. Pickett to support that the
value of the Hotel stock pledged as collateral at or near the time of their § 6324A election was
more than sufficient to pay the remaining amount of the federal estate tax that had been deferred
under 26 U.S.C. § 6166. Their motion was granted and defendants filed their second motion for
1
For purposes of the prior motion to dismiss, defendants did not dispute that “trustees” were “transferees”
that fall within the scope of Section 6324(a)(2). In this motion for summary judgment, defendant trustees
argued that they can only be liable as transferees under this statute if the Trust assets were included in
Decedent’s gross estate under Sections 2034-2042, a position that was not at issue in the previous motion.
See Section 2, infra. The court finds that this clarification of defendants’ position was not clearly
inconsistent with their position in the prior motion to dismiss, nor was their prior position calculated to
mislead the court, nor did this clarification give defendants an unfair advantage. See Hansen v. Harper
Excavating, Inc., 641 F.3d 1216, 1227 (10th Cir. 2011). Defendants stated this position as their Fifteenth
Defense in their Answer to Amended Complaint filed on August 27, 2013; the discovery deadline was
still several months away when defendants clarified their position; and the government has always had the
burden of proving that it has met all elements of its Section 6324(a)(2) claim. Because Section 6324(a)(2)
is a strict liability statute that imposes liability based not on a trustee’s improper acts, but on the status of
being a trustee, receiving property, and having unpaid federal estate taxes, it is necessary for the court to
fully consider each of the statute’s elements and defendants’ arguments without being constrained by
prior statements when these questions were not directly at issue previously.
11
partial summary judgment on the grounds that Smith and Johnson were discharged from personal
liability pursuant to their furnishing of the § 6324A special lien. This motion is before the court.
(Dkt. No. 122.)
For its part, on March 17, 2015, the government timely filed its second motion for
summary judgment on the remaining counts of its amended complaint, and part of this motion is
now before the court. (Dkt. No. 117.) On July 21, 2015, the court held a hearing on the parties’
second motions for summary judgment, defendants’ motion for reconsideration, and defendants’
motion for extension of time to submit expert reports. The court granted defendants’ motion for
an extension of time to submit expert reports. The court granted the government’s second motion
for summary judgment as to the defendants’ personal liability for estate tax attributable to the life
insurance proceeds received from the decedent. The court took the claims regarding the
successor trustees’ personal liability under submission. Defendants’ motion for reconsideration
and second motion for partial summary judgment were also taken under submission.
After both parties submitted expert reports and supplemental briefing regarding the
expert reports and defendants’ claims that Smith and Johnson should be discharged from
personal liability as a result of satisfying the requirements for a special lien pursuant to § 6324A
and thus obtaining a discharge pursuant to § 2204 such that they are not personally liable
pursuant to § 3713, the court held a final hearing on the briefing on June 23, 2016. After
consideration of the parties’ extensive briefing, the relevant law, and the oral arguments by the
parties, the court now rules on the following motions: United States’ Second Motion for
Summary Judgment (Dkt. No. 117), Defendants’ Motion to Reconsider (Dkt. No. 119), and
defendant’s Motion for Partial Summary Judgment (Dkt. No. 122).
12
ANALYSIS
1.
Failure to Substitute Estates as Defendants Requires the Court to Dismiss
Defendants Marian S. Barnwell and Billie Ann S. Devine
As a preliminary matter, the court begins by addressing the government’s claims against
the two deceased defendants. Notice of the September 1, 2015 death of defendant Billie Ann S.
Devine was filed on September 21, 2015. (Dkt. No. 172.) Notice of the April 17, 2016 death of
Defendant Marian S. Barnwell was filed on May 16, 2016. (Dkt. No. 190.) Rule 25(a)(1) of the
Federal Rules of Civil Procedure governs the substitution of a party for claims that are not
extinguished by a party’s death. In this case, the government’s claims against these two deceased
heirs as the beneficiaries of Trust assets under Section 6324(a)(2) to the extent of the
distributions they received from the Decedent’s life insurance policies is not necessarily
extinguished by their deaths and could potentially have survived against their estates. Rule 25,
however, requires a motion for substitution of a party to be “made within 90 days after service of
a statement noting the death.” Fed. R. Civ. P. 25(a)(1). For Devine, that time expired in
December 2015. For Barnwell, that time expired in August 2016. When a party—here the
government—has failed to make a timely motion for substitution of a party, “the action by or
against the decedent must be dismissed.” Id. There has been no motion for substitution of either
defendant here; accordingly, the court dismisses all of the government’s claims against
defendants Devine and Barnwell.
2.
Motion to Reconsider Whether Trust Assets Were Included in Decedent’s
Gross Estate Under 26 U.S.C. § 2033
The court now turns to defendants’ motion to reconsider its decision to grant partial
summary judgment to the government on the question of whether Smith and Johnson as
13
successor trustees are personally liable for the unpaid estate tax to the extent of the value of the
property in the Trust under section 6324.
As successor trustees of the Trust, Johnson and Smith can be personally liable for unpaid
estate taxes up to the value of the Trust assets under 26 U.S.C. § 6324(a)(2) only if the Trust
assets were included in decedent’s gross estate under 26 U.S.C. §§ 2034 to 2042, inclusive. 2 In
their motion for partial summary judgment, defendants argued that Decedent’s assets were
included in her Estate under 26 U.S.C. § 2033, 3 rather than under 26 U.S.C. § 2036 or 26 U.S.C.
§ 2038, because the Decedent retained full beneficial ownership of all Trust assets during her
lifetime and there was no transfer to any other Trust beneficiary until the time of her death.
(Def.’s Mot. for Summ. J. 7, Dkt. No. 86.) By contrast, the government’s motion for summary
judgment on this claim argued that decedent’s assets were either included in her estate under 26
U.S.C. § 2036(a) because they were transfers with a retained life estate, 4 or under 26 U.S.C. §
2
The parties agree that the only possibly relevant sections within this range are section 2036 and section
2038.
3
Section 2033 refers to property in which the decedent has an interest, and states:
The value of the gross estate shall include the value of all property to the extent of the interest
therein of the decedent at the time of his death.
26 U.S.C. § 2033.
4
Section 2036 states:
(a) General rule. The value of the gross estate shall include the value of all property to the extent
of any interest therein of which the decedent has at any time made a transfer (except in case
of a bona fide sale for an adequate and full consideration in money or money’s worth), by
trust or otherwise, under which he has retained for his life or for any period not ascertainable
without reference to his death or for any period which does not in fact end before his death—
(1) the possession or enjoyment of, or the right to the income from, the property, or
(2) the right, either alone or in conjunction with any person, to designate the persons who
shall possess or enjoy the property or the income therefrom.
26 U.S.C. § 2036.
14
2038 because the Decedent retained the power to alter, amend, revoke, or terminate the Trust. 5
(Gov. Mot. for Summ. J. 13-19, Dkt. No. 88.) After oral argument on October 1, 2014, the court
denied defendants’ motion and granted summary judgment to the government on the claim that
Smith and Johnson were personally liable for the unpaid estate tax as successor trustees of the
Trust. (Dkt. No. 108.) The court concluded that the assets in the Trust, a fully revocable grantor
trust, were included in Decedent’s gross estate under 26 U.S.C. § 2036(a)(2) because as a result
of the creation of the Trust and the designation of the beneficiaries therein, “at the instant of
death the beneficiaries in this property had a legally enforceable interest.” (Hr’g Tr. dated Oct. 1,
2014 49; Dkt. No. 113.)
Defendants have asked the court to reconsider this decision, arguing that the critical
question for their claim that the Trust assets were included in the gross estate under 26 U.S.C. §
2033 is not whether the beneficiaries obtained a legally enforceable interest at the moment of
Decedent’s death, but rather what interest the Decedent held at the moment of her death. (Dft.’s
Mot. to Reconsider 3, Dkt. No. 119.) Defendants argue that the court’s analysis of 26 U.S.C. §
2036 was in error because it incorrectly focused on the interests held by the beneficiaries
immediately after the moment of death, rather than on the interests held by the Decedent during
her life. (Id. at 7.) From a temporal standpoint, in other words, the transfer envisioned by the
fully revocable grantor trust executed by the Decedent during her lifetime only occurred as a
5
Section 2038 states in pertinent part:
(a) In general. The value of the gross estate shall include the value of all property—
(1) Transfers after June 22, 1936. To the extent of any interest therein of which the decedent
has at any time made a transfer . . . by trust or otherwise, where the enjoyment thereof
was subject at the date of his death to any change through the exercise of a power (in
whatever capacity exercisable) by the decedent . . . to alter, amend, revoke, or terminate,
or where any such power is relinquished during the 3-year period ending on the date of
the decedent’s death.
26 U.S.C. § 2038 (emphasis added).
15
result of Decedent’s death, and thus the assets remained beneficially owned by her during her
lifetime and were includable in the Estate pursuant to 26 U.S.C. § 2033 rather than § 2036 or
§ 2038. They further argue that this temporal analysis was not originally briefed as to section
2036, id. at 3, although the court notes that the parties did present arguments on temporal
considerations as to section 2038. The government argues that the court should not reconsider
defendants’ motion because it merely restates the position defendants took in their initial motion.
(Gov.’s Opp’n Mem., Dkt. No. 143.) Thus, the court first evaluates the legal standard required
to grant a motion to reconsider.
A. Legal Standard on a Motion to Reconsider
Rule 54(b) of the Federal Rules of Civil Procedure provides, in relevant part:
[A]ny order or other decision, however designated, that adjudicates fewer than all
the claims or the rights and liabilities of fewer than all the parties does not end the
action as to any of the claims or parties and may be revised at any time before the
entry of a judgment adjudicating all the claims and all the parties’ rights and
liabilities.
Fed. R. Civ. P. 54(b).
The government argues that although Rule 54(b) allows a court to revisit any order that
rules on less than all of the claims in a case, a motion to reconsider is not appropriate when it
merely restates the party’s position taken in the initial motion. See Servants of the Paraclete v.
Does, 204 F.3d 1005, 1012 (10th Cir. 2000) (A motion for reconsideration is an “inappropriate
vehicle[] to reargue an issue previously addressed by the court when the motion merely advances
new arguments, or supporting facts which were available at the time of the original motion.”).
While defendants agree that “[a] motion to reconsider is not a second chance for the losing party
to make its strongest case or to dress up arguments that previously failed,” United States v. Huff,
782 F.3d 1221, 1224 (10th Cir. 2015), they note and the court agrees that the Tenth Circuit
encourages a court to reconsider an interlocutory ruling “where error is apparent.” Warren v. Am.
16
Bankers Ins., 507 F.3d 1239, 1243 (10th Cir. 2007). Furthermore, “[a] district court always has
the inherent power to reconsider its interlocutory rulings.” Id.
The court agrees with the defendants that the key language of section 2033 requires the
court to focus its analysis on what was “beneficially owned by the decedent at the time of his
death,” 26 C.F.R. 20.2033-1, rather than on the interests owned by the beneficiaries immediately
after decedent’s death, which it did at the October 1, 2014 hearing. Accordingly, based on the
foregoing standard and to prevent clear error, the court proceeds to reconsider whether the Trust
assets were included in Decedent’s gross estate under 26 U.S.C. § 2033.
B. Decedent Had Full Beneficial Ownership of All Trust Property During Her
Lifetime; Thus Trust Assets Were Included in Her Gross Estate Under 26 U.S.C.
§ 2033
The court’s focus during the October 1, 2014 oral argument for summary judgment on
this issue was on how it should interpret the meaning of the term “transfer” for purposes of these
estate tax statutes. (Hr’g Tr. dated Oct. 1, 2014 4; Dkt. No. 113.) While the court’s analysis still
revolves around the meaning of that term, the court erred by not also keeping in mind the overall
estate tax statutory scheme. Upon reconsideration, the court finds that an evaluation of estate tax
liability first requires the inclusion in the gross estate, under section 2033, of “the value of all
property, whether real or personal, tangible or intangible, and wherever situated, beneficially
owned by the decedent at the time of his death.” 26 C.F.R. 20.2033-1. Other sections then apply
to include in the gross estate certain gifts and/or transferred assets purportedly given away during
decedent’s lifetime where the decedent retained “strings” of control, whereas section 2033 “taxes
property which has never really been given away at all.” Estate of Tully v. U.S., 528 F.2d 1401,
1403 (Ct. Cl. 1976).
Consistent with this statutory structure, the court must first analyze whether the Trust
assets were ever “given away” such that Decedent lost the beneficial ownership of them during
17
her lifetime, or in other words, whether a “transfer” for purposes of sections 2036 and 2038 did
or did not occur prior to Decedent’s death. To do so, the court considers first the “legal interests
and rights created [by the Trust] under [s]tate law,” and then decides “whether the interests and
rights so created are sufficient to justify including the property in the gross estate” under section
2033. Estate of Watson v. Comm’r, 94 T.C. 262, 270-71 (1990). Under Utah law, “[a] trust is a
form of ownership in which the legal title to property is vested in a trustee.” Flake v. Flake (In re
Estate of Flake), 2003 UT 17 ¶ 12, 71 P.3d 589. Trust creation also requires a settler’s intent “to
confer a beneficial interest in the property in some other person,” id. at ¶ 11, although those
beneficial interests can take effect via inter vivos or testamentary transfers. Thus, under the
proper temporal analysis, a revocable grantor trust can potentially be included or not in a
decedent’s gross estate under section 2033, depending on its terms. 6
Here, the grantor of the Trust was the Decedent. (Dkt. No. 86-2 ¶ 1.) The Decedent was
also the sole trustee of the Trust before her death, having previously exercised her right to revoke
prior trust agreements that named co-trustees. (Id.) The Decedent, as grantor, had unlimited
power to revoke, modify, alter, or amend the Trust at any time. 7 (Id. at 11 ¶ 12.) It is undisputed
that during the Decedent’s lifetime, she did not resign as trustee or become incapacitated such
6
Merely reporting the Trust’s assets on Schedule G of the Estate tax return is insufficient to cause the
inclusion of Trust assets in the gross estate under sections 2035, 2036, 2037, or 2038, notwithstanding
that Schedule G appears to assume it. IRS instructions require assets to be listed on Schedule G if a
decedent created any trusts during his or her lifetime. (Def.’s Mot. Summ. J. 39-42, Dkt. No. 86.) Nor is
the court willing to decide questions of trustee liability under section 6324 based on the correctness of a
taxpayer’s preparation of a form rather than on proper application of the code sections themselves.
7
While Decedent’s power to “alter, amend, revoke, or terminate” the Trust tracks the plain language of
section 2038, it is not proper to conflate the plain language with the required initial analysis of beneficial
ownership under section 2033. Section 2038 interests require that the benefits—not just the legal title—
first be given away subject to these retained powers. Section 2033, on the other hand, is the provision by
which the government “taxes property over which the owner has kept so much control that he has never
really transferred it.” Tully, 528 F.2d. at 1405, n. 11. Without a valid transfer, property never leaves the
section 2033 gross estate. Were it otherwise, the plain language of section 2038 would swallow section
2033 in contravention of the estate tax structure.
18
that a successor trustee served in her place. The income and principal of the Trust could be
withdrawn without restriction by the Decedent only, as grantor, during her lifetime. 8 (Id. ¶ 5A.)
Only upon the grantor’s death were the Trust assets to be distributed for the payment of expenses
and debts and for distribution to the various beneficiaries of the Trust. (Id. ¶ 5B.)
Defendants do not dispute that Decedent’s creation of the Trust changed the legal title of
the Trust assets from ownership by Decedent personally to ownership by Decedent as the trustee
of the Trust. While that is true, the beneficial ownership of the Trust assets never changed during
Decedent’s lifetime. “Actual command over the property taxed,” as opposed to mere
“refinements of title” are key to questions of “the actual benefit for which the [estate] tax is
paid.” Burnet v. Guggenheim, 288 U.S. 280, 283 (1933). Here, not only did the transfer of title to
the Decedent as trustee not change Decedent’s beneficial ownership of the Trust assets during
her lifetime, but the beneficiaries of the Trust merely had a “hope and expectation” of inheriting
a beneficial interest in the Trust assets, rather than any actual ownership interests during
Decedent’s lifetime. 9 See Estate of Spruill v. Comm’r, 88 T.C. 1197, 1222 (T.C. 1987). The
government’s argument focused heavily on the Trust’s testamentary transfer of assets to the
successor trustees—rather than to Decedent’s estate—at the moment of death, claiming that
“[t]he language of § 2033 reaches interests in property held by a decedent at his death (i.e., his
8
The court is not persuaded by the government’s argument that the Decedent’s withdrawals were limited
by her fiduciary duties as trustee because, as defendants point out, “a self-imposed duty to hold and
manage assets for your own benefit is no duty at all.” (Def.’s Combined Opp’n Mem. 25, Dkt. No. 97.)
As a result, her fiduciary duties as trustee did not result in an inter vivos transfer that would take Trust
assets out of Decedent’s section 2033 gross estate.
9
The court rejects the government’s argument that the beneficiaries owned “vested interests” in the trust
during Decedent’s lifetime because of a provision relating to the rule against perpetuities. Similarly, the
court does not find a transfer for purposes of section 2033 because the Trust language provided that the
beneficiaries could designate one or more of their own heirs to receive Trust assets that a beneficiary
would have been entitled to receive had he or she been alive at Decedent’s death. None of the
beneficiaries exercised this special power of appointment, and even if they had, their appointee(s) would
have received nothing more than the beneficiaries had, which—during Decedent’s lifetime—was only an
expectancy.
19
estate), not beforehand.” (Gov. Opp’n Memo 22, Dkt. No. 88.) Upon reconsideration, however,
the court concludes that unless Decedent transferred beneficial ownership of Trust assets during
her lifetime, how or to whom they transferred upon her death—no matter how “instantaneous”—
simply plays no part in the section 2033 analysis. (Gov. Reply 4-7, Dkt. No. 98.) See 26 C.F.R.
20.2033-1.
Defendants cite to an IRS Technical Advice Memorandum and an IRS Revenue Ruling to
support the conclusion that a trust arrangement of this type does not transfer the beneficial
ownership away from the decedent for purposes of section 2033. In IRS Technical Advice
Memorandum 89-40-003, dated June 30, 1989, the IRS stated:
In the present case, X was directed to invest the principal deposited by A and
distribute income and corpus as directed by A. At A’s death, any assets remaining
were to be distributed to A’s personal representative. The trustee’s discretion was
limited to investment decisions. Thus, the assets held in Trust Arrangement Y
were held solely for the benefit of A during A’s lifetime and were payable to A’s
estate on A’s death. Since there is no third party involved in the Trust
Arrangement A is properly treated as the owner of the assets held in the Trust
Arrangement at the time of her death. Accordingly, the assets held in the Trust
Arrangement at the time of A’s death are properly includible in A’s gross estate
under section 2033 and not section 2038 of the Code.
I.R.S. Tech. Adv. Mem. 89-40-003 (June 30, 1989) (emphasis added). (Dkt. No. 86-4.) The
focus of this IRS ruling is not on the fact that technically, a legal transfer of assets to trustee X
took place. Instead, the focus is on the fact that the sole economic and ownership benefit of these
assets during A’s lifetime was held by A. Compared to this analysis, defendants’ case for
inclusion of Trust assets under section 2033 is even stronger than the taxpayer in the
memorandum because Decedent’s creation of the Trust did not transfer title to a third party
20
trustee, such as X in the example above. Instead, it transferred title solely to herself during her
lifetime, in her dual roles as grantor and trustee. 10
Similarly, in IRS Revenue Ruling 75-553, the decedent created a fully revocable trust
during her lifetime, with trust assets to be distributed to her estate upon her death. The issue the
IRS considered was whether the bank trustee would be liable under 6324(a)(2) for any unpaid
estate taxes. The IRS said “no” and stated:
Although sections 2036, 2037, and 2038 of the Code include in a decedent’s gross
estate the value of any interest in property transferred by the decedent, in trust or
otherwise, where a life estate, reversionary interest, or power to alter, amend or
revoke is retained by the decedent, these provisions of the Code do not become
operative unless someone other than the decedent receives a beneficial interest in
the transferred property. The transfer of property to a trustee acting as agent for
the transferor, without a third party receiving any interest in the property, would
not fall within the scope of sections 2036, 2037, and 2038. In the instant case the
trust corpus is payable to the decedent’s estate and is property of the decedent
within the meaning of section 2033 and is includible in the gross estate only under
that section.
Accordingly, the trustee is not subject to transferee liability for estate tax
pursuant to section 6324(a)(2) of the Code since the corpus of the trust was not
includible in the decedent’s estate under sections 2036, 2037, or 2038, but was
includible under section 2033 exclusively.
Rev. Ruling 75-553 (emphasis added). Here, again, the IRS was not focused on the fact of a
technical transfer of title to a bank trustee, but rather on whether someone other than the
decedent received a beneficial interest in the transferred property during the decedent’s lifetime.
Like the decedent in Revenue Ruling 75-553, the Decedent here beneficially owned all of the
Trust assets up until the time of her death. Additionally, the IRS was not focused on the fact that
upon the Revenue Ruling decedent’s death, trust assets were distributed to his estate, as opposed
10
In the cases cited by the government suggesting that a transfer for estate tax purposes takes place
regardless of the transferee having dual roles, the court notes that in those cases, the transferees were not
the same persons as the grantors, and the interpretations of sections 2033 and 2036 were not at issue. See
Bell v. Comm’r, 82 F.2d 499, 500 (3d Cir. 1936); Agnes McCue, Addressed as the Transferee of the
Estate of John J. Nolan v. Comm’r, 1946 Tax Ct. Memo LEXIS 248, *127-*128 (T.C. 1946).
21
to a beneficiary or to a testamentary trust. It is true that here, Decedent’s Trust arrangement
meant that Trust assets avoided probate and allowed retention of control over a closely held
business after Decedent’s death. But Trust asset passage through probate—or any other afterdeath process or event—is not relevant to what beneficial ownership of the property the
Decedent held during her lifetime. The court finds that these IRS interpretations of the Code and
its regulations are reasonable and are entitled to “substantial judicial deference.” 11 U.S. v.
Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001).
The court’s original ruling erred in determining that the specific language of section 2036
was broad enough to make Decedent’s creation of the Trust and transfer of legal title from the
Decedent as grantor to the Decedent as trustee a “transfer” for estate tax purposes. (Hr’g Tr.
dated Oct. 1, 2014 48; Dkt. No. 113.) The court also erred in determining that at the “instant of
death” the beneficiaries had a legally enforceable interest such that Trust assets were properly
includable in the estate pursuant to section 2036, id. at 48-50, because it was persuaded by the
government’s argument that sections 2036 and 2038 are “transfer provisions” intended to capture
“all incomplete transfers, which includes transfers taking effect at death via revocable trusts.”
(Gov. Reply 6, Dkt. No. 98.) Upon reconsideration and for the reasons stated above, the court
finds that Trust assets were never “given away” such that Decedent lost the beneficial ownership
of them during her lifetime, and thus that there was no transfer—incomplete or not—for
purposes of sections 2036 and 2038 prior to Decedent’s death. As a result, the court concludes
11
Additionally, while the court is persuaded by defendants’ arguments that (1) the determination of what
is included in the gross estate should be harmonized with how that property is valued under the tax code,
and (2) that section 2035 can inform the court regarding why sections 2036 and 2038 do not apply to the
Trust at issue here, it does not make its ruling on the basis of those arguments. (Def.’s Mot. to Reconsider
9, 16; Dkt. No. 119.) It is worth noting, however, that the IRS interpretations above are consistent with a
statutory tax scheme that functions as set forth by defendants in their motion to reconsider, and that
nothing in the government’s response persuades the court otherwise. (Gov.’s Opp’n Mem. 8, Dkt. No.
143.)
22
that Trust assets were included in the gross estate pursuant to section 2033, which precludes
Smith and Johnson’s liability as trustees for the estate tax under 26 U.S.C. § 6324. The court
vacates its prior grant of partial summary judgment to the government as to trustee liability,
(Dkt. No. 108), and grants defendants’ motion for partial summary judgment on this claim. (Dkt.
No. 86.)
3.
Second Cross-Motions for Summary Judgment
The remaining claims for which the government seeks summary judgment are (1) that
Smith and Johnson have fiduciary liability under 31 U.S.C. § 3713(b) for the unpaid estate tax in
their capacities as personal representatives of the Estate, or, as alternatives, (2) that the
government as a third party beneficiary may enforce the Distribution Agreement against the
defendants or (3) that the government may foreclose its federal tax lien against the Distribution
Agreement. Meanwhile, the defendants have moved for partial summary judgment on the
grounds that Smith and Johnson were discharged from personal fiduciary liability for any unpaid
estate tax under section 3713(b) because they furnished a section 6324A special lien agreement
sufficient to pay the deferred taxes. The court begins with the legal standard for summary
judgment.
A.
Summary Judgment Legal Standard
Rule 56 of the Federal Rules of Civil Procedure governs the standard for summary
judgment. Under Rule 56(c), the court should grant summary judgment “if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the declarations, if
any, show that there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.” Smith v. Midland Brake, Inc., 180 F.3d 1154, 1160
(10th Cir. 1999). “One of the purposes of a motion for summary judgment is to pierce the
23
pleadings and to assess the proof in order to ascertain whether there exists a genuine need for
trial.” Metro Oil Co. v. Sun Refining & Marketing Co., 936 F.2d 501, 504 (10th Cir. 1991).
“Once the moving party has properly supported its motion for summary judgment, the burden
shifts to the nonmoving party to go beyond the pleadings and set forth specific facts showing that
there is a genuine issue for trial.” Sally Beauty Co., Inc. v. Beautyco, Inc., 304 F.3d 964, 971
(10th Cir. 2002). “An issue is genuine if the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Id. at 972 (internal punctuation omitted). If a reasonable jury
could not return a verdict for the nonmoving party, summary judgment is appropriate. See
MacPherson v. Brinecell, 98 F.3d 1241, 1246 (10th Cir. 1996).
B.
Defendants Smith and Johnson Furnished a Valid Section 6324A Special
Lien That Discharged Their Personal Liability under Section 2204 and
Precludes Section 3713 Personal Liability
Having determined that defendants Smith and Johnson are not personally liable for the
unpaid estate taxes in their capacities as trustees of the Estate, the court next turns to the question
of whether Smith and Johnson are personally liable for the unpaid estate taxes in their capacities
as personal representatives of the Estate. Because the government’s claim for section 3713
liability will be rendered moot if the court determines that Smith and Johnson’s personal liability
was discharged under section 2204 as a result of furnishing a valid section 6324A special lien,
the court begins with the requirements for discharge under section 2204 and then considers the
question of whether defendants furnished a valid special lien under section 6324A.
i.
Defendants Made an Effective Application for Discharge Under 26
U.S.C. § 2204
The general rule that allows fiduciaries such as executors or personal representatives of
an estate to be discharged from personal liability for unpaid federal estate tax is that the fiduciary
either pays the estate tax owed as determined and notified by the IRS, or, in the case of assessed
24
tax payments deferred under section 6166, by “furnishing any bond which may be required for
any amount for which time for payment is extended.” 26 U.S.C. § 2204(a). The IRS regulation
goes on to clarify that furnishing a bond for purposes of this section is met by furnishing a valid
special lien agreement under 26 U.S.C. § 6324A. 12 Smith and Johnson argue that they furnished
a valid special lien agreement to the IRS under 26 U.S.C. § 6324A; therefore, whether or not the
IRS formally acknowledged or provided receipt stating their personal liability was discharged,
their personal liability for the Estate’s federal tax was nevertheless discharged as a matter of law.
(Def.’s 2nd Mot. Summ. J., Dkt. No. 122.) The government argues that discharge under 26
U.S.C. § 2204(a) requires, as a prerequisite, a written application for discharge, which it claims
the defendants failed to provide. (Gov.’s Opp’n, Dkt. No. 135.)
Notwithstanding the government’s insistence that a written application is required for
discharge, it has entirely failed to demonstrate that section 2204 or any applicable authorities or
regulations require a specific format, form, or wording to make an application for discharge.
While section 2204 provides that a taxpayer may make a “written application . . . for
determination of the amount of the tax and discharge from personal liability therefor,” the
government has only identified that the application should be made to “the applicable internal
revenue officer with whom the estate tax return is required to be filed.” 26 C.F.R. § 20-2204-1.
The purpose of the application, according to the text of the statute and regulations, is for the
government to provide the fiduciary with a determination of the amount owed. See id.; 26 U.S.C.
12
Specifically, 26 U.S.C. § 2204(c) provides that:
[An] agreement which meets the requirements of section 6324A [26 USCS § 6324A]
(relating to special lien for estate tax deferred under section 6166 [26 USCS § 6166] shall
be treated as the furnishing of a bond with respect to the amount for which the time for
payment has been extended under section 6166 [26 USCS § 6166].
25
§ 2204(a). Discharge, however, is conditioned only on payment of the amount owed or the
furnishing of an appropriate lien or bond. Id.
In this case, as a result of the prior tax court proceeding about the value of the Hotel
shares and the second tax assessment in 1996 based on that settlement, both parties were already
fully aware of the amount of the tax owed by the Estate in August 1997 when the defendants
furnished their special lien. There is no dispute on that point. The court is not persuaded that a
separate written application is a substantive requirement of section 2204 because it appears that
its essential purposes are fulfilled not by a written application but by the payment of the tax
assessed or the furnishing of an appropriate bond. See Baccei v. United States, 632 F.3d 1140,
1145 (9th Cir. 2011) (“Substantial compliance with regulatory requirements may suffice when
such requirements are procedural and when the essential statutory purposes have been fulfilled.”)
(internal punctuation omitted). Because a separate written application is not a substantive
prerequisite, the court concludes that if the defendants furnished a valid special lien under
section 6324A, as a matter of law their personal liability as fiduciaries was discharged.
Even if the court is incorrect and section 2204 requires a written application as a
prerequisite to discharge, the court finds that the written communication between defendants and
the government leading up to defendants furnishing the special lien agreement constitutes a
written application pursuant to section 2204. The government initiated this communication. The
first sentence of Ms. Girard’s May 27, 1997 letter states that “The purpose of this letter is to
inform you of an alternative to your continued personal liability for the unpaid estate tax of the
Estate of Hazel Anna S. Smith that was deferred under 26 U.S.C. Section 6166.” (Ltr. from Ms.
Girard to Johnson dated May 27, 1997; Dkt. No. 122-2.) The government claims that the letter
was sent to protect its interest in the deferred tax payments, and it is true that later in the first
26
paragraph, the letter states that “This letter is being sent at this time because the government’s
interest must be adequately protected during the remaining period of your Section 6166
installment election.” (Id.) Having so stated, however, the letter goes on to state that “In order to
insure protection of the government’s interest and to terminate your personal liability, you as
personal representative of the estate may elect . . . [among other things] to furnish a Special Lien
for Estate Tax Deferred Under Section 6166, as described in 26 U.S.C. Section 6324A.” (Id.)
(Emphasis added.) The next two paragraphs of the letter go on to describe in detail the
requirements for electing a special lien, something the agent does not do with respect to the other
options she suggested. The letter also specifically states that “We have attached information to
assist you in completion of the application to elect the special lien.” (Id.) (Emphasis added.) The
information attached to the letter was an agreement form for the Agreement to Special Lien
under IRC 6324A, which the defendants completed and submitted prior to the IRS’s deadline.
These facts are undisputed. In light of them, along with the government’s failure to
identify any other form, method, procedure, or policy by which a “written application” is
otherwise properly made (assuming that a written application is a prerequisite), the court
concludes in the alternative that Smith and Johnson properly made a written application for
discharge under section 2204 when they timely followed the directions provided to them by the
IRS, who demonstrably understood that it was offering defendants a discharge of personal
fiduciary liability, even if in so doing it did not explicitly reference section 2204. 13 Having thus
concluded that the parties understood that an application for discharge was both suggested by the
13
Section 2204 also provides a special rule in the case of estate tax deferred under section 6166, namely,
that the government may provide the personal representative or executor a statement of the bond (or lien)
required “to be furnished within 9 months after receipt of the application,” but “if no notification is
received, the executor is discharged at the end of such 9 month period from personal liability for the tax
the payment of which has been extended.” 26 CFR § 20.2204-1. It is undisputed here that the government
did not provide any notice of any additional lien or bond amount it required at any time following receipt
of defendants’ special lien agreement.
27
IRS and made by the defendants, the court next evaluates whether defendants made a valid
special lien election.
ii.
Defendants Smith and Johnson Furnished a Valid Section 6324
Special Lien
When a personal representative elects to defer estate tax payments under 26 U.S.C. §
6166, he or she can furnish a special lien on certain property in favor of the United States. If the
three requirements for a valid special lien under 26 U.S.C. § 6324A are met, the IRS must accept
the special lien in lieu of a general lien under section 6324, 26 U.S.C. § 6324A(d)(4), and “the
deferred amount . . . shall be a lien in favor of the United States on the section 6166 lien
property.” 26 U.S.C. § 6324A(a).
The first requirement to furnish a lien under section 6324A is for the personal
representative to make an election. The Code of Federal Regulations states that “the election is
made by applying to the Internal Revenue Service office where the estate tax is filed” before the
tax and interest are paid in full. 26 CFR § 301.6324A-1(a). The government does not dispute that
the timeliness requirement was met here. The regulations go on to state that the “application is to
be a notice of election requesting the special lien . . . and is to be accompanied by the
[Agreement to lien].” Id. The government has also not disputed that defendants made a notice of
election requesting the special lien and that it was accompanied by the lien agreement document.
Accordingly, this requirement was met.
The second requirement to furnish a lien under section 6324A is for the personal
representative to file a proper agreement that contains (1) signatures by all parties having an
interest in the property consenting to the lien, (2) decedent’s name and Social Security number,
(3) the amount of the lien, (4) the fair market value of the property subject to the lien on the date
of decedent’s death as well as on the date of the election, (5) the amount of encumbrances to the
28
property on both dates, as above, (6) a clear description of the property subject to the lien, and
(7) designation of an agent for the beneficiaries of the estate and parties consenting to the lien for
all dealings with the IRS. 26 CFR § 301.6324A-1(b). It is undisputed that the Agreement to
Special Lien Under IRC Section 6324A filed by the defendants in August 1997 met the above
requirements. Although the government implies that the subsequent encumbrance of the Hotel
stock in 1999 or 2000 creates a dispute that the defendants did not treat the stock as if was
subject to a special lien, this is not a genuine dispute of material fact for two reasons. First, at the
time the agreement was submitted to the IRS, defendants correctly noted that the stock was
unencumbered. It only became encumbered several years after the agreement was filed. Second,
special lien property is not required to start out as or remain unencumbered under section 6324A;
in fact, section 6324A(b)(2)(B) anticipates that the initial valuation of lien property should take
into account any encumbrances, and section 6324A(d)(3) provides instructions as to the priorities
of security interests. Furthermore, the statute allows the IRS to accelerate the deferred payments
if at any time it determines the value of the special lien property is not adequate. 26 U.S.C. §
6324A(d)(5). As a result, the fact that defendants subsequently used the Hotel stock as collateral
does not invalidate the previous creation of a proper lien and the second requirement has been
met.
The third and final requirement to furnish a lien under section 6324A is that the section
6166 lien property (i.e. the collateral) must satisfy the requirements of the statute. The statute
requires the lien property to be an interest “in real and other property to the extent such interests
can be expected to survive the deferral period, and are designated in the agreement.” 26 U.S.C. §
6324A(b)(1). And, although the IRS cannot require the lien property to have more than a
maximum value consisting of the deferred tax amount plus the required interest, the statute does
29
not require the lien property to have a minimum value to create a special lien in the property. Id.
at (b)(2). While the government does not dispute that the Hotel stock was properly designated in
the agreement, it disputes whether the stock was expected to survive the deferral period and
whether its value was sufficient. The court does not find that either claim is a genuine dispute of
material fact and addresses them separately below.
(a)
Survival
The government disputes the Report of Jeffrey S. Pickett, defendants’ expert, as to the
history of the business and its claim that the Hotel had been in operation for decades without
interruption or financial stress, which supports the survivability of its stock. (Gov.’s Opp’n 9,
Dkt. No. 135.) The government also claims that the internal memorandum statement of its agent,
Ms. Girard, that “I have analyzed the security and feel a lien under IRC 6324A against the stock
will adequately secure the liability for the remainder of the IRC 6166 election” is not binding
on the government. (IRS Memo. dated Aug. 21, 1997; Dkt. No. 122-2, p. 13.) (Emphasis added.)
With respect to defendants’ expert report, the court reiterates that while it is defendants’
burden to come forth with evidence to support its motion for summary judgment, once they have
done so, the burden shifts to the government to “set forth specific facts showing that there is a
genuine issue for trial.” Sally Beauty Co., 304 F.3d at 971. After the court granted defendants’
motion to submit its expert’s report, it authorized the government to submit its own expert report.
The government’s expert report does not set forth any specific facts suggesting that the Hotel’s
financial stability or history were not as represented. (Expert Review Report of Don M.
Drysdale, Dkt. No. 176-1.) In fact, the report states only that Mr. Pickett’s report should have
included additional information about facilities, organizational structure, management team,
classes of equity interests and rights attached thereto, products or services offered, and strategy
30
and future plans to assist the government in assessing risk. (Id. at 11-13.) The government argues
that a jury could infer from its expert’s report that the defendants failed to meet their burden to
come forth with evidence supporting the survivability of the lien property. The court disagrees.
Without specific facts showing a genuine dispute as to the parties’ expectations about the
survivability of the Hotel stock, it is the government who has failed to meet its burden. 14
Perhaps more importantly, however, Ms. Girard’s statement constitutes a party admission
by the government that it had, in fact, evaluated the survivability of the Hotel stock for the
duration of the deferral and found it to be adequate at the time it was offered. The government
argues that an IRS agent’s statement cannot bind the agency and for support refers the court to
Sidell v. Comm’r, 225 F.3d 103, 111 (1st Cir. 2000); Connecticut Gen. Life Ins. Co. v. Comm’r,
177 F.3d 136, 145 (3d Cir. 1999); Armco, Inc. v. Comm’r, 87 T.C. 865, 867 (T.C. 1986); and
Honeywell, Inc. v. United States, 661 F.2d 182, 185-86 (Ct. Cl. 1981). These cases, however,
reference individual agent views about or interpretations of IRS regulations and policies. As a
result, they do not apply here to Ms. Girard’s statement about her factual evaluation that the
Hotel stock would survive the deferral period, which is neither a regulation nor a policy. As a
14
Furthermore, as to survivability, the IRS Office of Chief Counsel has provided internal guidance that
although
“[t]here is a risk that the Service may err in its conclusion [about the survivability of closely held
stock] . . . Congress intended that the Service bear such a risk. Comm. on Ways and Means, 94th
Cong., Background Materials on Federal Estate and Gift Taxation 302, (Comm. Print 1969)
(“[t]he Government will not only permit the deferral of taxes, but will bear part of the risk that the
illiquid asset may decline in value during the deferral period”). If Congress had intended that the
Service be assured payment, Congress would have required that a bond be provided to the Service
for deferred estate taxes.
IRS CCA 200747019 (IRS 2007). (Dkt. No. 122-1, p. 21.) Although letter rulings and memoranda such
as this are not precedent, courts commonly rely on such statements because they “reveal the interpretation
put upon the statute by the agency charged with the responsibility of administering the revenue laws.”
Estate of Roski v. Comm’r, 128 T.C. 113, 120 (T.C. 2007); Thurman v. Comm’r, T.C. Memo 1998-233
(T.C. 1998); Hanover Bank v. Comm’r, 369 U.S. 672, 686 (1962).
31
result, Ms. Girard’s admission persuades the court that there is no genuine dispute of fact that
defendants met the survivability requirement for a special lien.
(b)
Value
Although the parties’ biggest apparent dispute about the special lien requirements is
whether the value of the Hotel stock was sufficient, the court finds this dispute to be nonmaterial.
First, section 6324A does not require a minimum value to be met for a special lien to arise.
Taxpayer election of lien property expected to survive the deferral period and designated in an
appropriate agreement “shall be a lien in favor of the United States on the section 6166
property.” 26 U.S.C. § 6324A(a) (emphasis added). Thus, the government’s contention that it
properly rejected the lien property because of “uncertain market value” is not well taken. If the
value of lien property is too low, is does not mean that the special lien did not arise, it just means
that the government is under-secured. The government’s remedy for insufficient value to secure
deferred tax obligations is to accept a bond in the amount of the shortfall, 26 U.S.C. §
6324A(b)(3), or to require the addition of property to the special lien agreement. 26 U.S.C. §
6324A(d)(5). It is undisputed that rather than making such specific requests, the government
instead purported to reject the Hotel stock as collateral. But, because section 6324A is a taxpayer
election, nothing in the statute authorizes the government to reject the election. It must be
consented to not by the government, but by “all parties having any interest on the property” that
creates the lien, as it was here. 26 CFR § 301.6324A-1(b).
Furthermore, the court is not persuaded that the government’s attempt to reject the stock
was based on consideration of its value as opposed to consideration of its nature. As explained
above, Ms. Girard’s letters and memoranda constitute party admissions. Ms. Girard’s rejection
letter dated November 6, 1997 states “Thank you for the information you provided. As I stated,
32
this District has not accepted closely held stock as security for the remainder of IRC 6166
elections.” (Dkt. No. 122-2, p. 15.) After informing defendants that she had sought guidance
from District Counsel, Ms. Girard went on to state that “They have advised our office that
closely held stock should not be accepted as collateral by the Internal Revenue Service because
the IRS can not sell stock at a public auction as it violates securities regulations.” (Id.) A review
of Ms. Girard’s internal memorandum seeking guidance from District Counsel shows that she
reported that “The four Smith children are offering 4,768 shares of stock giving the security
pledged a value of $6,092,578” for an unpaid assessment of $1,889,970 and an amount of
security required of $2,192,365.20. (Id.) She then stated that “I have analyzed the security and
feel a lien under IRC 6324A against the stock will adequately secure the liability for the
remainder of the IRC 6166 election.” (Emphasis added.) Ms. Girard then went on to state that
“The District does not have any IRC 6324A liens against stock” and asked for guidance
regarding security consisting of stock in a closely held corporation. (Id.) Ms. Girard’s concern,
then, was not value, as she appeared to find it adequate, but rather the nature of the property. 15
Nothing about the nature of closely held businesses permits rejection of the security by
the IRS. The IRS has previously accepted special liens under section 6324A in closely held
businesses. IRS v. Skiba (In re Roth), 301 B.R. 451 (W.D. Pa. 2003) (286 shares in closely held
car dealership); Center Heights Lumber Co. v. United States, 1999 U.S. Dist. LEXIS 7495 (S.D.
Ind. 1999) (1995 creation of 6324A lien on closely held stock). Nothing in the plain language of
section 6324A provides a mechanism for the IRS to reject the section 6166 collateral if it meets
15
The government also argues that Ms. Girard’s follow-up letter dated January 20, 1998 is a discussion
about the IRS’s concerns about the fair market value of the closely held stock as opposed to a discussion
of its nature. Even if the government is correct, a special lien in the Hotel stock offered by defendants’
agreement still arose, and could not be rejected because the government failed in its obligation to value
the stock at the time of the election and make a request for a specific amount of additional property or
bond it believed it required as security.
33
the requirements of the statute. Furthermore, the title of section 6166 specifically contemplates
acceptance of liens in closely held businesses: “Extension of time for payment of estate tax
where estate consists largely of interest in closely held business.” Case law discussing the
purpose of section 6166 suggests that the government’s argument that it cannot (or should not)
accept stock in closely held businesses for special liens to secure taxes deferred under section
6166 is unsupported. Roski, 128 T.C. at 129-130 (stating that section 6166 was enacted because
existing law was “inadequate to deal with the liquidity problems experienced by estates in which
a substantial portion of the assets consist of a closely held business.”); Estate of Bell v. Comm’r,
928 F.2d 901, 902 (9th Cir. 1991) (“The purpose of section 6166 is to prevent the forced
liquidation of closely held businesses because substantial estate taxes must be paid.”). And,
according to IRS Chief Counsel, the IRS must accept the collateral if it meets the requirements
and has no authority to reject it because it prefers alternative collateral. 16 IRS CCA 2008030016
(IRS 2007). (Dkt. No. 122-1, p. 32.)
To the extent that the government’s argument about the stock’s value is not that the
special lien did not arise, but rather that the discharge under section 2204 would not have
automatically occurred had the lien been insufficient to cover the unpaid tax and interest, the
court refers again to the applicable burden of proof. Defendants have presented evidence that at
16
Specifically, the memorandum states:
If the three requirements under I.R.C. § 6324A are met, the I.R.C. § 6324A special lien arises and
the collateral must be accepted by the Service. The Service does not have the authority to reject
collateral proffered by the Estate on the grounds that it would be burdensome for the Service to
determine the value. Nor does the Service have the authority to reject collateral proffered by the
Estate because the Service would prefer other collateral. Congress gave the Service a very
limited role in the creation of the I.R.C. § 6324A special lien: the Service determines whether the
statutory requirements have been met. If the statutory requirements have been met, the special
estate tax lien arises under the statute and the Service must accept the Interest.
IRS CCA 2008030016 (IRS 2007). (Emphases added.)
34
the time they applied for the special lien, the value of the offered stock was nearly triple the
amount of unpaid tax and interest. 17 (Agreement to Special Lien Under IRC Section 6324A, Dkt.
122-2, p. 9.) Defendants have also presented Ms. Girard’s party admission that the stock would
“adequately secure the liability.” 18 (Dkt. No. 122-2, p. 15.) In addition to this, the defendants
have presented evidence from their expert witness that on the two relevant dates, the stock
pledged as collateral was worth $4,710,000 as of June 2, 1992 and $5,800,000 at the time of the
furnishing of the Special Lien Agreement on August 4, 1997. (See Dkt. No. 122 ¶ 18, pp. 10, 22;
and Pickett Report (Ex. 10 thereto) at 032-038.) In response to this evidence, the government’s
expert, Mr. Drysdale, has only opined that Mr. Pickett overvalued the Hotel stock, but he has
failed to provide his own valuation. Just as with the government’s argument about survivability,
the government argues that a jury could infer from Mr. Drysdale’s report that the defendants
failed to meet their burden to come forth with evidence supporting the sufficiency of the value of
the lien property. The court disagrees. Without specific contrary facts from which a jury could
find that the stock value was less than the amount owed—and not just lower than Mr. Pickett’s
valuation—it is again the government who has failed to meet its burden to rebut the defendants’
evidence. MacPherson, 98 F.3d at 1245 (“[M]ore than a mere “scintilla” of evidence is needed to
create a genuine issue of material fact.”).
17
The $1,273 value per share was based upon the settlement reached with the IRS in the tax court case in
1996.
18
While Ms. Girard’s January 20, 1998 letter subsequently raised questions about whether this value for
purposes of the estate tax assessment was the appropriate value for security purposes, it never actually
valued the stock. (Ltr. from Ms. Girard dated Jan. 20, 1998; Dkt. No. 122-2, pp. 19-20.) The IRS is the
party with the duty to value the stock if it disagreed with defendants’ valuation, and it failed to perform
this duty. Neither is the court persuaded by the government’s argument now that Ms. Girard’s subsequent
letter represents that she believed the stock had no value, or at least a value less than the amount of tax
and interest owed.
35
For the foregoing reasons, the court finds that the three requirements for a valid special
lien are met under 26 U.S.C. § 6324A. Therefore, the IRS had no discretion to reject the special
lien, and that lien constitutes the bond required pursuant to the discharge statute. 26 U.S.C. §
2204. Consequently, Johnson and Smith’s fiduciary liability as personal representatives of the
Estate for the unpaid estate tax was discharged as a matter of law and the government’s claim for
fiduciary liability under 31 U.S.C. § 3713(b) is moot.
4.
Statute of Limitations Expired on Contract Enforcement Claim
The court now turns to the government’s claim seeking to enforce the terms of the
Distribution Agreement against the defendants, which was raised for the first time in the
government’s Amended Complaint filed July 31, 2013. 19 (Am. Compl. 12, Dkt. No. 77.) The
government claims that the December 31, 1992 agreement between Smith and Johnson in their
capacities as trustees of the Trust and personal representatives of the Estate and the four
defendant beneficiaries is a contract to which they are third party beneficiaries. The government
seeks one quarter of the unpaid estate tax and interest due from each beneficiary as a result of
this language in the contract:
A portion of the total federal estate tax upon the Estate of Anna Smith is being
deferred and is the equal obligation of the BENEFICIARIES to pay as THE
SAME becomes due. Likewise, if, upon audit, additional federal estate taxes . . .
are found to be owing, the responsibility for any such additional taxes, interest or
penalties will be borne equally by the BENEFICIARIES. 20
(Agreement ¶ 6, p. 2; Dkt. No. 32-8.)
19
In the Amended Complaint, the contract enforcement claim is the government’s fourth cause of action.
(Dkt. No. 77.)
20
Because the deceased beneficiaries have been dismissed from this case, at best the government’s claim
is for one quarter of the unpaid estate tax and interest due each from Smith and Johnson as the surviving
beneficiary parties to the contract.
36
Defendants do not dispute that the Distribution Agreement is a contract and that the
government is a third party beneficiary with rights under the agreement. Defendants argue,
instead, that the government’s rights are time barred due to the applicable six year state statute of
limitations on contract claims. Utah Code. Ann. § 78B-2-309(2). The “statute of limitations
ordinarily begins to run when the breach occurs.” Butcher v. Gilroy, 744 P.2d 311, 313 (Utah Ct.
App. 1987). When a party refuses to perform under a contract, the limitation period begins to
run. See S&G Inc. v. Intermountain Power Agency, 913 P.2d 735, 740-41 (Utah 1996). The facts
are undisputed. The deferred tax owing as a result of the section 6166 election was about $1.5
million, interest payments on which were paid until the Hotel’s bankruptcy proceedings in 2002.
At that time, Smith and Johnson requested a one year extension to pay the next estate tax
installment due. When no payments were made thereafter, the IRS sent delinquent billing notices
dated August 28 and December 2, 2003, the latter of which demanded payment by December 15,
2003 and stated that if payment was not received, “the whole balance of the account will be due
immediately.” It is undisputed that no payments were made and that the section 6166 payment
extension defaulted as of December 15, 2003. When the beneficiaries failed to pay their
respective shares of the tax due as of that date, each of them breached the Distribution
Agreement. This breach, according to the defendants, initiated the running of the state statute of
limitations for contracts that expired six years later on December 15, 2009. It is also undisputed,
the court notes, that the IRS did not become fully aware of the Distribution Agreement and its
terms until June 2005, when counsel for defendants sent a copy to the IRS. Even if the court uses
June 2005 as the date triggering the running of the statute of limitations, without deciding that it
must, it had expired no later than June 2011, which is two years prior to the government filing its
Amended Complaint containing the breach of contract claims.
37
For its part, the government claims that the applicable statute of limitations is not the
state statute of limitations for contracts, but the federal statute of limitations on collections of tax
assessments pursuant to 26 U.S.C. § 6502. 21 (United States’ Reply Mem. 18, Dkt. No. 146.)
(“When the United States uses a state law remedy to collect taxes, its ability to do so is not
governed or shortened by state procedural rules or state law limitations. Instead § 6502 of the
Internal Revenue Code and any applicable federal extensions control limitations.”) Upon review
of the relevant case law, the court concludes that the government is incorrect on the facts of this
case.
The government points the court to U.S. v. Summerlin, a 1940 case where the United
States was the assignee of a creditor’s claim against the estate of a decedent. 310 U.S. 414
(1940). In Summerlin, the Supreme Court reversed a determination that a Florida state statute of
limitations applied when the United States, acting in its governmental capacity, becomes entitled
to a claim and asserts its claim in that right. Id. at 417. To foreclose any argument that § 6502(a)
is not the relevant statute of limitations here, the government cites U.S. v. Galletti for the
proposition that “the limitations period resulting from a proper assessment governs the extent of
21
Section 6502(a) provides the following limitations period as to collections after assessment of tax:
(a) Length of period. Where the assessment of any tax imposed by this title has been made within
the period of limitation properly applicable thereto, such tax may be collected by levy or by a
proceeding in court, but only if the levy is made or the proceeding begun—
(1) Within 10 years after the assessment of the tax, or
(2) if
(A) There is an installment agreement between the taxpayer and the Secretary,
prior to the date which is 90 days after the expiration of any period for
collection agreed upon in writing by the Secretary and the taxpayer at the
time the installment agreement was entered into; or
(B) There is a release of levy under section 6343 after such 10-year period, prior
to the expiration of any period for collection agreed upon in writing by the
Secretary and the taxpayer before such release.
If a timely proceeding in court for the collection of a tax is commenced, the period during
which such tax may be collected by levy shall be extended and shall not expire until the
liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied
or becomes unenforceable.
38
time for the enforcement of the tax liability.” 541 U.S. 114, 123 (2004) (internal punctuation
omitted) (citing U.S. v. Updike, 281 U.S. 489 (1930)). The Tenth Circuit followed these
precedents in a case where the government sought to collect a tax assessment against the sole
shareholder distributee of a now-defunct corporation taxpayer in U.S. v. Holmes, 727 F.3d 1230
(10th Cir. 2013). The shareholder defended on the basis of a Colorado state statute of limitations
for collections by creditors of a dissolved partnership. Id. at 1232. The Tenth Circuit stated that
determining “[w]hether in general a state-law action brought by the United States is subject to a
federal or state statute of limitations is a difficult question,” but that in Holmes, notwithstanding
that the government was “invoking a provision of state law” to hold the shareholder accountable
for the liability of the taxpayer corporation, the reality was that “the present suit, though not
against the corporation but against its transferee to subject assets in his hands to the payment of
the tax, is in every real sense a proceeding in court to collect a tax.” Id. at 1235. As a result, the
Tenth Circuit determined that federal law, not the state statute of limitations, governed the time
limit on collections enforcement. Id.
The court also located a 1965 Sixth Circuit case that appears to have applied Summerlin
in circumstances factually similar to those at issue here. In U.S. v. Parker House Sausage Co.,
344 F.2d 787 (1965), defendant Parker House entered into a sales contract to purchase real estate
subject to a tax lien for the seller’s withholding taxes. The contract provided that the purchaser
would assume and pay the tax liabilities. The government filed suit for payment of the tax as a
third party beneficiary of the sales contract requiring Parker House as purchaser to pay the
liability. Defendants pled the Michigan six-year statute of limitations for contracts as a defense,
claiming that the government’s action did not seek to enforce a tax liability against it (as it was
not the taxpayer), but was instead a civil action for breach of contract and thus subject to the
39
state statute of limitations. Without analysis, but citing to Summerlin, the Sixth Circuit rejected
the defense and stated that “[t]he United States is not barred in an action brought to enforce its
claim by a state statute of limitations.” Id. at 788.
Based on a subsequent U.S. Supreme Court ruling, however, the court concludes that
Parker House was decided incorrectly. In U.S. v. California, 507 U.S. 746 (1993), the Supreme
Court indicated that a more robust analysis of the cause of action under which the government is
proceeding is required before simply relying on the general assertion in Summerlin and related
cases that the government is not bound by state statutes of limitations. U.S. v. California
involved the government’s attempt to recover taxes it paid that it alleges were wrongfully
assessed against one of its private contractors under California law. The initial cause of action it
asserted was a federal common law cause of action for “money had and received,” an implied-inlaw contract. Id. at 749. The Supreme Court first determined that the government did not have a
federal cause of action for an implied contract because its position in the proceeding was
essentially that of a subrogor of the private contractor’s claims against California. Id. at 756. The
private contractor’s rights as subrogee had lapsed under the state statute of limitations and its
claims were barred; thus, under traditional subrogation principles, the United States’ claims
would also be time barred. Id. The government argued that its claims were not limited by the
state’s statute of limitations on the basis, among other cases, of Summerlin’s statement that
“[w]hen the United States becomes entitled to a claim, acting in its governmental capacity, and
asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so
as to become subject to a state statute putting a time limit upon enforcement.” Summerlin, supra,
at 417. The Supreme Court disagreed. It proceeded to distinguish Summerlin and the other cases
relied on by the government on the basis that, first, in those cases the rights upon which the
40
government were proceeding were “obtained by the Government through, or created by, a
federal statute,” and second, because in those proceedings, “[t]he government was proceeding in
its sovereign capacity.” Id. at 757. While the Court ultimately did not provide a definitive answer
as to “[w]hether in general a state-law action brought by the United States is subject to a federal
or state statute of limitations,” it did determine that Guaranty Trust Co. v. United States, 304
U.S. 126 (1938), provided guidance, namely, that if “the proof demonstrated that the United
States never acquired a right free of a pre-existing infirmity, the running of limitations against its
assignor,” then “[e]ven if the United States had a right to be free from the statute of limitations, it
was deprived of no right on these facts.” U.S. v. California at 758. In other words, “[b]ecause the
Government waited until after the state statute of limitations had run against [its private
contractor] to bring suit, the Government was not subrogated to a right free of a pre-existing
infirmity.” Id. at 758-59 (internal punctuation omitted).
U.S. v. California, then, requires this court to first evaluate the nature of the
government’s claim to determine whether it was obtained through or created by a federal statute,
and second, to determine whether it is pursuing the claim in its sovereign capacity. Only if it
meets those requirements has it acquired a right not barred by the state statute of limitations.
Here, the parties all agree that the nature of the government’s claim is as a third-party beneficiary
to the contract entered into by Smith and Johnson as trustees of the Trust and personal
representatives of the Estate with the four defendant children. While the underlying estate tax
debt was created by federal statute, the government’s breach of contract claim was not obtained
through, or created by a federal statute, but by virtue of the government being an intended thirdparty beneficiary of a contract governed by state law. See U.S. v. California at 757. This fact
means that the state statute of limitations period, not the federal limitations period, applies to the
41
breach of contract claim. The government also cannot meet the second requirement to avoid
being subject to the state statute of limitation, because to prevail in the breach of contract claim,
it must proceed as a third-party beneficiary rather than in its sovereign capacity. 22 See id. As a
third-party beneficiary, the government stands in the shoes of and “takes on the rights and
limitations” that Smith and Johnson have as trustees and/or personal representatives to enforce
the right of contribution against the beneficiaries, “one limitation being a time limit for filing
civil suits.” See Flying Phoenix Corp. v. Creative Packaging Mach., Inc., 681 F.3d 1198, 1201
(10th Cir. 2012). See also Rio Algom Corp. v. Jimco Ltd., 618 P.2d 497 (Utah 1980) (stating that
third party beneficiaries are not entitled to greater rights than the actual parties to a contract). In
the language of U.S. v. California, the government acquired a right with a “pre-existing
infirmity,” i.e. the state statute of limitations. U.S. v. California at 759. After stepping into Smith
and Johnson’s shoes as a third-party beneficiary, the government then waited until after the
limitations period had run to bring suit against the contract beneficiaries. Accordingly, the court
finds that the government’s claim for breach of contract is time barred.
5.
The Government Cannot Foreclose Its Section 6321 Lien Against an Expired Asset
The government’s final claim 23 seeks to foreclose its federal tax lien, which arose
pursuant to 26 U.S.C. § 6321 at the time the tax was assessed, against any rights which were
created by the Distribution Agreement. The parties each raise numerous arguments for and
22
Notwithstanding the Tenth Circuit’s language in Holmes that “the present suit . . . is in every real sense
a proceeding in court to collect a tax,” the facts here are distinguishable from those in Holmes and require
a different result. Holmes at 1232. The difference is that the government in Holmes was acting in its
sovereign capacity to collect a tax debt against the sole shareholder of a defunct corporation on the basis
of a state law that permitted debt collections against shareholder distributees of dissolved corporations. Id.
Here, the government cannot act on the contract claim unless it acts in the capacity of a third-party
beneficiary as opposed to a sovereign.
23
This claim is asserted as the third cause of action in the Amended Complaint. (Dkt. No. 77.)
42
against this claim, but the court finds that two of them are both simple and dispositive. 24 First,
pursuant to 26 U.S.C. § 2204(c), a special lien agreement that meets all of the requirements of
section 6324A “shall be treated as the furnishing of bond.” Following that, section 6325(a)
provides that the IRS “shall issue a certificate of release of any lien imposed” within 30 days of
being timely furnished an acceptable bond for the assessed tax. 26 U.S.C. § 6325. The court
determined in section 3, supra, that defendants furnished a special lien agreement that met all of
the requirements of section 6324A and that the IRS was required to accept, and it is thus a bond
under section 2204(c). As a result, the government’s various tax liens under section 6321 were
required to be released within 30 days of being furnished, and there is no section 6321 general
lien remaining upon which the government can foreclose.
Second, although the government subsequently filed a Notice of Tax Lien in 2005 and a
corrected notice in 2007, presumably because the Estate defaulted on its section 6166 payments,
the government released these liens in both 2007 and in 2012, including after filing its lawsuit in
this matter. While it is true that 26 U.S.C. § 6325(f)(2) authorizes the IRS to revoke lien
releases—whether released mistakenly or not—the Revocations filed by the government were
not effective. The 2007 Revocation was ineffective because it is undisputed that the government
failed to file it in the Salt Lake County recorder’s office as required by statute. 26 U.S.C. §
6325(f)(2)(B). The 2012 Revocation was ineffective because by the time the government
properly refiled it in the Salt Lake county recorder’s office on May 20, 2015, the asset it sought
to attach—the Distribution Agreement—was no longer a “right to property” held by the taxpayer
Estate because the statute of limitations allowing it to be enforced against defendants had
24
As a result of finding that the following two points are dispositive on this issue, the court declines to
address the parties’ remaining arguments.
43
expired. 25 The “property” or “right to property” to which a lien can attach is defined by state law.
In Gardner v. U.S., 34 F.3d 985 (10th Cir. 1994), the Tenth Circuit stated:
Additionally, although federal law delineates the standard for determining when a federal
tax lien attaches, [t]he threshold question in this case, as in all cases where the Federal
Government asserts its tax lien, is whether and to what extent the taxpayer had
“property” or “rights to property” to which the tax lien could attach. In answering that
question, both federal and state courts must look to state law, for it has long been the rule
that in the application of a federal revenue act, state law controls in determining the
nature of the legal interest which the taxpayer had in the property . . . sought to be
reached by the statute.
(internal punctuation omitted) (emphasis added). The Tenth Circuit also observed “[i]t has been
aptly noted that the Government’s rights can rise no higher than those of the taxpayer to whom
the property belongs. . . Moreover, the tax collector not only steps into the taxpayer’s shoes but
must go barefoot if the shoes wear out.” Id. (internal punctuation omitted), citing 4 B. Bittker,
Federal Taxation of Income, Estates, and Gifts paragraph 111.5.4, at 111-102 (1981); and U.S. v.
Rodgers, 461 U.S. 677, 690-91 (1983). Here, because the taxpayer Estate’s rights to enforce the
Distribution Agreement had been long expired by 2015, the government is barefoot with respect
to its section 6321 tax lien. There is nothing to which its 2015 Revocation or its newly filed 2015
Notice of Tax Lien could attach. Because the taxpayer Estate no longer has “property” or “rights
to property” to which its lien could attach in 2015, the government’s action to foreclose the lien
against the Distribution Agreement must fail. 26
25
This conclusion also assumes that the government’s failure to name the Estate as a party is not in itself
fatal to its claim here.
26
26 U.S.C. § 6322 provides that the government’s section 6321 tax lien arises at the time the taxes are
assessed and continues “until the liability for the amount so assessed . . . is satisfied or becomes
unenforceable by reason of lapse of time.” Contrary to the government’s position, the court finds that the
language “or becomes unenforceable by reason of lapse of time” must have some meaning that precludes
its ability to extend the lien indefinitely, in this case, at least 20 to 24 years from the date of assessment.
The government had ample time during that period to protect its rights and failed to do so.
44
CONCLUSION
For all of the foregoing reasons, the court GRANTS defendants’ Motion to Reconsider
(Dkt. No. 119), VACATES its previous grant of summary judgment on the government’s Motion
for Summary Judgment (Dkt. No. 87) and GRANTS summary judgment on defendants’ Motion
for Partial Summary Judgment (Dkt. No. 86) finding that the trustees of the Trust are not liable
for the unpaid federal estate tax and interest under section 6324(a)(2) because Trust assets are
included in the gross estate under section 2033.
In addition, the court GRANTS defendants’ Motion for Summary Judgment (Dkt. No.
122) and finds that the trustees of the Trust were discharged from personal liability for the
unpaid federal estate tax under section 2004 because they properly furnished a special lien under
section 6324A.
The court previously granted in part the United States’ Second Motion for Summary
Judgment (Dkt. No. 117) on the Amended Complaint’s first claim for relief that defendants are
liable, pursuant to 26 U.S.C. § 6324(a)(2), for the unpaid estate tax liabilities to the extent of the
proceeds they received as beneficiaries of Decedent’s life insurance policies. The court now
clarifies that because this decision dismisses defendants Barnwell and Devine from this action,
the government’s recovery is limited to life insurance proceeds received by defendants Smith
and Johnson. The government should file a motion requesting judgment in the appropriate
amount on this claim.
Finally, as to the remainder of the government’s Second Motion for Summary Judgment
(Dkt. No. 117), the court DENIES the remainder of the government’s first claim for relief in the
Amended Complaint for trustee or transferee liability under Section 6324(a)(2); finds MOOT the
government’s second claim for relief for fiduciary liability under 31 U.S.C. § 3713; DENIES the
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government’s third claim for relief for foreclosure of federal tax lien against rights created by the
Distribution Agreement; and DENIES the government’s fourth claim for relief for breach of
contract as a third party beneficiary to the Distribution Agreement. The Clerk of Court is directed
to dismiss defendants Barnwell and Devine from this action and enter Judgment as above, with
the exception of the court’s partial grant of relief on plaintiff’s first cause of action, which
remains to be resolved by the court.
SO ORDERED this 1st day of December, 2016.
BY THE COURT:
_______________________________
Clark Waddoups
United States District Judge
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