The IRS lien is broad and attaches to the taxpayer’s property. Creative tax attorneys have tried to find ways around the lien with limited success. The recent Saccullo v. United States, No. 17-14546 (11th Cir. 2019) case raises the question as to whether a defectively executed deed be used to defeat the IRS’s estate tax lien.
Facts & Procedural History
The taxpayer’s father transferred property to a trust for the taxpayer-son in 1998. The father then died in 2005.
The IRS filed an estate tax lien against the property based on the theory that the father had failed to get a second witness for the execution of the deed. The second witness is required by Florida law. Thus, according to the IRS, the property was still in the estate at the time of the fathers death and subject to the Federal estate tax.
Florida law also has a savings statute. This statute says that a defect in transferring property is cured after five years. Thus, the taxpayer-son argued that the defect in the deed was cured in 2003–two years before the IRS filed its estate tax lien.
Federal Tax Law Preempts State Law
The general rule is that Federal tax law looks to state property law to determine what property rights exist. Once those rights exist, Federal tax law dictates the consequences.
Also, state laws that would limit the IRS’s ability to collect Federal taxes are preempted by Federal law. Put another way, state law does not dictate whether the IRS can collect taxes.
State Savings Law Transfer Before Lien Filed
The IRS argued that it was authorized to collect the estate tax under Federal law. It further argued that the Florida savings statute does not trump Federal law.
The appeals court agreed with the IRS. But the court also agreed with the taxpayer. The appeals court held that the Florida savings statute cured the deed after the five year period. This means that the property was transferred to the trust before the IRS filed its estate tax lien. As a result, the IRS estate tax lien did not reach the property.
This case leaves one wondering whether intentionally defective transfers can be used to buy time to see what the most tax-advantaged position is after the decedent dies. To the extent a transfer is not preferred in the future, but before the five year period lapses, the taxpayer could take steps to ensure that the state savings law is not triggered. If a transfer is preferred, the taxpayer could do nothing and trigger the statute.