If someone gives you property and then dies and more than ten years has passed since the gift, can the IRS sue you to collect the amount of the gift from you? Most would think the answer is a resounding “no,” as the recipient isn’t liable for unpaid gift taxes and the statute of limitations for collecting the tax had long passed. Those who said “no” should read the Estate of Elson, No. 18-11325 (D.N.J. 2019) case.
Facts & Procedural History
The decedent gifted real estate to several individuals in 2004. The decedent didn’t file Federal gift tax returns and did not pay Federal gift taxes. He died in 2006, two years later.
The executrix for the estate filed a gift tax return in 2009, three years later. It reported approx. $80,000 of gift taxes. The IRS audited the gift tax return and, in 2011, assessed an additional $375,000 of gift taxes for the estate. Presumably the IRS also proposed substantial failure to file and pay penalties as well.
The estate made several sizable payments, but did not pay off the balance. The amount was still over $600,000 in 2017. The IRS brought suit to collect the taxes in 2018, which is 14 years after the gifts were made. The suit was brought against the individuals who had received the gifts in 2004.
The IRS’s Time To Collect
The IRS generally has ten years to collect taxes. This collection statute can be extended by certain events, which aren’t relevant to this article.
The ten year period begins when the tax is assessed. The tax is assessed at the time the IRS records the liability on its books. This is typically the date the taxpayer timely-files its tax return or the date the IRS receives the taxpayer’s late-filed tax return. If the IRS makes an additional assessment after this, this is the later date of the assessment (up to the amount of the additional assessment).
This brings in the IRS’s assessment statute. The IRS generally has three years to assess taxes. This too can be extended by certain events that aren’t relevant to this article.
One event that is relevant pertains to estate tax returns. The three year assessment period is extended to six years for an estate tax return that omits sizeable taxable gifts (the estate tax return calculation factors in lifetime gifts in computing the estate tax).
In this case, the court opinion does not say when the estate tax return was filed. It would seem that the estate tax return was filed in 2006 or 2007. If this is correct, the IRS would have until 2012 or 2013 to assess additional estate tax based on the unfiled and unpaid gift taxes.
The court notes that the IRS assessed approx. $300,000 of tax on May 2, 2011 for the estate–which the court says was timely. According to the court, this May 2, 2011 was the start for the ten year collection period. Since the IRS filed its lawsuit within ten years of this 2011 date, the court concludes that the IRS’s lawsuit was timely.
But this pertains to the assessment for the estate. How is the IRS collecting able to collect against the recipients of the gifts after this period when there was no assessment against the recipients?
The IRS’s Ability to Collect from Recipients of Gifts
The IRS generally has to invoke its transferee liability powers to collect tax against a third party. To impose transferee liability, the IRS generally has one year after the expiration of the time to assess the liability for the original party.
So if the IRS’s assessment period for the estate ended in 2012 or 2013, the IRS could have assessed the individual gift recipients until one year after that. But the IRS did not do so. The IRS never assessed tax against the recipients. The government brought suit against them instead.
The government brought suit under Sec. 6324. This Code section provides for transferee liability for estate and gift taxes. The court noted that “the overall purpose of § 6324 is to impose liability on the decedent’s estate and upon transferees or donees of the estate when the estate fails to pay federal taxes.”
This is accomplished by providing the IRS with a lien on the transferee for ten years from the date of the gift. In this case, the gifts were in 2004. The IRS’s Sec. 6324 lien was valid until 2014–right?
Nope. The court concluded that the ten year period doesn’t apply to the transferee. Instead, the court said that the general ten year rule for collecting from the person who made the gifts applies, as described above. Since those rules were satisfied in this case, according to the court, the IRS could proceed against the transferee after fourteen years.
That the recipient of a gift can be liable for taxes the donor failed to pay after more than a decade has passed seems unfair. Such a rule provides little in the way of finality for those trying to settle estates. This appears to be an issue to be reviewed by Congress and the political process.