IRS TAX PROBLEMS – Personal Liability of Executor For Taxes

IRS TAX PROBLEMS – Personal Liability of Executor For Taxes

In a recent case of United States v. David Stiles in the United States District Court for the Western District of Pennsylvania, the Court held that “the federal insolvency statute, 31 U.S.C. § 3713, provides that when a person is insolvent or an estate has insufficient assets to pay all of its debts, priority must be given to debts due the United States.”

Personal liability may be imposed upon a fiduciary (Executor) of an estate in accordance with the federal statutes, 31 U.S.C. § 3713(b) and 26 U.S.C. § 6901(a)(1)(B). Under the federal priority statute, a fiduciary (Executor) “paying any part of a debt of . . . [an] estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government”.

Personal liability can attach, to the extent of the distribution, if the Government establishes Three (3) elements:

(1) the fiduciary distributed assets of the estate;

(2) the distribution rendered the estate insolvent; and

(3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

As stated by the Court, “the purpose of imposing personal liability on estate representatives ‘is to make those into whose hands control and possession of the debtor’s assets are placed, responsible for seeing that the Government’s priority is paid.” “Of course, [i]n order for liability to attach, the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.

The Third (3rd) Circuit Court of Appeals also stated:

In recognition of the insolvency statute’s “broad purpose of securing adequate revenue for the United States Treasury, courts have interpreted it liberally.” With respect to “the type of payments or ‘distributions’ from the estate for which an executor may be held liable,” “a fiduciary, e.g., an executor, may be held liable under the federal insolvency statute for a distribution of funds from the estate that is not, strictly speaking, the payment of a debt.” Id. (alteration and internal quotation marks omitted). He may, for example, be held liable for “stripp[ing]” an otherwise solvent estate “of all of its assets and render[ing] it insolvent” by “provid[ing] for the distribution of all of the estate assets” to the heirs of the estate. Id. (internal quotation marks omitted).