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U.S. Tax Court, 1989 Gumm v. C.I.R. 93 T.C. 475; 93 T.C. No. 38; Tax Ct. Rep. (CCH) 46,085; Tax Ct. Rep. Dec. (P-H) 93.38
JUDGE: Swift, J. DATE: Filed October 11, 1989. SUBSEQUENT
HISTORY: Affirmed
by Gumm v.
C.I.R., 933 F.2d 1014 (9th Cir. May 29, 1991) (Table, Text in Westlaw, No.
90-70100)
Addition to tax There is no dispute as to the liability of the estate for the deficiency and addition to tax. The only issue for decision in these consolidated cases is whether petitioners are liable therefor as transferees of the estate. [*476] At trial, petitioner objected to the admission of an alleged copy of an unsigned transcript of a tape-recorded interview of Richard Z. Gumm, M.D. conducted by respondent. The alleged transcript was not adequately authenticated, and we sustain petitioners’ objection. Rule 1003, Fed. R. Evid. FINDINGS OF FACT Many of the facts have been stipulated and are so found.
On July 16,
1980, decedent’s will was admitted to probate in the Fifth Judicial
Circuit, Edgar County, Illinois. On the same day, the probate court appointed
Dr. Gumm executor of decedent’s estate. At the time of trial, no
accounting had been filed by the executor with the probate court. On February
23, 1981, Dr. Gumm filed a Federal estate tax return on behalf of the estate.
On the return,) the estate’s net estate tax liability was reported as
$101,451.54, which the estate paid on February 23, 1981. On or about
March 18, 1981, the executor presented a $9,807.95 check to the Treasurer of
Edgar County, Illinois, in payment of Illinois death taxes due from the estate
and credit with respect thereto was claimed on the Federal estate tax return.
The check was dishonored when presented for payment by the County Treasurer. [*477]
On or about
September 14, 1981, respondent issued a refund check to the estate in the
amount of $8,090.41. The refund consisted of the sum of the claimed overpayment
in the amount of $7,600.64 and interest in the amount of $489.77. The Illinois
death tax liability was never paid by the estate. TRANSFERS OF
ESTATE PROPERTY Soon after
decedent’s death and pursuant to the terms of decedent’s
will, transfers or distributions of estate property were made to Dr. Gumm and
to petitioners. Some of the property along with the undisputed value thereof
transferred or distributed to petitioner Ellen Gumm Bailey is listed below: 100 shares of Diamond Shamrock Stock ................ $2,781.25 937 shares of Nevada Power Stock .................... 22,429.44 Nuveen Tax Exempt Bond Trust, Series 91 .............. 4,021.00 American Tax Exempt Bond Trust, Series 23, 9 units ... 5,779.00 American Tax Exempt Bond Trust, Series 13, 3 units ... 2,343.00
Transfers or
distributions of the following property of the estate were made to petitioner
Ellen Gumm Bailey but no credible valuation is found in the record with respect
thereto: a truck-repair garage and shop, a 50-percent interest in an automobile
body shop, an interest in an office building, and a Cadillac Fleetwood
automobile. On April 19,
1982, Walter Kirsten died. The family residence passed to petitioners and to
Dr. Gumm under the terms of decedent’s will. On August 19, 1982,
petitioners and Dr. Gumm and his wife sold the family residence to a third
party for $61,000. Petitioners each received a distribution of approximately
one-half of the proceeds from the sale of the family residence. The record does
not indicate that Dr. Gumm and his wife received any proceeds from this sale. [*478] Prior to decedent’s
death, Dr. Gumm had borrowed money from decedent and had executed promissory
notes in favor of decedent. Dr. Gumm also was a partner with decedent and Nancy
Gumm in a partnership known as First Securities Income Fund
(‘FSIF’). The partnership was formed in 1979 for the purpose
of engaging in stock and option transactions. During 1982, liquid assets of the
estate worth at least $100,000 apparently were lost in conjunction with FSIF
investments or other investments managed by Dr. Gumm as executor of the estate.
Also, the estate was paid only a portion of the promissory notes owed to it by
Dr. Gumm. The estate did not file a claim or lawsuit against Dr. Gumm relating
to the investment losses, and the estate apparently did not file a claim or
lawsuit against Dr. Gumm to obtain a judgment on the amount owed on the
promissory notes. In 1982, after
the above-mentioned estate assets worth at least $100,000 were lost, the last
parcels of real property owned by the estate (‘the Four Lots
’) were distributed for no consideration to Dr. Gumm and to
petitioners. On February 10, 1983, Dr. Gumm and petitioners sold the Four Lots
to Richard C. O’Hair, decedent’s brother, for $36,000.
Proceeds from the sale were apparently distributed in equal parts of $12,000 to
Dr. Gumm and to each petitioner. No assets remained in the estate after
distribution of the Four Lots. After
suffering major financial difficulties for a number of years prior to 1984, due
in part to losses in connection with the stock and option investments of FSIF,
Dr. Gumm filed for bankruptcy on July 2, 1984, and relief subsequently was
granted under Chapter 7 of the Bankruptcy Act, 11 U.S.C. RESPONDENT’s
ASSESSMENT AND COLLECTION EFFORTS On June 10,
1981, respondent sent a letter to the estate addressed to Dr. Gumm informing
him that the credit claimed by the estate pursuant to section 2011 with respect
to Illinois death taxes would only be allowed if evidence of payment was
provided to respondent. On December 31, 1981 and May 13, 1983, respondent again
sent letters to the estate addressed to Dr. Gumm notifying him that a liability
in the amount of the credit claimed by the estate for Illinois death taxes
would be assessed against the estate [*479]
Respondent
alleges that on October 10, 1983, an assessment was made in the amount of
$9,018.27 against decedent’s estate disallowing the claimed credit in
that amount for the unpaid Illinois death taxes. Although no certificate of
assessment against the estate is contained in the record, the record does
contain Forms 3031, Reports of Investigation of Transferee Liability, prepared
with respect to petitioners, attached to which were Forms 4907, Transcripts of Account,
which indicate that on October 10, 1983, an assessment in the amount of
$9,018.27 was made against the estate. In its
unsuccessful effort to collect the estate’s $9,018.27 estate tax
deficiency, respondent’s agents contacted the executor and the
executor’s representatives, examined respondent’s collection
file, contacted representatives of the State of Illinois, and undertook other
actions to confirm payment of the Illinois death taxes, and to locate
undistributed assets of the estate to apply toward the estate’s
Federal estate tax liability. In light of the fact that the statute of
limitations on assessment of transferee liability was about to expire,
respondent issued a timely notice of transferee liability to Dr. Gumm and to
each petitioner on February 15, 1985. At the time of
trial, the administration of the estate remained nominally open. OPINION Section
6901(a) provides a procedure through which respondent may collect from a
transferee of assets unpaid taxes owed by the transferor of the assets if a
basis exists under State law or equity for holding the transferee liable. Commissioner
v. Stern, 357 U.S. 39,
42-47 (1958); Berliant v. Commissioner, 729 F.2d 496, 499 (7th Cir. 1984), affg. a Memorandum
Opinion of this Court; Dillman v. Commissioner, 64 T.C. 797, 800 (1975). Respondent
bears the burden of proving that he has satisfied the procedural requirements
of section 6901(a) and that the transferee is [*480] liable, as a transferee, under State law or equity.
Sec. 6902(a). The procedural
requirements of transferee liability that must be established by respondent
under section 6901(a) are the following: (1) That the alleged transferee
received property of the transferor, section 6901(a); Leach v. Commissioner, 21
T.C. 70, 75 (1953); (2) that the transfer was made without consideration or for
less than adequate consideration, Estate of Miller v. Commissioner It is clear
that petitioners received estate property as a result of transfers made after
the estate’s tax liability accrued for which petitioners paid no
consideration. The value of the property transferred to each petitioner exceeds
the amount of the Federal estate tax liability of the estate. We therefore conclude
that respondent has established the first, second, third, and sixth of the
above-enumerated procedural requirements necessary to establish
petitioners’ transferee liability under section 6901(a). We turn to the
fourth procedural requirement (namely, insolvency of the transferor at the time
of or as a result of the transfer). Petitioners argue that after petitioners
received their share of estate property, the estate was not insolvent because
it still had various choses in action or [*481]
claims against Dr. Gumm relating to the outstanding debt obligations Dr. Gumm
owed the estate and relating to Dr. Gumm’s mismanagement of estate
assets. Respondent argues that the choses in action were not assets that
realistically could be reached or levied upon by respondent and that they could
not reasonably be applied toward the Federal estate tax liability of the
estate. Respondent therefore argues that the choses in action should be
disregarded in determining the insolvency of the estate. In determining
whether a transferor is insolvent at the time of or as a result of a transfer,
assets on hand at the time of the transfer that could not reasonably be reached
or levied upon by respondent to satisfy the transferor’s Federal tax
liability are not considered. Brown v. Commissioner Such a
requirement would only involve the Government in protracted litigation which is
inconsistent with the legislative intent to provide the Commissioner with a
summary procedure for the collection of taxes from the transferee. [See 158-3d
Tax Mgmt. at A-5 (BNA 1987).] Regardless of
the correctness of the cases on which petitioners rely, because of Dr.
Gumm’s poor financial condition at the time of the transfers through
the time of trial in this case, including his bankruptcy proceeding in 1984,
and on the facts of this case, the estate’s purported choses in action
or claims against Dr. Gumm must be regarded as speculative and uncollectible.
We conclude that the purported choses in action or claims allegedly held by
Petitioners
alternatively argue that under Illinois law title to the real property of the
estate actually vested in Dr. Gumm and petitioners (as devises under
decedent’s will) immediately on the date of decedent’s death
(i.e., on May 19, 1980), and therefore that the transfers of real property to
petitioners from the estate occurred on that date, at which time the estate
owned sufficient assets to satisfy its Federal estate tax liability and at
which time the estate was solvent. Respondent counters that for purposes of
section 6901, the real property of the estate should be regarded as having been
transferred to Dr. Gumm and petitioners at the time the property was
distributed by the estate, not on the date of decedent’s death.
Respondent argues specifically that the Four Lots, which were distributed to
petitioners in 1982, were the last properties held in and distributed by the
estate and that (if the estate was not already insolvent) the estate was
rendered insolvent by that distribution. Under Illinois
law, title to real property passing under a will generally passes to and vests
in a devisee at the time of the testator’s death. Meppen v. Meppen, 392 Ill. 30, 63 N.E.2d 755, 757
(1945); In the Matter of Estate of Hall, 127 Ill. App. 3d 1031, 469 N.E.2d 378, 380 (1984).
Within the context of section 6901, however, the definition of transferee
includes a ‘devisee,’ a ‘distributee,’ and
a ‘distributee of an estate of a deceased person.’ Sec.
6901(h); sec. 301.6901-1(b), Proced. and Admin. Regs. Also, under
Illinois law, a devisee does not acquire absolute title to real property
devised to him under the terms of a will until all indebtedness of the decedent
is fully discharged. [FN2] Peters v. Peters, 342 Ill. App. 270, 96 N.E.2d
[*483] 369 (1950). An administrator or
executor has the power to subject real property of an estate to sale for
payment of debts of the estate, regardless of who holds nominal title to the
property. Burr v. Bloemer, 174 Ill. 638, 640, 51 N.E. 821 (1898). In Ryan v.
Jones 15 Ill. 1, 3-4
(1853), the Supreme Court of Illinois explained Illinois law that enables
creditors of an estate to reach real property in the hands of an heir or
devisee where the personal estate of the decedent is not sufficient to satisfy
the estate’s outstanding debts. The court stated — The devisee
has no just claim to the lands, until the debts of the testator are fully
discharged. Nor has the heir any superior right to the lands of his ancestor.
They both acquire the lands subject to the payment of the debts of the former
owner. They are only entitled to the surplus that may remain after those debts
are discharged. If the creditor can not obtain satisfaction of his debt from
the personal estate, he may resort to the real estate in the hands of the heirs
or devisees; and in the case of a bona fide alienation of the same before suit
[is] brought, he may charge them personally with its value. [Ryan v. Jones,
supra at 4.] See also Durflinger
v. Arnold, 329 Ill.
93, 160 N.E. 172 (Ill. 1928). Also, we note
that only property or the value thereof that a transferee actually receives
from a transferor triggers transferee liability under section 6901. United
States v. Floersch,
276 F.2d 714, 717-718 (10th Cir. 1960). Based upon the
above authorities and under Illinois law, the transfer of real property from an
estate, for purposes of section 6901, is to be regarded generally as occurring
not on the date of death of the decedent but at the time of physical transfer
or distribution, by deed, of real property to the heirs or devisees. As a result of
the transfers of the Four Lots to petitioners in 1982, the estate, if not
already insolvent, was rendered insolvent. Petitioners each received $12,000 in
proceeds from the sale of the Four Lots, which amount exceeded the estate’s
Federal estate tax liability. The fourth procedural requirement of section
6901(a) is thus established. Petitioners
next allege with respect to the fifth procedural requirement of section 6901(a)
that respondent did not send [*484] a
notice of deficiency to the estate for the $9,018.27 Federal estate tax
deficiency and that respondent did not make an assessment against the estate.
Petitioners therefore argue that respondent failed to make reasonable efforts
to collect the delinquent taxes from the estate prior to attempting to collect
from the transferees pursuant to section 6901(a). Where a
transferor is insolvent and efforts to collect delinquent taxes from the
transferor would be futile, respondent is not required to send a notice of
deficiency to the transferor or to make an assessment against the transferor
prior to collecting delinquent taxes from transferees. California Iron Yards
Corp. v. Commissioner,
82 F.2d 776, 779 (9th Cir. 1936); Flynn v. Commissioner, 77 F.2d 180, 183 (5th Cir. 1935);
City Nat. Bank v. Commissioner, 55 F.2d 1073, 1073-1074 (5th Cir. 1932); Kuckenberg
v. Commissioner, 35
T.C. 473, 483 (1960), modified on other points 309 F.2d 202 (9th Cir. 1962); Park
& Tilford v. Commissioner, 43 B.T.A. 348, 382-283 (1941), Gideon-Anderson Co. v.
Commissioner, 20
B.T.A. 106, 110 (1930); 14 J. Mertens, Law of Federal Income Taxation, sec.
53.31 p. 83-84 (1987). Petitioner
relies on Brafman v. United States, 384 F.2d 863 (5th Cir. 1967), which arguably can be read as
holding, that respondent’s failure to make a valid, timely assessment
against a transferor prevents respondent from collecting delinquent taxes from
a transferee. In that case, however, the statute of limitations on assessing
the taxes against the transferee under section 6901(c)(1) had expired in 1957,
[FN3] and the Fifth Circuit did not consider whether the transferee would have
been liable had respondent sent to the transferee a timely notice of transferee
liability, as respondent did in the instant case. Brafman is distinguishable
and does not apply where a timely notice of transferee liability is mailed to
the alleged transferee under section 6901(c)(1). [FN4] [*485] Based on the above authorities,
it is not necessary to determine whether respondent made an assessment against
the estate. We have concluded that decedent’s estate was insolvent
prior to February 15, 1985, and therefore that respondent was not required to
issue a notice of deficiency to or make an assessment against the estate before
proceeding against petitioners as transferees. Petitioners
further argue that respondent should have filed a proof of claim in the estate
proceedings. It is apparent that the estate was insolvent more than two years
before respondent issued the notices of transferee liability. After transfer of
the Four Lots to petitioners, any action by respondent to effect collection of
the delinquent taxes from the estate would have been futile. Estate of
Miller v. Commissioner,
42 T.C. 593, 599-600 (1964). Respondent
made reasonable efforts to contact Dr. Gumm and his representatives, to confirm
payment of the Illinois death taxes, and to locate undistributed assets of the
estate to apply against the estate’s Federal estate tax liability. We
conclude that respondent made reasonable efforts to collect the $9,018.27
Federal estate tax deficiency at issue in this case prior to proceeding against
petitioners under section 6901(a). Respondent has established all of the
procedural requirements of transferee liability under section 6901 in order for
such liability to be imposed on petitioners. As explained,
section 6901 sets forth a collection procedure to be used by respondent against
transferees. Section 6901 does not establish or define a transferee’s
substantive liability ‘as a transferee’. The existence and
extent of liability as a transferee is determined under State law or equity. Commissioner
v. Stern, 357 U.S. 39,
41-45 (1958); Berliant v. Commissioner, 729 F.2d 496, 499 (7th Cir. 1984); Dillman v.
Commissioner, 64 T.C.
797, 800 (1975); Ginsberg v. Commissioner, 35 T.C. 1148 (1961), affd. 305 F.2d 664 (2d Cir. 1962).
Thus, Illinois law, where the instant probate estate was administered, must
also be analyzed to determine whether petitioners may be held liable, as transferees, [*486] for the unpaid taxes of
decedent’s estate. Berliant v. Commissioner, supra at 500. ‘As a
matter of equity, Illinois has long imposed on estate transferees liability to
creditors of the estate.’ Berliant v. Commissioner, supra
at 500. [FN5] An heir is liable for
debts of an estate to the extent of the personal and real property received
from the estate even where the debts do not accrue until after administration
of the estate is closed. Snydacker v. Swan Land & Cattle Co.,
154 Ill. 220, 40 N.E. 466, 468 (1895); Union
Trust Co. v. Shoemaker,
258 Ill. 564, 101 N.E. 1050, 1053 (1913). Petitioners
argue that under Illinois case law the administration of an estate must be
closed in order to hold a transferee liable for the tax liabilities of the
estate. Petitioners interpret the cases too narrowly. Those cases address
contingent liabilities which often do not mature until all assets of an estate
are distributed and the estate is closed. A Federal estate tax liability is not
a contingent liability. Magill v. Commissioner, T.C. Memo. 1982-148, affd. sub nom. Berliant
v. Commissioner, 729
F.2d 496 (7th Cir. 1984). In this case,
the estate is insolvent and, although administration of the estate is not
formally closed, the estate is unlikely to obtain any additional assets.
Respondent took appropriate collection action against petitioners. If
respondent were required to wait until administration of the estate is closed
before proceeding to collect the Federal estate tax liability, the heirs of an
estate could prolong administration of the estate beyond the period during
which respondent may send a notice of transferee liability. For the
reasons stated, petitioners are liable as transferees of decedent’s
estate for the $9,018.27 Federal estate tax liability of the estate.
Petitioners also are liable for the addition to tax imposed under section
6651(a)(2). Decisions will
be entered for the respondent. FN2 Ill. Ann. Stat. ch. 110 1/2, par. 18-14 (Smith-Hurd 1978) provides as follows: SECTION 18-14. ESTATE CHARGEABLE WITH LEGACIES, EXPENSES AND CLAIMS FN3 In Brafman v. United States, 384 F.2d 863 (5th Cir. 1967), the statute of limitations on assessing the estate under the predecessor of section 6501 expired at the end of 1956. Therefore, the statute of limitations on asserting transferee liability under the predecessor of section 6901(c)(1) would have expired one year later at the end of 1957. FN4 Sec. 6901(c)(1) provides as follows: Sec. 6901(c). PERIOD OF LIMITATIONS. — The period of limitations for assessment of any such liability of a transferee or a fiduciary shall be as follows: (1) INITIAL TRANSFEREE. — In the case of the liability of an initial transferee, within 1 year after the expiration of the period of limitation for assessment against the transferor; FN5 See also Burns v. Commissioner, T.C. Memo. 1989-395.
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