United States v. Guyton, Jr., 2010 WL 1172428 (11th Cir. March 26, 2010)

In this case a father sold his McAlpin, Florida poultry farm in January of 2000 and died six months later. Before his death dad deposited the sales proceeds in a joint account held with his son “Blake.” These joint account funds went directly to Blake after dad’s death. In other words, none of this cash ever became a part of dad’s probate estate. After dad’s death another son, “Guyton”, was appointed personal representative or PR of dad’s probate estate.

As dad’s PR, Guyton was responsible for reporting the farm sale on dad’s “final” 1040 income tax return and paying the income tax triggered by that sale. Along with this responsibility comes personal liability: as dad’s PR, Guyton was personally liable for dad’s unpaid taxes. This is all text book tax law, which I’ve written about here from a risk-management viewpoint and is also summarized nicely in Beneficiary and Fiduciary Liability for Income, Gift and Estate Taxes by Lakewood Ranch, FL estate planning attorney Marc J. Soss.

So what went wrong?

Brother Guyton, who appeared before the court on a pro se basis (in other words, without a lawyer), just could not understand why he was responsible for paying taxes on non-probate funds that went directly to his brother Blake. Unfortunately for Guyton, the IRS didn’t buy his “it’s just not fair” argument. By the time this case got to the 11th Circuit, the unpaid taxes, penalties and interests Guyton was fighting totaled a little over $50,000.

Here’s how the 11th Circuit summarized Guyton’s tax argument:

Guyton argues that, because Guyton, Sr. deposited the proceeds from the sale of his farm into a joint bank account prior to his death, the beneficiary of that bank account, Blake Guyton, is liable for the tax on those proceeds as “income with respect to a decedent,” under 26 U.S.C. § 691.

Income in respect of a decedent (IRD) is the name given to all types of taxable income earned, but not received by the decedent by the time of his or her death. If the farm-sale proceeds were IRD, then Blake would be on the hook for these taxes. If the farm-sale proceeds were NOT IRD, then Guyton is on the hook for paying these taxes . . . irrespective of the fact that this cash never flowed through dad’s probate estate. The 11th Circuit ruled the farm-sale proceeds were NOT IRD:

When a taxpayer dies during the tax year, his personal representative must file a Form 1040 for the tax year in which the taxpayer died. See 26 U.S.C. § 6012(b)(1). That “final” 1040 will contain all gross income realized by the decedent, but only for the period in which the decedent was alive: the tax year effectively ends on the date of the taxpayer’s death. 26 U.S.C. §§ 441(b)(3), 443(a)(2); see also Treas. Reg. § 1.443-1(a)(2) (generally, “the return of a decedent is a return for the short period beginning with the first day of his last taxable year and ending with the date of his death”). Thus, any income realized by the taxpayer after the date of death is “income in respect to a decedent.” See 26 U.S.C. § 691(a), (b); I.R.S. Pub. 559 at 9, 15-16. Accordingly, § 691 is inapplicable for income realized prior to the decedent’s death because such income is properly reported on the decedent’s final Form 1040. 26 U.S.C. § 691(a), (b); I.R.S. Pub. 559 at 9; Treas. Reg. § § 1.691(a)-1(a), (b) (defining “income in respect to a decedent” as income “not properly includible in respect of the taxable period in which falls the date of his death”) (emphasis added).

Because Guyton, Sr., realized a gain from the sale of his farm prior to his death [and actually received the sales proceeds prior to his death], .  .  .  his estate must pay the tax. Blohm v. C.I.R., 994 F.2d 1542, 1549 (11th Cir.1993). Depositing the proceeds into a joint bank account did not relieve or transfer his obligation to pay taxes on that gain. Id. Thus, summary judgment was proper on this issue and we affirm.

Lesson learned?

Although unstated in the 11th Circuit’s opinion, my guess is that Guyton got himself into trouble by distributing most of dad’s estate assets to himself and his siblings prior to being absolutely sure all of the estate’s tax debts were paid up. As I explained here, there’s a lot you can do to limit a PR’s personal tax-exposure risk. But the number one most important lesson all PR’s need to know is this: never ever distribute estate assets to the heirs until you’re absolutely sure you’ve paid all of the decedent’s taxes. Forget that lesson and you’ll find yourself in the same boat as the poor PR in this case.

  • Gregory P Turza

    But what if the assets in the probate estate were not sufficient to pay the tax? Two questions:
    1. Is the surviving joint tenant who got the cash from the sale that generated the tax off the hook?
    2. Does the PR’s “personal liability” mean he has to cover the tax out of his own pocket?

  • Juan Antunez

    Hi Greg –

    The surviving joint tenant who got the cash from the sale that generated the tax is NOT directly liable to the IRS, the PR is. And YES, PR’s “personal liability” means he has to cover the tax out of his own pocket.

    Juan

  • D Lopez

    Assume the decedent spent the gain before he died and the probate estate assets are not sufficient to pay the tax, but the PR is unaware of this until he / she has assumed the responsibility, are they personally liable for the tax? If so, who would ever want to take on this responsibility without complete knowledge of the financial situation before assuming the position? (rhetorical question)

  • Juan Antunez

    Dear Mr. Lopez –

    Prerequisite to a PR’s personal liability for payment of the decedent’s taxes is that [1] the estate had some assets available to it at some time and [2] the PR used those assets to either pay a debt that has lower priority than taxes or distributed those assets to beneficiaries before making sure the taxes were paid. Bottom line, I’m guessing the PR in this case had assets available to him but mistakenly paid them out to his siblings or used those assets to pay debts and then realized after-the-fact that he had a tax problem.

    In the Mark Soss article linked-to above, he provides a comprehensive summary of the preconditions to PR liability for a decedent’s taxes. Once you read Mark’s summary I think you’ll find that being a PR is very doable, you just need to make sure you know what you’re doing or hire a good CPA or lawyer to advise you.

    “Prerequisites for Fiduciary Liability:

  • M

    What about State tax liability – i.e. if there are no probate assets and there is a State estate (Pickup State) tax, is the executor personally responsible for this liability?