John R. Bullis: Surviving spouse, executrix found liable for taxes

July 2002 Robert Reitano died. He was survived by his wife Marci McNicol and four minor children.

Ms. McNicol was executrix of his estate. She was responsible for being sure the assets of the estate were first used to pay the $340,000 or so of income taxes that Mr. Reitano owed.

The federal priority statute requires that the government be paid first when the assets of the estate are not enough to pay all of the debts of the estate.

Personal liability can be imposed upon a fiduciary (person in charge of settling the estate such as Executrix or Personal Representative) if that person fails to pay the government first.

Personal liability happens when the government proves the fiduciary distributed the assets of the estate; the debts of the estate were more than the assets at the time of distribution and the fiduciary knew or should have known (had constructive knowledge) of the liability for unpaid taxes.

The assets of Reitano’s estate were mainly the stock (ownership) of two corporations. Each corporation owned a fishing vessel that produced a “lucrative income.” The debts of the estate for his unpaid income taxes were more than the value of the assets. Ms. McNicol transferred the shares of both corporations to herself for no consideration (she did not buy them). She admitted that she knew about his unpaid income taxes.

IRS contacted Ms. McNicol about the income taxes owed (and the penalties and interest involved) and served her with a formal notice of her potential liability under the federal priority statute. She still did not pay IRS so a lawsuit was begun to collect from her personal assets.

The district court found she was liable under the federal priority statute and entered a judgment against her personally. She appealed to the First Circuit Court of Appeals.

The Appellate Court found the district court decision should stand: “She failed to submit a brief statement of the material facts in support of her motion ...”

The court noted she did the transfers to herself while the estate was insolvent (had more debts than assets). Also the court noted she was aware of the unpaid tax liabilities when she transferred ownership (stock) of the corporations to herself.

She appealed to the U.S. Supreme Court, but it declined to even hear or review the case. She had to pay IRS out of her personal assets.

The person in charge of settling an estate has significant responsibilities. It is a big job.

Did you hear? “There is never a wrong time to do the right thing,” by author unknown.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.