Source: http://rubinontax.floridatax.com/2017/08/
Timestamp: 2019-04-26 16:10:52+00:00

Document:
No, this has nothing to do with Barack Obama, and where he was born.
In a recent Tax Court case, Wilfred Omoloh found himself embroiled in a dispute over how old he was. There are various age limitations and age-related provisions in the Internal Revenue Code. This is the first time I recall litigation over a taxpayer’s actual age regarding such provisions. Here, the question was whether the taxpayer was subject to a 10% early withdrawal tax under Code §72(t) for a distribution taken from a qualified retirement plan while the participant was under the age of 59 1/2.
Wilfred was born in the Republic of Kenya and became a U.S. citizen in 1997. In preliminary proceedings, he represented that he was born on October 1, 1951, which made him younger than 59 1/2 at the time of the distribution. He then corrected it to October 1, 1950, which would have made him older than 59 1/2.
The government argued his driver’s license and certificate of naturalization, other immigration documents, college transcript, and a court petition for a name change had an October 1, 1952 date of birth. However, Wilfred acquired and presented a newly issued Kenya birth certificate showing an October 1, 1950 date of birth.
The Court sided with the government and applied the 10% penalty, in large part because Kenya had issued the birth certificate based on information supplied by Wilfred.
Not a surprising result, but interesting as to being a litigated dispute over age.
Under Treas. Regs. §1.170A-13, taxpayers making substantial noncash charitable contributions are required to disclose information regarding the contribution on Form 8283.
In March 2002, a partnership paid $2.95 million to acquire a remainder interest in property. A year and a half later, it assigned the interest to a university and claimed a charitable deduction of $33,019,000. The Form 8283 that the taxpayer submitted with its income tax return to disclose the contribution required the donor to provide the “Donor’s cost or other adjusted basis,” but the partnership left that disclosure blank.
The IRS sought to disallow the deduction for the taxpayer’s failing to meet the reporting requirements. The taxpayer responded with a substantial compliance argument.
On review, the Tax Court held a taxpayer can raise substantial compliance, since the applicable regulations are directory and not mandatory. Reviewing other case law, the Tax Court noted that in determining whether there was substantial compliance the court considers whether the taxpayer provided sufficient information to permit the IRS to evaluate the reported contributions, with an eye to the purpose of the substantiation requirements. That purpose is to alert the IRS, in advance of audit, of potential overvaluations of contributed property and thereby deter taxpayers from claiming excessive deductions in the hope they would not be audited. The court went on to comment that given the significant disparity between the claimed fair market value of the contributed property and the price paid for the property just 17 months earlier, had the basis of the property been disclosed it would have alerted the IRS to a potential overvaluation of the contributed property. Since the missing information kept the IRS from being able to evaluate its reported contribution without an audit, the Tax Court determined that substantial compliance could not be used to save the taxpayer from having its deduction disallowed.
Would You Take on a Job if the IRS Had Discretion to Decide Whether You Got Paid?
Raelinn Spiekhout was the personal representative of the estate of Deborah Scott. The estate was subject to claims of over $1.8 million dollars, including IRS claims for $591,406.05. The principal asset of the estate was real estate worth $282,000. After litigation involving the priority of payment of creditors, the issue came down to whether the personal representative was entitled to be paid compensation and expenses out of the proceeds of sale of the real estate, or whether the IRS, by reason of tax liens filed during the decedent’s lifetime, was entitled to all the net proceeds.
As the case in many states, administrative expenses, including funeral expenses, attorney fees, and executor/personal representative fees, are usually entitled to preference under state law over almost all creditors, including the Government for unpaid taxes. As to compensatory administrative expenses, the policy is that if the fiduciaries or their counsel are unlikely to be paid in an insolvent estate, then no one will take on the job of administering the estate (nor provide legal counsel to the fiduciaries). Since state law is subject to federal preemption under the Supremacy Clause of the U.S. Constitution, the issue devolves into whether there is any federal law overriding such state law priority provisions.
One such priority provision is the Federal Priority Statute (31 USC §3713). This statute provides that a claim of the U.S. Government shall be paid first when the estate of a deceased debtor is insufficient to pay all debts of the debtor. But based on the foregoing policy, and on an interpretation that administrative expenses are not expenses “of the debtor,” courts have ruled that administrative expenses can nonetheless take priority of the U.S. Government claims.
The federal District Court for Southern Indiana noted that this was all well and good, but when a federal tax lien is filed, the governing law is actually the Federal Tax Lien Act (Code §§6321-23), and not the Federal Priority Statute. Code §6321 provides “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” Code §6323 does provide some exceptions to this blanket federal priority for purchasers, holders of security interests, mechanics lienors, and judgment lien creditors whose interests are choate at the time that the notice of federal tax lien is filed. Estate administrative expense creditors, including the fiduciary, are unlikely to come within this list of exceptions to the federal priority. The Court relied on the Federal Tax Lien Act and ruled in favor of the Government’s priority.
The Court did take notice of concerns that this interpretation would result in no executor/personal representative or counsel taking on the administrative tasks. However, it stated that this policy concern is addressed and remedied by Internal Revenue Manual (IRM) Section 5.5.2.4(3) which provides that “Federal law controls in situations in which a federal tax lien competes with any interest under state law or by contract. However, the Service may in its discretion not assert priority over reasonable administrative expenses of the estate.” Since the Government indicated it intended to pay the unreimbursed expenses of the personal representative to maintain the real property ahead of its tax liens, the Court was agreeable to the federal tax lien priority.
This is not the first case reaching a similar conclusion. In Estate of Friedman v. Cadle Co., the Federal District Court for the District of Connecticut similarly held that federal tax liens take priority over administrative and funeral expenses.
These cases cast a pall over any executor/personal representative or counsel that want to serve an estate administration if federal tax liens exceed the value of the probate estate (and assets that are obligated to pay estate expenses and liabilities, such as revocable trusts in some states). Who will take on the job if their compensation is at risk?
Notwithstanding the Court’s conclusion that this policy concern is addressed and remedied by IRM Section 5.5.2.4(3), that provision is only discretionary with the IRS. There is nothing that obligates the IRS to pay any administrative expenses. If it deigns to do so, it will be the sole arbiter of what is reasonable. Presumably, the terminology “reasonable administrative expenses” includes fees for the estate administrators and their counsel. But note how the IRS had only agreed to pay the unreimbursed expenses of the personal representative to maintain the real property. Does this encompass fees? Does it encompass other expenses that are incurred in the administration that do not directly relate to maintenance of the estate property? And what about funeral expenses?
There is some uncertainty here – was the Court ruling as a matter of law that the lien statutes are effective in granting no priority for administrative expenses because of the mere existence of the quoted IRM provision, or was it a factual holding only because the Government agreed to exercise its discretion to pay some administrative expenses in a manner agreeable to the court? Since Friedman ruled similarly without requiring payment of administrative expenses or funeral expenses, the answer for now appears to be the former and not the latter.
So what does this mean for estate practitioners? At a minimum, it strongly suggests that such counsel not undertake providing legal services if there is a risk of federal tax liens eating up all or a large part of the estate, since their fees would be at risk (absent some other source of payment of fees other than the probate estate). Likewise, such counsel should advise the executor/personal representative of its risk of not getting paid. Prudent practitioners should do a federal tax lien search before agreeing to serve, and to properly advise the executor/personal representative.
In both of the cases, it appears the federal tax liens were filed prior to death. The issue remains whether a similar federal priority will apply even if the liens are filed post-death.
So I ask you, if you were being asked to serve as executor/personal representative of, or counsel to, an estate with federal tax liens that cover most if not all of the value of the estate assets, would you serve?

References: §72
 §1
 §3713
 §6321
 §6323
 v.