Source: http://www.cilaw.com/index.php?p=72
Timestamp: 2013-05-24 13:49:42
Document Index: 723155609

Matched Legal Cases: ['§44', '§44', '§ 44', '§44', '§3467', '§44', '§44', '§ 44', '§ 44', '§ 44', '§44', '§6501', '§6501', '§6501', '§6501', '§6501', '§6501', '§301', '§6502', '§641', '§1', '§1', '§3713', '§6901', '§301']

Estate Tax Duties and LiabilitiesDomicile and Fiduciary Estate Tax Duties and Liabilities Under Rhode Island and Federal Law	This article analyzes fiduciary liability if additional taxes are assessed on estate accounts finally and fully distributed in the context of domiciliary disputes. Specifically, Rhode Island and federal law are analyzed with regard to how and when additional taxes could be assessed, and what, if anything, fiduciaries can do to protect themselves before and after a final distribution.
RELEVANT RHODE ISLAND ISSUES
In Rhode Island, there are two methods to close an estate, one is to file an Affidavit of Completed Administration, and the other is to request that a Final Account be allowed. It is preferable to prepare a Final Account and obtain a Final Order that closes the estate and discharges any lien placed on the estate. According to the Rhode Island General Laws (R.I.G.L.) §44-23-9, a Rhode Island inheritance tax shall be paid to the Tax Administrator, and if not paid it shall be and remain a lien upon the estate until it is paid. Until the tax is paid and the lien is released, all executors, administrators, and trustees are personally liable for the tax. As part of the process of checking an administration to determine that all actions have been performed, a probate clerk will ascertain whether a discharge of inheritance tax has been obtained from the Rhode Island Division of Taxation. Until notification of such discharge is received by the estate, the fiduciaries remain personally liable for any tax.
If an estate has received only a closing letter from both the Rhode Island Division of Taxation and the Internal Revenue Service (IRS), additional state and federal taxes can still be assessed against the estate. While in most circumstances an estate tax closing letter is considered a final determination of estate taxes, it remains nonbinding. So long as there remains a possibility, however remote, that further estate taxes could be levied, the fiduciaries cannot completely rely on a closing letter.
Print Next Moreover, the assessment of additional estate taxes may theoretically be made at any time; neither Rhode Island common law nor statutory law subjects the State of Rhode Island to any statute of limitations with respect to the collection or enforcement of estate taxes.1
Disputes over the allocation of estate taxes based on domicile can also be an issue. However, based on a review of Rhode Island case law, the prospect of a prospective challenge to domicile is historically unlikely. Indeed, no reported decision of a Rhode Island court in which the Rhode Island Tax Administrator has challenged a decedent's domicile after the payment of inheritance taxes and the closing of the estate could be found.
Despite the unlikelihood and difficulty of succeeding in a future challenge to domicile, the Rhode Island Tax Administrator has the power to reassess estate taxes within a four year period from the payment of the tax for "errors" made in the initial assessment. Under R.I.G.L. §44-23-26, the Rhode Island Tax Administrator may assess additional tax whenever a clerical or palpable error or mistake is made in any statement relating to the estate tax return.
If a Rhode Island court has not ruled on whether a person is a domiciliary of Rhode Island for inheritance tax purposes, the Tax Administrator could, in theory, interpret the "palpable error" provision in section 44-23-26 to cover the issue of the person's domicile for estate tax purposes. Consequently, the Tax Administrator could recalculate the tax on an estate and reassess additional inheritance taxes even though a closing letter states that the tax has been paid.2 The likelihood of this happening, however, is remote. Again, no Rhode Island case in which the Tax Administrator has invoked the "palpable error" provision as a basis for recalculation of estate taxes could be found.
Even if a challenge to domicile were brought, the Tax Administrator would have the burden of establishing Rhode Island domicile by a preponderance of the evidence,3 which would likely require an analysis of where the decedent (1) resided, (2) made home improvements, (3) held bank accounts, (4) filed intangibles tax returns, (5) was registered to vote, and (6) was licensed to drive, among other factual considerations. Additionally, if a decedent recent to death held a domicile other than Rhode Island, the Tax Administrator would have the burden of proving that the decedent abandoned that other domicile in favor of Rhode Island.4
Print Back Next Under Rhode Island law, domicile is established by proving that a person has "an actual place of abode" in the state "with the intention to live there permanently and without any present intention of changing home in the future."5 In Deblois, the Rhode Island Supreme Court held that contacts with the State of Florida, such as property ownership, licensure to drive, registration to vote, and declarations of Florida as a person's official residence, are sufficient to establish domicile in Florida.6 Where a person is registered to vote is also highly dispositive of domicile under Rhode Island law.7
If, however, Rhode Island were to find that a decedent is a domiciliary after the estate has been closed, the executor may elect to invoke the remedies set forth in R.I.G.L. §§ 44-23-27 through 44-23-32, which is a statutory scheme devised to deal with a conflict of laws situation in which two or more states claim to be the domicile of the decedent.8 In such a case, the executor is empowered to enter into an agreement with the Rhode Island Tax Administrator and tax officials from other states which will conclusively fix the amount of taxes owed to Rhode Island.9 Alternatively, if an agreement cannot be reached within one year from election, all states claiming domicile are required to arbitrate the issue of domicile, and the decision resulting therefrom is considered to be final and conclusive.10 Again, at arbitration the Rhode Island Tax Administrator would have to establish that Rhode Island was the domicile of the decedent at the time of death.
Given the somewhat unpredictable nature of the law, fiduciaries can file a General Release request with the Division of Taxation to protect themselves from any personal liability that may result from a distribution that leaves less funds than any potential tax owing. This release will forever discharge the fiduciaries from all liability on account of the estate. However, as with a federal discharge from liability, fiduciaries may be protected personally from liability for additional taxes, but they continue to be fully liable for taxes in their fiduciary capacity to the extent of the remaining estate assets in their possession or control. In general, it is also understood that Rhode Island would "follow the money" to the beneficiaries,11 and with the prospect of litigation costs and an unknowable prospect of success on such a matter, the risk of a final distribution is somewhat limited when the facts strongly favor a domicile other than Rhode Island.
Generally speaking, the Rhode Island Tax Code, with its administrative policies and acceptance of certain facts, is tied to the Federal Tax Code, with its administrative policies and any determination on specific cases made by the IRS. The issue of domicile needs to be determined for the Federal 706 Estate Tax Return. Therefore, a review of the federal provisions follows.
Print Back Next RELEVANT FEDERAL ISSUES
Although a fiduciary has received a discharge of personal liability for federal estate taxes due from the estate, that discharge does not affect the IRS' statute of limitations for actual assessment and collection of an estate tax deficiency under section 6501 of the Internal Revenue Code. The discharge of a fiduciary from personal liability for payment of tax would apply only to the fiduciary in a personal capacity and only to personal assets.
As is the case at the state level in Rhode Island, the discharge would not prevent or void a subsequent assessment of a federal tax deficiency against the estate. In addition, a fiduciary continues to be fully liable for a deficiency in the fiduciary capacity to the extent of the remaining estate assets in the fiduciary's possession or control, or to the extent of property in the hands of transferees.12 The discharge also does not operate as a release of any part of the gross estate from estate tax liens for any later assessed deficiencies.13
Based on the foregoing, the Rhode Island Tax Administrator and the IRS both have the ability to assess additional taxes despite the payment of federal and state estate taxes and the receipt of federal and state closing letters. As a precautionary measure, if making a final distribution, it is recommend that the fiduciary hold back a limited amount to cover any underpayment, as stated above.
However, again, from the perspective of a pure analysis, it is always preferable to file a Final Account with a Final Order, and to hold limited funds until discharge of any tax lien levied against an estate according to R.I.G.L. §44-23-9. When a Final Account and Final Order are rendered, the fiduciary can be certain that all taxes were paid.
Print Back Next RELEVANT FEDERAL ISSUES: FIDUCIARY INCOME TAX STATUTE OF LIMITATIONS
The expiration date of the statutory period for assessment of a fiduciary income tax liability is three years after the due date of the return, or the date the return is filed if after the due date.14 The due date of a fiduciary income tax return is three and one-half months after the close of the fiscal year or taxable year. The three-year statute of limitations is subject to several exceptions, however. The assessment period remains open unless and until a return is filed.15 Similarly, if a false or fraudulent return is filed, the statute never runs.16
Another exception which extends the three-year period to six years occurs where substantial gross income (i.e., more than 25 percent) is omitted from the return.17 There is a disclosure safe harbor to this rule. Specifically, "in determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item."18
A prompt assessment may be requested to shorten the period of assessment to 18 months after filing the return.19 Section 6501(d) provides generally that in the case of any tax for which a return is required for a decedent's estate during the period of administration, the tax shall be assessed (and any proceeding in court without assessment for the collection of such tax shall be begun) within 18 months after written request therefore (filed after the return is made and filed in such manner and such form as may be prescribed by regulations of the Secretary) by the executor, administrator, or other fiduciary representing the estate of such decedent, but not after the expiration of three years after the return was filed.20
The IRS has ten years from the assessment date to collect the tax by administrative means (seizures, levies, offsets) or to institute a suit for collection or a judgment. If the IRS commences timely suit to collect the tax or obtain a judgment, then it may continue its efforts to administratively collect the tax beyond the ten-year period.21
Print Back Next RELEVANT FEDERAL ISSUES: LIABILITY FOR AN ESTATE'S INCOME TAX
The fiduciary is obligated to compute any tax due on income generated by the estate assets.22 Liability for the payment of the tax on the income of an estate attaches to the fiduciary up to the time of discharge.23 If the fiduciary has been discharged, he or she is only responsible for tax obligations which he or she had notice of or could have ascertained using due diligence.The extent of a fiduciary's liability under section 641(b) is determined under section 3467 of the Revised Statutes (31 U.S.C. 192), which reads as follows:
As used in section 3467, the word "debt" includes a beneficiary's distributive share of an estate. Thus, if a fiduciary pays a debt of the estate or distributes any portion of the estate before all of the estate's income tax is paid (which there is a duty to pay), the fiduciary is personally liable, to the extent of the payment or distribution, for so much of the income tax as remains due and unpaid.
The estate's income tax liability also "follows the assets" of the estate, and beneficiaries may be liable under the transferee liability rules of section 6901.24 Therefore, heirs, devisees, legatees, and distributees may be required to discharge the estate's income tax liability to the extent of the distributive shares received by them. Interest and penalties that are collectible as part of the estate's tax may generally be collected from the transferee as well.
A fiduciary may also be subject to personal liability if any debt of the estate is paid before the debts due the United States are paid from such estate.25 Taxes are included within the meaning of debts.26 Thus, the fiduciary can also be personally liable for the payment of an estate's income taxes if assets are distributed to beneficiaries or creditors with lower priority before the federal income tax is paid.
Print Back Next However, section 3713 does not impose strict liability on a fiduciary who makes a distribution that leaves the estate with insufficient funds with which to pay the income tax liability. "It has long been held that a fiduciary is liable only if it had notice of the claim of the United States before making the distribution."27 Whether a fiduciary had notice is determined by whether he or she knew or was chargeable with knowledge of the debt. The knowledge requirement may be satisfied by either actual knowledge of the liability or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.28 To be chargeable with knowledge of such a debt, the fiduciary must be in possession of such facts as to "put him on inquiry."29 "It is (the) knowing disregard of the debts due to the United States that imposes liability on the fiduciary."30
The liability of a fiduciary is not dependent upon any benefit the fiduciary may or may not receive from the estate. The amount of liability is once again limited by Rev. Stat. §3467 to the amount of payments the fiduciary made of debts over which the United States was entitled to priority under Section 3713 or to the amount which may remain due and owing the United States on its claim, whichever is less.31
Section 6901 provides summary assessment and collection procedures against both the transferee and the fiduciary. The liability of a fiduciary or transferee must be assessed "(a) not later than one year after that liability arises, or (b) not later than expiration of the period for collection of the tax on which the liability is predicated, whichever is later."32 As mentioned above, income taxes must be assessed within three years from the date the return is filed if there is no substantial omission or fraud. Consequently the earliest time liability may cease is four years after the return is filed and the latest time is the expiration of the statute of limitations on collection.
Alternatively, be aware that the IRS can commence an action to impose liability under state or federal fraudulent conveyance acts. The IRS has taken the position that there is no statute of limitations with respect to such actions.
In conclusion, a final distribution of estate funds would likely be prudent where domicile or liabilities are questionable, if subject to a minimal "hold back" that is appropriate in the event of an audit for error. In contested matters, the signing of releases along with the execution of an indemnification agreement by the beneficiaries would be helpful.
Print Back Next (1) See State v. Lead Industries Assoc., Inc., 2001 WL 345830 12 (R.I. Super. 2001) (citing Guaranty Trust Co. v. United States, 304 U.S. 126, 132-33 (1938) ("(t)he sovereign is exempt from the consequences of its laches, and from the operation of statutes of limitations unless the statute specifically provides otherwise.") (internal citations omitted)).
(2) The only legal significance of the closing letter is that it establishes a presumption that estate taxes have been paid to the extent of the receipt of payment. The letter is not conclusive as to whether the estate has discharged its full tax liability. See R.I.G.L. §44-23-36 ((t)he receipt of the tax administrator for the amount of tax shall be conclusive as to the payment of the tax to the extent of the receipt, and the certification of the tax administrator that an estate, property or interest is not liable for any tax imposed by (§44-22-1.1) shall be conclusive of such fact."). See also Watson v. Erikson, 111 N.E. 99 (Mass. 1931) (holding that allowance of executor's final account did not constitute an adjudication that all taxes had been paid and that payment of part of legacy tax did not bar further recovery of taxes).
(3) See Deblois v. Clark, 764 A.2d 727, 732 (R.I. 2001).
(4) See Israeloff v. Norberg, 1977 WL 190994 2 (citing Vezina v. Bodreau, 133 A.2d 753 (R.I. 1957) ("It is well established that domicile, once acquired, is presumed to continue until the contrary is shown. The burden of rebutting this presumption is upon the party alleging it."))
(5) Deblois, 764 A.2d. at 734; See also Flather v. Norberg, 377 A.2d 225, 229 (R.I. 1977).
(6) See Deblois, 764 A.2d at 736.
(7) See Id. (citing to Blount v. Boston, 718 A.2d 1111, 1115 (Md. 1998) (characterizing the place of voting as "the highest evidence of domicile").
(8) Note, however, that under R.I.G.L. § 44-23-33 this statute only applies where each of the states involved has in effect at the time it is invoked a "substantially similar" law.
(9) See R.I.G.L. § 44-23-29.
(10) See R.I.G.L. § 44-23-30.
(11) See R.I.G.L. §44-23-14, which makes the heir, devisee, or donee personally liable for estate taxes on real estate, and further provides that if an executor or trustee pays that tax, he or she will have the right to recover the tax from the heir, devisee or donee. Consistently, Rhode Island courts have placed the burden for the payment of inheritance taxes on beneficiaries where it is not otherwise prohibited by the terms of the testamentary instrument. See e.g. Rhode Island Hospital Trust Co. v. Sanders, 125 A.2d 100 (R.I. 1956); Union Trust Co. v. Watson, 68 A.2d 916 (R.I. 1949); McGee v. McGee, 1978 WL 195984 (R.I. Super. 1978).
Print Back Next (12) See Estate of Ella Meyer, 58 T.C. 69 (1972); Estate of Bert L. Sivyer, 64 T.C. 581 (1975); Treas. Reg. Section 20.2204-1(a).
(13) See Treas. Reg. Section 20.2204-2(b).
(14) See IRC §6501(a).
(15) See IRC §6501(c)(3).
(16) See IRC §6501(c)(l) and (2).
(17) See IRC §6501(e)(l)(A).
(18) See IRC §6501(e)(l)(A)(ii).
(19) See IRC §6501(d).
(20) See Treas. Reg. §301.6501(d)-l.
(21) See IRC §6502.
(22) See IRC §641(b).
(23) See Treas. Reg. §1.641(b)-2(a).
(24) See Treas. Reg. §1.641(b)-2(a).
(25) See 31 U.S.C. §3713 (a) and (b).
(26) See Price v. United States, 269 U.S. 492 (1926).
(27) Want v. Commissioner, 280 F.2d 777, 783 (2d Cir. 1960).
(28) Leigh v. Commissioner, 72 T.C. 1105, 1110 (1979) (citing Irving Trust Co. v. Commissioner, 36 B.T.A. 146 (1937); Livingston v. Becker, 40 F.2d 673 (E.D. Mo. 1929)).
(29) New v. Commissioner, 48 T.C. 671, 676 (1967).
(30) Leigh, 72 T.C. at 1109-1110 (citing United States v. Crocker, 313 F.2d 946 (9th Cir. 1963)).
(31) See IRC §6901(a)(l)(B); Internal Revenue Manual 5.17.4.16.4.
(32) See IRC 6901(c)(3); Reg. §301.6901-l(c)(4).Print Back	©2013 Correira & Correira LLP