Estates & Trusts: Fiduciaries Personally Liable if They Don’t Pay Government Claims First

In United States v. David A. Taylor IRS Lays Down the Law

The Wills, Trusts, and Estates Prof blog reports on a recent case demonstrating that if a fiduciary has a duty to pay a claim of the government before paying a debt—or they may be personally liable for the unpaid claims of the government!   Here are some of the case details:

David J. Tyler and Paula I. Tyler were a married couple who held real property on Cricket Lane in Pennsylvania as tenants by the entirety. The IRS issued deficiencies for their income taxes from 1992-1998.

On August 20, 2003, after receiving the IRS deficiency, Mr. Tyler executed an indenture and transferred the residence to Mrs. Tyler for consideration of $1. Mr. Tyler died three years later on August 15, 2006 and Mrs. Tyler died on June 26, 2007.

On September 11, 2008, the IRS notified the co-executors David A. Tyler and Lewis J. Ruch of the payments that they needed to make for the income tax deficiency. The co-executors failed to make the payment and subsequently sold the property on Cricket Lane for net proceeds of $313, 206. The said that they invested the proceeds but that the investments did not do well.

On March 2010, the IRS filed to collect the deficiency amount. In United States v. David A. Tyler et al., the court held that the co-executors were personally liable for the income tax deficiency as estate fiduciaries.

First, the court dealt with the issue of whether or not the lien remained attached to the property of the surviving spouse when Mr. Tyler died.  Normally, if a lien is attached to one-half of a tenancy by the entirety and the decedent who caused the lien     passes away, then there is no longer an interest of the taxpayer to which the federal lien attaches and the surviving non-liable spouse takes the property unencumbered by the tax lien.

In this case though, Mr. Tyler severed the tenancy by the entirety when he transferred the property to Mrs. Tyler for the consideration of $1, so the lien remains attached to Mrs. Tyler’s property.

Second, since the lien was still attached, the fiduciary has a duty to pay a claim of the government before paying a debt or they may be personally liable for the unpaid claims of the government. Since the co-executors were fiduciaries, had notice of the government claim, and sold the house without paying the claim, they will be held personally liable to pay the income tax lien.