UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
UNITED STATES OF AMERICA,
FRED D. GODLEY, JR., as Administrator C.T.A. of the Estate of Fred O. Godley and individually,
GREGORY GODLEY, as former Co-Executor of the Estate of Fred O. Godley and individually, LISA
GODLEY GILSTRAP, as former Co-Executor of the Estate of Fred O. Godley and individually,
KIMBERLY GODLEY, as former Co-Executor of the Estate of Fred O. Godley and individually,
RODNEY GODLEY, as Trustee of the Fred O. Godley Revocable Trust and individually, MARTHA
MARTHA GODLEY, WILLIAM C. GODLEY, ROBERT GODLEY, DAVID GODLEY,
CATHY GODLEY MATTHEWS, IVY GODLEY BRUCE, MARK GODLEY, and PETER GODLEY,
Filed September 30, 2015.
Link to U.S. v. Godley (Google Scholar - contains links to citations)
Link to U.S. v. Godley (PDF of the District Court opinion)
Primary case citations:
Lake Shore National Bank v. Coyle, 419 F.2d 958 (7th Cir. 1969)
United States v. Askegard, 291 F. Supp. 2nd 971 (D. Minn., 2003)
Adell v. Commissioner, T.C. Memo 2013-228, 106 T.C.M. (CCH) 377 (T.C. 2013)
United States v. Jersey Shore State Bank, 781 F.2d 974 (3rd Circuit 1986), aff'd 479 U.S. 442, 107 S. Ct. 782, 93 L. Ed. 2d 800 (1987)
United States v. Godley - Detailed Timeline
|May-11-1990||Date of death|
|Feb-11-1991||Statutory return due date - Form 4768 filed. No indication that a payment was made.|
|Jul-22-1991||Co-Executors filed suit in probate court against the other heirs of the Estate seeking declaratory judgments regarding accounts receivable flowing to and from the various parties and entities of the Estate.|
|Aug-11-1991||Extended return filing due date (Sunday).|
|Aug-14-1991||Actual return filing date per court opinion (see n1, below). Filed (most likely at Memphis Service Center) with a §6166 election. No payment.|
|Sep-16-1991||IRS assessed the reported Estate tax of $270,737. The § 6166 election was tentatively allowed pending IRS examination results and a tentative § 6166 deferred tax billing account was established.|
|Feb-07-1992||Estate voluntarily paid $70,000 Estate tax. The relation between this payment and the amount due on the 1st anniversary date is not explained in the opinion. (See n2, below.)|
|Feb-11-1992||1st Anniversary Date under the § 6166 election. Interest only would have been due under a regular § 6166(a) 14-year election. The opinion does not state whether a separate interest payment was made at this time.|
|Apr-17-1992||Co-Executors and the other heirs entered into a Settlement Agreement acknowledging the existence of unpaid Federal estate taxes and the section 6166 election. It included an agreement by Fred D. Godley, Jr. (Godley, Jr.) to pay any additional taxes that might be owed to IRS or to indemnify the Estate if it paid any such taxes. All of the heirs promised to repay any amounts previously advanced from the Estate if such demand was made by the Estate's personal representative.|
|Aug-13-1992||Estate voluntarily paid $114,200 estate tax|
|Nov-13-1992||Estate voluntarily paid $1,195 estate tax|
|Feb-11-1993||2nd Anniversary Date - interest only was due. No indication if it was paid.|
|Feb-11-1994||3rd Anniversary Date - interest only was due. No indication if it was paid.|
|Aug-02-1994||IRS Statutory Notice of Deficiency was issued asserting additional Estate tax of $696,554 was due, based primarily on valuation increases of property inherited solely by Godley, Jr. The Estate had 90 days within which to petition the Tax Court.|
|Oct-03-1994||Estate voluntarily paid $42,480 estate tax. This was the last tax payment made by the Estate. The balance due after this payment was $42,862 of the originally assessed tax, plus the finally determined deficiency, interest, and penalties.|
|Oct-31-1994||Estate filed a Tax Court Petition challenging the IRS Statutory Notice of Deficiency|
|November 1994||The Estate made distributions to all of the beneficiaries except Godley, Jr. Those beneficiaries signed refunding agreements providing that they would refund the amount distributed upon demand by the Estate's representative in the event that any taxes were payable out of the distributed property.|
|Dec-29-1994||The Co-Executors resigned from their positions and Godley, Jr. took over as Administrator CTA of the Estate and also took over prosecution of the Tax Court litigation. The resigning Co-Executors transferred $443,916 in Estate assets to Godley, Jr. as Administrator.|
|Mar-28-1995||Godley, Jr. filed an Inventory with the probate court listing the same Estate assets with a value of $443,916.|
|Jan-03-1996||Godley, Jr. filed the Estate's Annual Accounting reporting that he had distributed all $443,916 of Estate assets to himself in 1995 and that the Estate held no assets.|
|Feb-11-1996||4th Anniversary Date - interest only was due. No payment.|
|Feb-11-1997||5th Anniversary Date - 1st Tax Installment due, plus interest. No payment.|
|Feb-11-1998||6th Anniversary Date - 2nd Tax Installment due, plus interest. No payment.|
|Feb-11-1999||7th Anniversary Date - 3rd Tax Installment due, plus interest. No payment.|
|Feb-11-2000||8th Anniversary Date - 4th Tax Installment due, plus interest. No payment.|
|Aug-04-2000||After 6 years in litigation the Tax Court entered an opinion ruling on the valuation of the Estate's property. The deficiency was determined to be $247,714.|
|Feb-11-2001||9th Anniversary Date - 5th Tax Installment due, plus interest. No payment.|
|Aug-01-2001||IRS assessed a deficiency of $247,714 based on the Tax Court opinion. The total due IRS at that point, before accrued interest, was $518,451, determined as follows|
|$ 42,862||Balance of unpaid tax from the original assessment.|
|$ 247,714||Deficiency assessed by IRS.|
|$ 227,875||Interest and applicable penalties.|
|Oct-15-2001||IRS Statement of Tax Due (probably Letter 6335) sent to the Estate. The total due was $619,794. This figure was determined as follows.|
|$ 177,177||Past-due installments of deferred tax|
|$ 442,617||Interest and applicable penalties and non-deferred tax|
|The Estate had 10 days to pay this amount.|
|The Statement did not include any language regarding termination of the 6166 election or acceleration of the unpaid amount.|
|Godley, Jr. did not respond.|
|Feb-11-2002||10th Anniversary Date - 6th Tax Installment due, plus interest. No payment.|
|Sep-18-2002||IRS Notice and Demand for payment of $839,897, determined as follows|
|$ 798,332||Balance of tax, interest and penalties from prior assessments.|
|$ 41,565||Late 2002 installment plus additional interest and penalties.|
|The Notice stated: "The Section 6166 Installment Agreement is in default due to non-payment and the account is in danger of being accelerated, making the full account balance due immediately. In order to avoid this, we must receive the installment payment by September 30, 2002."|
|The statement also provided: "In order to avoid ACCELERATION OF THE ACCOUNT, please send the amount due by September 30, 2002 along with the completed Certificate of Unchanged Status."|
|Godley, Jr. did not respond.|
|Sep-30-2002||The payment deadline that was specified in the Sep-18-2002 Notice. No payment was made.|
|Feb-11-2003||11th Anniversary Date - 7th Tax Installment due, plus interest, if and only if the § 6166 election had not previously been terminated. If the election had previously been terminated by acceleration of the account, there would be no additional anniversary dates occurring after the termination date.|
|Oct-15-2003||IRS Notice and Demand for payment of $834,452, due and payable by October 27, 2003 (see n3, below). The Estate was informed that the § 6166 account was being accelerated because the § 6166 election was in default. Information regarding the IRS Appeals process was included. IRS argued that this was the date on which the §6503 suspension of the 10-year collection statute was lifted.|
|The Estate was notified that its claims had been disallowed and that its "account [was] being accelerated for payment due to your 6166 election default." (For Cincinnati Campus billing purposes, there were no further Anniversary Dates to consider because the account had been accelerated and was now a Collection Advisory matter.)|
|Godley, Jr. did not respond.|
|Feb-09-2009||Godley, Jr. filed the Estate's Final Annual Report with the probate court reporting zero assets in the Estate. He requested that the Estate be closed.|
|Nov-26 and Nov-27-2012||IRS filed Notices of Federal Tax Liens against the Estate in jurisdictions where all real estate assets were located.|
|There is no evidence to indicate that IRS took any action between October 2003 and November 2012. See n4, below.|
|May-28-2013||IRS sent Notices of Federal Taxes Due to all the defendants in the case regarding the Estate's outstanding taxes.|
|Sep-27-2013||IRS filed suit to collect the unpaid tax liability.
Primary Issues Presented
1. When was the IRC §6166 election accelerated under §6166(g)(3) for failure to make payment of principal or interest?
2. Was the IRS suit to collect unpaid tax, penalties, and interest timely filed?
Related or Subsidiary Issues
A. Does a default in payment alone trigger the running of the §6502(a) statute of limitations?
B. Must the IRS affirmatively terminate the §6166 election before the §6502(a) statute of limitations begins running?
C. When were the §6503(b) and §6503(d) suspensions of the running of the §6502(a) ten-year collection statute lifted?
The Estate's Argument:
Either the Oct-15-2001 Notice or the Sep-18-2002 Notice constituted notice and demand by IRS such that the 10-year limitations period began running as early as Oct-15-2001, and no later than Sep-18-2002. The limitations period expired no later than Sep-18-2012 and the government's suit filed on Sep-27-2013 was therefore untimely.
The IRS's Argument:
A notice and demand operates to lift the §6503(d) suspension of the statute of limitations only if it affirmatively terminates the section 6166 election, accelerates all future installments, and demands payment thereof. The statute of limitations therefore did not begin running until the IRS sent the Oct-15-2003 notice, which satisfied these requirements, and the suit filed Sep-27-2013 was timely because the statute of limitations therefore did not expire until Oct-15-2013.
Alternatively, pursuant to §6503(b) the 10-year statute of limitations will not expire until Feb-09-2019. Although the Estate held zero assets from 1996 forward, it held contractual rights to recover taxes and assets from the Estate distributees until the Estate was closed on Feb-09-2009, and the 10-year collection statute began running on Feb-09-2009.
The Decedent, Fred O. Godley, died May 11, 1990. The statutory return due date was Monday, Feb-11-1991. Form 4768 was filed on or before that date to request extensions of time to file (section 6081) and (presumably) time to pay (section 6161).
The estate tax return was timely filed on or before the extended filing due date of Monday, August 12, 1991. The return was date stamped “Received” by IRS processing on August 14 n1. It reported a gross estate of $2,424,526 and a net estate tax of $270,737. A section 6166 election was filed with the return. The IRS tentatively allowed the election pending examination results. Payment of the deferred portion of the tax was extended under the section 6166 election, while payment of the non-deferred tax was apparently extended under section 6161; the specific amounts of each category are not given in the opinion.
Among the estate assets qualifying for the section 6166 election were the decedent’s 50% interests in 5 general partnerships:
|Monroe Housing for the Elderly|
|Clinton Housing for the Elderly|
|Rocky Mount Housing for the Elderly|
|Charlotte Housing for the Elderly|
|Godley Management Association|
The other 50% interests were held by the Decedent’s son, Frank D. Godley (“Godley, Jr.”). The estate tax value of each partnership interest was $10,000, based on options held by Godley, Jr. to purchase the Decedent’s interest in each partnership for $10,000.
Other business interests also qualified for the section 6166 election (the total value of the qualifying business interests is not given in the opinion). Based on a gross estate of $2,424,526 and a net estate tax of $270,737, the minimum amount of qualifying business interests eligible for a section 6166 election on the return as filed was $498,356. See Computation Exhibit 1.
The estate tax return was audited (examined) by IRS. A deficiency of $694,554 was proposed based on increases to the estate tax values of the 5 partnership interests and other changes. IRS allowed a discount for lack of marketability but did not allow a minority interest discount. The Estate did not agree. A Statutory Notice of Deficiency was issued August 2, 1994 explaining that an additional $696,554 in estate taxes was due. The Estate filed a petition in Tax Court on October 31, 1994 for a redetermination of the deficiency. After 6 years of litigation the Tax Court entered an opinion on August 4, 2000 that the correct deficiency was $247,714. See Estate of Fred O. Godley, Fred D. Godley, Administrator CTA, v. Commissioner, T.C. Memo 2000-242. The IRS assessed the deficiency a year later, on August 1, 2001.
The Tax Court’s corrected values for the Decedent’s 50% general partnership interests were:
Monroe Housing for the Elderly $10,000 $315,723
Clinton Housing for the Elderly $10,000 $ 63,357
Rocky Mount Housing for the Elderly $10,000 $ 74,914
Charlotte Housing for the Elderly $10,000 $171,202
Godley Management Association $10,000 $180,000
Other business interests included in the gross estate were also adjusted:
Godley Realty, Inc. (50%) $ 64,696 $225,048
Concrete Panel Systems, Inc. (25%) $ 27,049 $ 34,271
No information is given in the opinion about adjustments to other estate asset values or the finally determined amounts allowable as deductions on Schedules J, K, or L; this information can be obtained from court records via PACER.
The Estate timely filed an appeal of the Tax Court decision with the Court of Appeals for the Fourth Circuit regarding valuations of the 5 partnership interests. On April 15, 2002 the Court of Appeals affirmed the Tax Court judgment. See Estate of Fred O. Godley, Fred D. Godley, Administrator CTA, v. Commissioner, 286 F.3d 210.
Despite the ongoing section 6166 election with its annual payment due dates of Feb-11 each year, the Estate did not make any payments to IRS after Oct-03-1994. During the period that the Tax Court litigation was underway the IRS did not initiate the section 6166(g)(3) acceleration procedures for non-payment. Upon assessment of the Tax Court deficiency, the section 6166(g)(3) acceleration procedures were initiated by the IRS, most likely at Cincinnati Campus.
Section 6503(d) provides:
(d) Extensions of time for payment of estate tax
The running of the period of limitation for collection of any tax imposed by chapter 11 shall be suspended for the period of any extension of time for payment granted under the provisions of section 6161(a)(2) or (b)(2) or under the provisions of section 6163 or 6166.
Generally, section 6502(a) provides that the IRS has ten years within which to collect a tax after it is assessed or to file a suit for judgment on the tax. However, section 6503 provides exceptions whereby the ten-year statute of limitations is suspended for a period of time. When a Section 6166 Election is made, section 6503(d) provides that the "running of the period of limitation for collection of any tax imposed by chapter 11 shall be suspended for the period of any extension of time for payment granted under the provisions of section . . . 6166."
The District Court concluded that there is a two-step process that must be completed before a section 6166 account can be terminated for failure to pay an installment of tax or interest:
- An estate must fail to pay any principal or interest payment pursuant to its section 6166 election; and,
- Notice and demand for payment of taxes due must be made by IRS.
There was no question that the Godley estate failed to make payments after 1994. This constituted a default of its section 6166 installment agreement. However, a default alone is not sufficient to trigger the 10-year statute of limitations. See Lake Shore National Bank v. Coyle, 419 F.2d 958 (7th Circuit 1969) and United States v. Askegard, 357 F. Supp. 2d 1152 (Dist. Ct. MN 2005).
Section 6166(g)(3)(A) specifies that notice and demand must be made following a default of the agreement, but it does not specify the form of such notice and demand. Section 6303(a) governs in this situation. That statute provides that the IRS shall "give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof." The Defendants cited Tilley v. United States, 270 F. Supp. 2d 731 (M.D.N.C. 2003), aff'd 85 F. App'x 333 (4th Circuit 2004), for their argument that the form of a section 6303(a) notice "is irrelevant as long as it adequately inform[s] the taxpayer of his or her tax liability and request[s] payment."
The Third Circuit also interpreted a section 6303(a) notice as one that contains the same two elements, and described a 6303(a) notice as one that gives the taxpayer "one last opportunity to pay taxes before the government invokes the full panoply of its administrative collection powers." United States v. Jersey Shore State Bank, 781 F.2d 974 (3rd Circuit 1986), aff'd 479 U.S. 442, 107 S. Ct. 782, 93 L. Ed. 2d 800 (1987).
The Defendants argued that the Oct-15-2001 notice and demand satisfied these tests because it indicated an amount "due within 10 days from the date of this notice" and requested payment of that amount. In the alternative, if that notice is deemed insufficient, the Defendants argued that the Sep-30-2002 notice constituted notice and demand by IRS and started the 10-year limitations period running. The 2002 notice stated:
"The Section 6166, Installment Agreement is in default due to non-payment and the account is in danger of being accelerated, making the full account balance due immediately. In order to avoid this, we must receive the installment payment by September 30, 2002."
The notice also included the following statement:
"In order to avoid ACCELERATION OF THE ACCOUNT, please send the amount due by September 30, 2002 along with the completed Certificate of Unchanged Status."
Referring to the Tax Court opinion in Adell v. Commissioner, T.C. Memo 2013-228, 106 T.C.M. (CCH) 377 (T.C. 2013), the Court held that the 6166 election was terminated on the acceleration date specified in the Sep-18-2002 notice and demand for payment of the past-due annual amounts, or Sep-30-2002. The critical language in that letter was the statement that the account would be accelerated if payment was not received by Sep-30-2002. This satisfied the "precondition" for termination of the section 6166 election.
The Court stated that the 2002 notice language in this case "mirrors the language in Adell." The relevant facts in Adell were described as follows.
The estate in Adell failed to make installment payments for three years, and the IRS issued what the Tax Court determined, and the IRS agreed, was a final notice and demand, which stated that if the estate failed "to pay the delinquent installment by the due date shown above, the IRS will terminate your IRC section 6166 election and the total amount of estate tax deferred . . . will be due." 106 T.C.M. (CCH) 377, at *18, *25. The Tax Court interpreted section 6166(g)(3)(A) and applied its provisions to that final notice and demand, which contained substantially similar language to the 2002 Notice in this case. The Tax Court determined that, upon the notice and demand, "the extension of time for payment of the estate tax provided in section 6166 [was] terminated as a matter of law." Id. at *26.
The 2001 notice in this case did not apprise the Estate that the section 6166 election would be terminated if payment were not received within 10 days of the notice; it merely stated that payment was due within 10 days.
The section 6503(d) suspension of the 10-year collection statute was lifted on September 30, 2002, the date specified in the September 18, 2002 notice and demand for payment as the date on which the section 6166 election would be accelerated if payment was not made by that date. The 10-year collection statute began running on September 30, 2002 and expired on September 30, 2012. The IRS suit filed September 27, 2013 was time-barred.
Section 6503(b) provides
(b) Assets of taxpayer in control or custody of court
The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States or of any State or of the District of Columbia, and for 6 months thereafter.
The Estate had no assets by, at the latest, Jan-03-1996, the date on which Godley, Jr. filed the Estate's Annual Accounting to report that he had distributed the entirety of the Estate's assets to himself as beneficiary. The IRS argued that while these "original assets" of the estate had, indeed, been distributed to the beneficiaries by 1996, the Estate held assets in the form of contractual rights which remained under the Probate Court's control until Feb-09-2009, when Godley Jr. filed the Estate's Final Annual Report and requested that the Estate be closed. These contractual rights represented "all or substantially all" of the Estate's assets. There were three sets of contractual rights:
(1) a right under the 1992 Settlement Agreement to demand full payment from Godley, Jr. for any additional taxes owed by the Estate as a result of the Tax Court litigation or the Section 6166 Election;
(2) the rights to recover distributions under the refunding agreements that were signed by John White, William Godley, Robert Godley, and Godley, Jr. when they took distributions from the Estate in 1994; and
(3) the right under North Carolina law to recover the value of the real estate that had passed to William Godley and Robert Godley outside of the probate estate
However, the Court concluded that
"[t]he presence of assets of the decedent, substantial in value in relation to the total value of the decedent's estate, not subject to the custody and control of the probate court precludes" the section 6503(b) suspension of the statute of limitations. United States v. Silverman, 621 F.2d 961, 967 (9th Cir. 1980). That presence of assets outside of the estate and not subject to the control of a court "may be attributable to their passage from the decedent by means other than his last will or [by] partial distributions" from the estate. Id.
The Court held that, as of January 1996, the last distribution of the Estate's assets occurred and there were no leviable or inheritable assets of any substantial value which had been owned by the Decedent remaining in the Estate after that date. The section 6503(b) suspension was lifted on January 3, 1996, the running of the 10-year collection statute expired January 3, 2006, and the IRS suit filed September 27, 2013 was time-barred.
|n1||August 14, 1991 is the Service Center "Received" red ink date stamp on the face of the return. Due to internal processing time frames, the stamped date is usually one or more days after the actual date of receipt by IRS. The Assessment Statute Expiration Date (ASED) posted on the IRS computer system is keyed to the later of the statutory return due date or the Received date stamped on the face of a return. The ASED posted on the IRS computer system can therefore be off by several days in cases like Godley, which can mislead litigants. It appears that in Godley the return was timely filed on or before the Monday immediately following the Sunday extended return filing due date.|
|n2||If the payment was undesignated, the Service Center would have credited part of it to the interest due on the anniversary date and the balance would have been applied against tax. If it had been designated as a tax payment, however, and a separate interest payment in response to the anniversary date billing notice had not also been made, the interest due on the anniversary date would have remained unpaid and the § 6166(g)(3) underpayment acceleration process would have (or should have) begun.|
|n3||The Sep-18-2002 notice stated the balance due was $839,897, while the Oct-15-2003 notice stated the balance due was $834,452. The decrease in the balance due is attributable to the automatic elimination of the section 6166(g)(3)(B)(iii) 5%-per-month penalty on past-due 6166 installments. This penalty assessment is reversed when an account is accelerated, as the penalty is due and payable only when the 6166 election has been saved by payment of the past-due installment amount, penalty, and interest. (Additional interest accruing between the two notice dates would offset somewhat the decrease attributable to the penalty elimination.)|
|n4||The original estate tax return was most likely filed at Memphis Service Center in 1991. By 2001 Cincinnati Service Center (Cincinnati Campus) had become the nation-wide centralized estate tax return filing location. All active section 6166 accounts from the other 9 service centers were shipped to Cincinnati for future administrative and billing purposes. Cincinnati Campus would therefore have sent at least the Oct-15-2003 demand and notice, and most likely the 2002 notices as well (delinquent billing accounts were sometimes retained at the original service centers for resolution). After the 6166 account was terminated on the Cincinnati records, future billing activity (if any) would have devolved to Collection Advisory. Collection Advisory would then refer the matter to IRS Counsel, who would then contact the Department of Justice to file a suit to collect the tax. See, generally, IRM 188.8.131.52 et seq, Administrative and Judicial Actions for Estate Taxes.
|When using a §6166(a)(2) ratio carried out to 6 decimal places, as is specified on page 15 of the Instructions for Form 706, a §6166 business value of $498,356 and a §6166(b)(6) adjusted gross estate of $1,423,872 yields a ratio of 35.0001%, which exceeds the threshold of 35.0000%. This is the method used by IRS when processing §6166 elections.|
|However, the minimum §6166 business value becomes $ 512,594 if the ratio is carried out to only 2 decimal places, as is illustrated in example 1(i) in Reg. §20.6166-1(i). Section 6166(a)(2) itself is silent regarding the number of decimal places. Section 6166(a)(1) says only that a qualifying business value is one that “exceeds 35 percent of the adjusted gross estate”.|
Note also: There are 2 methods of using a spreadsheet to determine the 6-decimal- place §6166(a)(2) ratio.
1. Divide $498,356 by $1,423,872. The cell shows "0.35". The cell formula might be "=F5/F6". Expand the number displayed in the cell by clicking the "← .0 .00" button in the ribbon at the top margin until the cell shows "0.350001". While this is the displayed ratio, the actual spreadsheet cell content is "0.3500005618482560".
2. Divide $498,356 by $1,423,872. The cell shows "0.35". The cell formula might be "=F5/F6". Modify the cell formula to "=round(F5/F6,6)". The cell shows "0.350001". The actual spreadsheet cell content is "0.3500010000000000". This is the method used by IRS. The dollar differences might appear to be de minimis; e.g., multiplying the cell factors above by $10,000,000 yields a difference of $4.38 between the products. However, the differences can be hundreds of dollars when the numbers are large enough. The point is that one can duplicate the IRS numbers with the correct input. See United States v. Godley Computation Exhibit 1.