United States v. Anne Jane Kulhanek, et al
On December 8, 2010 the U.S. District Court in the Western District of Pennsylvania released its opinion in United States v. Anne Jane Kulhanek, et al, 755 F.Supp. 2nd 659 (Google Scholar, with links). [The Google Scholar link to the case report sometimes breaks. We repair it. If the link is broken when you visit, a PDF copy of the case is available here. The PDF file currently has live Google Scholar links to the case citations in the Kulhanek opinion.]
The decedent, Robert Q. Roth, Sr., died June 10, 1991. The estate filed its section 6166 election statement with the estate tax return on the regular due date of March 10, 1992 (the IRS received it on March 11, but it had been mailed on or before March 10). IRS assessed the tax on April 20, 1992.
On July 27, 1998 Robert Q. Roth Jr. (apparently an executor of the estate) entered into a contract to sell the closely held business that qualified for the section 6166 deferral. The sale took place on March 1, 1999. Pursuant to section 6166(g)(1)(A), the 6166 election terminated on March 1, 1999 and the entire balance of tax due on that date no longer qualified for an extension of time to pay. The balance was payable on notice and demand from the IRS.
On July 24, 2008 the IRS filed an action in US District Court for the Western District of Pennsylvania to collect the balance due from the transferees of the estate under section 6324(a)(2). The court was not aware that a section 6166 election had been made until the government attorney stated that this was their conclusion in a telephonic conference on March 2, 2010. The court refers to the transcript of that conference and notes that the 6166 election was made with the filing of the return on March 11, 2002. This has to be a typographical error or verbal slip - the return and election were received by IRS on March 11, 1992.
The transferees' Motion to Dismiss was grounded on section 6324(a)(1), which provides a fixed 10-year period from the date of the decedent's death for duration of the special lien for estate tax on the assets of the estate. This period cannot be extended. An action by the government grounded on section 6324(a)(1) must be filed within 10 years of the date of the decedent's death, which was not the case here. The transferees argued that this lien provision expired 10 years after the decedent's date of death and cannot be the basis for transferee liability after that time.
However, the government's action against the transferees was grounded on Section 6324(a)(2), and the statutory period for assessing tax against transferees is governed by section 6502. Section 6502 provides that the period for assessing tax against transferees is suspended for the period of time in which an election under section 6166 is in effect. Since the 6166 election in this case was filed before the estate tax was assessed, the period for assessing tax against the transferees did not begin to run until the 6166 election terminated on the date the business was sold, or March 1, 1999.
This opinion makes clear that the statutory period for assessing tax against transferees of an estate begins running on the date the 6166 election is terminated under section 6166(g)(1)(A). It could also resume running on the 6166(g)(1)(A) termination date if no election had been filed with the original return, but had instead been a 6166(h) election filed within 60 days of the IRS notice and demand for payment of an examination deficiency assessment.
Jun-10-1991 - Date of death. Section 6324(a)(1) 10-year lien on estate assets begins running.
Mar-10-1992 - Estate tax return with section 6166 election timely filed.
Apr-20-1992 - Tax shown due on the return assessed by IRS. Ordinarily, section 6502(a)(1) would apply and the 10-year period for collecting tax would begin to run on this date, except section 6503(d) suspends the running of this 10-year period while a section 6166 election is in effect. The 6166 election was filed before the tax was assessed, so the running of this 10-year collection statute is suspended.
Mar-01-1999 - The estate sells all of the section 6166 assets. The section 6166 election is automatically terminated on this date pursuant to section 6166(g)(1)(A) (the subsequent date on which IRS sends notice and demand for payment of all tax and interest is not relevant). The section 6502 10-year collection statute begins running on this date, within which a section 6324(a)(2) personal liability action may be brought against the transferees of the estate.
Jun-10-2001 - Expiration of the section 6324(a)(1) 10-year lien on estate assets.
Jul-24-2008 - Date the United States filed its section 6324(a)(2) claim against the transferees.
Mar-01-2009 - Date on which the section 6502 10-year collection statute (and period within which a section 6324(a)(2) claim could be filed) expired.