UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
3:13-cv-549-RJC-DCK
UNITED STATES OF AMERICA,
Plaintiff,
v.
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,
Defendants.

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)

Links to Internal Revenue Code: §6166, §6303, §6502, §6503

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)    

Overview

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.

Background

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:

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:

                                                                    Returned                      Corrected

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:

                                                                    Returned                      Corrected

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.

Discussion

Section 6503(d)

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:

1. An estate must fail to pay any principal or interest payment pursuant to its section 6166 election; and,
2. 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. 

Conclusion

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)

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.

Conclusion

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.