In United States v. Estate of Lillian Beckenfeld, et al., T.C. Memo. 2017-25 (Jan. 31, 2017) the Tax Court agreed with the Internal Revenue Service that a collection action against an estate was valid.
Gift Tax Returns
Lillian Beckenfeld died in October 2007. Her husband, Mickey, died in May 2012. Their son, Ronald, was trustee of both Lillian’s estate and Mickey’s estate. On Aug. 31, 2012, Lillian’s estate filed a late Form 709 gift tax return regarding tax year 2007, showing a total gift tax of $1,324,650. The estate didn’t elect to treat any gifts by either Lillian or Mickey to third parties during 2007 as made one-half by each of them. On the date of the filing, Lillian’s estate paid $1,324,650 to the IRS, which was the amount equal to that shown on the late-filed 2007 gift tax return.
That same day, Mickey’s estate filed a late gift tax return regarding Mickey’s tax year 2007, showing a total gift tax of $1,324,650. Mickey’s estate similarly didn’t elect to treat any gifts by either Lillian or Mickey to third parties during 2007 as made one-half by each of them. On the date of the filing, Mickey’s estate paid $1,324,650 to the IRS, which was the amount equal to that shown on the late-filed 2007 gift tax return.
IRS Assessments
In January 2013, the IRS assessed the total gift tax of $1,324,650 in Lillian’s gift tax return and credited her estate’s Aug. 31, 2012 payment of $1,324,650 against the total gift tax of $1,324,650 shown in her 2007 gift tax return. Because the return was filed late and the gift tax paid late, the IRS assessed additions to tax of $298,046.25 and $331,162.50 under Internal Revenue Code Sections 6651(a)(1) and (2), respectively, along with $322,202.59 of interest. The IRS sent notice to Lillian’s estate in which it asked for $951,411.34—the total amount of additions to tax and interest.
In June 2013, the IRS assessed the total gift tax of $1,324,650 shown in Mickey’s 2007 gift tax return. The IRS credited Mickey’s estate’s Aug. 31, 2012 payment of $1,324,650 against the total gift tax of $1,324,650 shown in his 2007 gift tax return. Because the return was filed late and the gift tax paid late, the IRS assessed additions to tax of $298,046 and $331,162.50, respectively, under IRC Sections 6651(a)(1) and (2), along with interest of $316,835.12. It sent notice to Mickey’s estate and requested payment of $946,043.62—the total amount of additions to tax and interest.
Correspondence Between Attorney and IRS
Both Lillian’s estate and Mickey’s estate retained attorney Stephen A. Newstadt to represent them with respect to the IRS’ request for payments. In May 2014, the IRS sent a letter to Ronald, as trustee of Lillian’s estate, informing him that Lillian’s 2007 liability was still outstanding, and it demanded payment. An IRS officer met with Ronald and asked him to have Lillian’s estate attorney contact him. Newstadt contacted the IRS officer, informed him that it was his understanding that Lillian’s unpaid 2007 liability was satisfied and told him that he would send documentation to that effect.
Newstadt subsequently faxed to the IRS officer a copy of the IRS June 2013 letter that was addressed to Ronald, as trustee of Mickey’s estate. Newstadt also faxed a copy of a letter dated Aug. 26, 2013 that Newstadt, acting as the attorney for Mickey’s estate, sent to the IRS in response to the IRS’ June 2013 letter. In that Aug. 26, 2013 letter, Newstadt had included a check for $951,971.40, “which represents final payment pursuant to the enclosed letter and Notice Number CP220 dated June * * * 2013 in the above estate for form 709 and Tax period December 31, 2007.” Newstadt also faxed to the IRS officer a copy of the check for $951,971.40, which he’d included in the Aug. 26 letter. As part of the instructions in the Aug. 26 letter, Ronald signed the check as trustee of Mickey’s estate, noted on the front of the check that it was remitted with Mickey’s estate’s 2007 gift tax return and wrote Mickey’s Social Security number on the front of the check.
In August 2014, Newstadt, as attorney for Lillian’s estate, submitted Form 12153, “Request for a Collection Due Process or Equivalent Hearing.” He requested a hearing with an IRS Appeals Office regarding the notice of intent to levy, but didn’t mention in the request any collection alternatives. Rather, he attached a letter to explain why he was requesting a hearing, specifically that: penalties and interest for Lillian’s 2007 gift tax return were paid in full on Aug. 22, 2013, through check number 501, in the amount of $951,971.40; that the check clearly indicated in the memo line that it was for payment of monies owed by the “Estate of Mickey Beckenfeld,” but, because Mickey and Lillian were deceased at the time of payment, it was assumed that the amount owed for Lillian’s 2007 return was being charged over to her estate; the fact that Mickey’s Social Security number was included in the memo line of the check was of no consequence; and prior to payment in full of the penalties and interest owed on Lillian’s 2007 gift tax return, an IRS agent had verified over the telephone that $951,971.40 was in fact the full amount due by the Lillian’s estate.
Telephone Hearing
In October 2014, an IRS settlement officer sent a letter to both Ronald, as trustee of Lillian’s estate, and to Newstadt, as attorney for Lillian’s estate. The settlement officer acknowledged receipt of Lillian’s estate’s Form 12153 and scheduled a telephone hearing with Newstadt on Feb. 10, 2015, with respect to the notice of intent to levy. The hearing took place, during which Newstadt didn’t dispute Lillian’s unpaid 2007 liability. He argued, however, that despite Mickey’s estate’s instructions to the IRS, Mickey’s estate’s Aug. 22, 2013 check was intended to pay Lillian’s unpaid 2007 liability. Newstadt also advanced certain additional arguments that pertained to Mickey’s taxable year 2007.
The settlement officer reminded Newstadt of Mickey’s estate’s instructions in its Aug. 26, 2013 letter, as well as Ronald’s notation on Mickey’s estate’s Aug. 22 check. He also advised Newstadt that Mickey’s estate’s instructions to the IRS were to use the Aug. 22 check to satisfy Mickey’s 2007 liability, not Lillian’s unpaid 2007 liability. Finally, the settlement officer told Newstadt that he wouldn’t consider certain arguments that Newstadt advanced relating to Mickey’s taxable year 2007, because the IRS Appeals Office had jurisdiction over only the notice of intent to levy with respect to Lillian’s taxable year 2007, in response to which it filed the Form 12153.
IRS Appeals Office Determination
In February 2015, the IRS Appeals Office issued to Lillian’s estate a notice of determination in which it sustained the notice of intent to levy. The Appeals Office stated:
Appeals has verified that applicable laws and administrative procedures have been met, has considered the issues raised, and has balanced the Collection action with the legitimate concerns that such action be no more intrusive than necessary. Collection’s plan to levy is sustained.
Along with the above determination, the IRS Appeals Office also included a “Summary and Recommendation” and a detailed explanation of why levy by collection was appropriate. Such explanation included that both Forms 709, each filed separately for Lillian and Mickey, for the same amounts and at the same time, were filed late, and the gift taxes due were paid late. Additionally, the check that was submitted, which had Mickey’s Social Security number and a direction by Ronald to apply it to Mickey’s liability, was in fact applied to Mickey’s liability.
Newstadt, however, claimed that payment was “meant to be” for Lillian’s estate liability, and it wasn’t “intended” to apply to Mickey’s liability.
Estates’ Arguments Rejected
The Tax Court rejected Lillian’s estate’s claims that the Aug. 22, 2013 check was intended to pay for Lillian’s estate’s unpaid 2007 liability. Under Dixon v. Commissioner, 141 T.C. 173 (2013), a taxpayer can designate how voluntary tax payments should be applied, and the IRS must honor such designation. In this instance, Mickey’s estate’s Aug. 26, 2013 letter included the Aug. 22, 2013 check, which bore Mickey’s Social Security Number, along with a notation from Ronald that the check was being remitted with respect to Mickey’s 2007 gift tax return.
The Tax Court stated:
On the record before us, we find that Mr. Beckenfeld’s estate’s instructions to respondent instructed respondent, without reservation, to use Mr. Beckenfeld’s estate’s August 22, 2013 check to satisfy Mr. Beckenfeld’s 2007 liability, not Ms. Beckenfeld’s unpaid 2007 liability. On that record, we further find that respondent followed those instructions. On the record before us, we find that Ms. Beckenfeld’s unpaid 2007 liability remains unpaid. On that record, we shall sustain the determinations in the notice of determination.
As such, the Tax Court found the petitioner’s contentions and arguments “to be without merit, irrelevant, and/or moot,” and entered a decision for the IRS.
