In United States v. Paulson, the U.S. Court of Appeals for the Ninth Circuit held that the heirs of the estate of Allen Paulson, founder of the Gulfstream Aerospace Corporation, are liable for unpaid taxes under Internal Revenue Code Section 6324(a) as transferees or beneficiaries.
Tax Deficiency of $10 Million
Allen died with an estate valued at nearly $200 million, most of which was held in his revocable trust. The estate paid a portion of its estate tax liability at the time of the filing of its estate tax return and elected to pay the balance in installments under a 15-year plan (pursuant to IRC Section 6166). When the estate missed some payments, the Internal Revenue Service terminated the Section 6166 election and issued a notice of final determination under IRC Section 7479. When the approximately $10 million deficiency went unpaid, the United States sued Allen’s heirs, alleging that they controlled the trust as trustees, or received estate property, as transferees or beneficiaries, and are therefore liable for estate taxes under Section 6324(a)(2) and Section 19001 of the California Probate Code.
Government’s Argument
The District Court concluded that one beneficiary wasn’t liable for unpaid estate taxes as a beneficiary of the living trust because she didn’t receive life insurance benefits and that several other beneficiaries weren’t liable for unpaid estate taxes because they weren’t in possession of estate property at the time of Allen’s death. These conclusions were reached by virtue of statutory interpretation of Section 6324(a)(2), which provides in pertinent part: “If the estate tax imposed . . . is not paid when due . . . then the spouse, transferee, trustee . . . or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent’s death, of such property, shall be personally liable for such tax.” (Emphasis added.) The United States argued that the limiting phrase “on the date of decedent’s death” modifies only the immediately preceding verb “has” and not the more remote verb “receives.” Therefore, under the government’s view, liability for estate taxes is imposed on anyone who receives estate property on or after the date of decedent’s death or who has possession of estate property on the date of decedent’s death (that is, trustees and beneficiaries of the living trust, including those who receive property after the decedent’s death).
Personal Liability Imposed
The Ninth Circuit agreed that the government’s interpretation of Section 6324(a)(2) is the most natural reading of the statute and held that therefore personal liability is imposed with respect to unpaid estate taxes on the categories of people listed in the statute who own or receive estate property, regardless of whether received on or after the decedent’s date of death (subject to the applicable statute of limitations). The Ninth Circuit reached its conclusion by examining Congress’ intent, relating to other examples of statutory interpretation, disagreeing that the weight of precedent favored the beneficiaries’ interpretation and roundly rejecting the beneficiaries’ other arguments (for example, that generally ambiguities in tax statutes must be resolved in favor of the taxpayer, that the government’s interpretation is “absurd” because property could potentially depreciate after the decedent’s date of death to the point where property received is worth less than the tax owed and that the statute would hold a bona fide purchaser of estate property liable for estate tax).
Case Remanded
The Ninth Circuit didn’t address the application of Section 19001 of the California Probate Code and remanded the case to District Court to enter judgment in favor of the government on the claims made with any further proceedings necessary to determine the amount of each defendant’s liability for the unpaid taxes.
