In Uncategorized on 03/14/2016 at 16:28

Not Hardly

We all remember 26USC§3713, right? What, no? OK, I didn’t either, specifically. But in mitigation I proffer that I knew that an executor who gave away estate assets was liable to creditors who didn’t get paid.

But today’s little sermonette raises the defense: was the estate insolvent, within the meaning of Section 3713, and when do we measure insolvency?

Hear now the tale of Scott Singer, 2016 T. C. Memo. 48, filed 3/14/16 (that’s Pi to you), Judge Nega narrating.

Scott was executor of the estate of the late Mel. The late Mel owed beaucoup income tax, which Scott got blown away with an OIC. Some argy-bargy about whether the OIC was paid, but Scott wins that one. Unhappily, that’s not the end of his troubles.

The late Mel’s estate has a $3 million estate tax bill, including without in any way limiting the generality of the foregoing some three-year gifts clawed back. IRS wants to nail Scott for $422K thereof, claiming Scott gave away assets, rendering the estate insolvent, and unable to pay IRS the $422K balance due.

Scott did get a restraining notice out of NY Surrogate Court on the late Mel’s brokerage account, stating in his moving papers that assets on hand might be insufficient to pay estate tax.

But Scott did try to recover non-probate assets that the late Mel had given his girlfriends and grandchildren. And he did pry some cash out of them. IRS claims they never got it, but Judge Nega finds they did get at least some.

Judge Nega says IRS didn’t include as estate assets the non-probate stuff Scott was clawing back and had clawed back. Insolvency means something different for Section 3713 purposes than just inability to pay debts when same become due. It includes assets the estate could recover in an assets-over-liabilities beancount. Under New York law, which applies here, Scott had recovery and contribution rights against all the donees of the late Mel’s largesse.

And the time to measure insolvency is not date of death. “First, the solvency of the estate at [the late Mel’s] death is not relevant; the appropriate date for measuring the assets and liabilities of the estate is the date of distribution. Respondent has offered no evidence or calculations in this regard despite more than eight years’ elapsing between [the late Mel’s] death and the distribution at issue.” 20156 T. C. Memo. 48, at p. 21.

Note that last sentence. Going back to Justice John Marshall at the dawn of the Nineteenth Century, Judge Nega holds IRS has burden of proof.

IRS claims Scott’s settlement with some of the donees shouldn’t be considered. But Judge Nega says that since IRS hasn’t proved the estate was insolvent, so what?

While Scott has a lot of other arguments, no need for these.

Scott wins.

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