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Decline of Estate's Stock Value Leaves Nothing for Executor; Federal Liens Take Priority

(Parker Tax Publishing November 2016)

Reversing a district court, the Eleventh Circuit held that commissions claimed by the executor of an estate did not have priority over a Code Sec. 6324A deferred estate tax lien. The court also concluded that the executor's administrative expenses did not take priority over income tax liens imposed under Code Sec. 6321. U.S. v. Spoor, 2016 PTC 386 (11th Cir. 2016).


In 1989, Louise Paxton Gallagher created a revocable trust. When she died in 2004, the trust contained 39,700 units in Paxton Media Group, LLC (Paxton), a privately held and family-owned newspaper publishing company. Gordon Spoor is the personal representative of Gallagher's estate as well as the trustee of the trust. For estate tax purposes, the Paxton units were valued at approximately $35.8 million. On its estate tax return, the estate elected to defer and pay its estate tax liability in ten equal installments, pursuant to Code Sec. 6166. The estate made tax payments of approximately $3 million in 2005 and between $1.7 million and $1.8 million each in 2006, 2007, and 2008. In August 2010, the estate agreed to the creation of a special Code Sec. 6324A deferred estate tax lien on the Paxton units. The IRS recorded notice of the lien.

By 2012, the value of the Paxton units had become less than the unpaid portion of the deferred tax and interest, and the IRS demanded additional collateral from the estate. When the estate was unable to provide additional collateral within 90 days, the IRS accelerated the remaining deferred tax obligations. As of September 2013, the remaining estate tax, penalties, and interest totaled approximately $10.5 million. Because the estate also failed to pay its reported income taxes, as of September 2013, the estate owed an additional $551,000 in income tax, penalties, and interest. Pursuant to Code Sec. 6321, the failure to pay income tax liabilities resulted in federal tax liens attaching to the estate beginning in September of 2010.

The IRS filed suit in a district court, seeking to foreclose the designated property lien under Code Sec. 6324A and the income tax liens. Spoor did not dispute the validity or amount of the IRS liens, and in September of 2014, the district court granted summary judgment in favor of the IRS on its right to foreclose its tax liens on the Paxton units. Spoor filed a cross-motion for summary judgment, asserting that his claim to administrative expenses took priority over the IRS's liens. At the time of summary judgment, Spoor had paid himself $600,000 of his approximately $1.1 million claim, leaving almost $500,000 yet to be paid. The value of the Paxton units owned by the estate had fallen to approximately $2 million.

Estate Tax Liens

Liens for estate taxes operate slightly differently than liens for other taxes. Under Code Sec. 6324, an estate tax lien arises automatically from the date of death, and attaches to the gross estate, except that the part of the gross estate as is used for the payment of charges against the estate and expenses of its administration are divested of such lien. The estate tax lien is not valid against a mechanic's lienor or any of the interests that prime general tax liens listed in Code Sec. 6323(b). Under Code Sec. 6166, an alternative to this gross estate tax lien is available if more than 35 percent of the value of the adjusted gross estate is attributable to an interest in a closely held business. In that case, the executor may elect to pay the tax in up to ten equal installments, with the first payment due up to five years from the payment due date that would otherwise apply.

Code Sec. 6324A(a) provides for a special estate tax lien for estate tax deferred under Code Sec. 6166. As collateral, the executor may identify "section 6166 lien property" in lieu of the Code Sec. 6324 gross estate lien after receiving written consent from each person having an interest in the designated property. Under Code Sec. 6324A(b)(2), the maximum value of the property which the IRS may require as Code Sec. 6166 lien property cannot be greater than the deferred amount and required interest, taking into account any encumbrance on the property such as a lien on farm property. Until the special lien is recorded, Code Sec. 6324A(d) provides that it is not valid against any purchaser, holder of a security interest, mechanic's lien, or judgment lien creditor. Even after the special lien is recorded, it is not valid against certain other interests including real property tax and special assessment liens. If the value of the property designated by the agreement ever becomes less than the unpaid portion of the deferred tax and interest amount, the IRS may require that additional property be added to the agreement, although in no case may the value of the designated property exceed the unpaid portion of the tax liability. If property is not provided within 90 days to satisfy the liability, such failure accelerates payment obligations of the deferred portion.

District Court's Decision

Because Code Sec. 6324A is silent as to the priority of claims which arise prior to a federal tax lien, the district court relied on the common-law principle that "the first in time is the first in right." Because Spoor's administrative expense claim, as filed with the Form 706 tax return in 2005, arose prior to the tax liens that were recorded and assessed in September 2010, the district court concluded that Spoor's claim had priority. The court further held that this result was supported by public policy considerations, because estates might not be administered if personal representatives were not confident that they would be compensated for their efforts. The IRS appealed.

Eleventh Circuit's Decision

The Eleventh Circuit reversed the district court and held that the text and structure of Code Sec. 6324A do not permit an executor's administrative expenses to take priority over a Code Sec. 6324A estate tax lien.

The court compared the two sections governing estate tax liens - Code Sec. 6324 (the gross estate tax lien) and Code Sec. 6324A (the special property lien) - and noticed a stark difference. Specifically, the court said, the special property lien - unlike the gross estate lien - does not exclude amounts related to administrative expenses from the lien. While Code Sec. 6324 provides that the estate tax is a lien upon the gross estate, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, Code Sec. 6324A simply states that the deferred estate tax is a lien in favor of the IRS on the Code Sec. 6166 lien property. The court concluded that, in deciding not to repeat Code Sec. 6324's exclusion for administrative expenses in Code Sec. 6324A, Congress refused to give priority to administrative expenses on special liens.

For a discussion of estate tax liens, see Parker Tax ¶228,940.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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