Fiduciary Personally Responsible for Tax Debt

A fiduciary’s liabilities can sometimes arise in unexpected contexts.  A recent decision involving an estate tax liability held that a fiduciary was personally liable for unpaid estate taxes.

In Carroll v. United States, 2009-2 USTC ¶ 60,577 (N.D. Ala. 2009), the taxpayer was denied a bankruptcy discharge for unpaid estate taxes arising from the estate of his deceased father.

George Carroll, Sr. died on March 17, 1998.  The two executors of his estate were the appellant, George Carroll, and his two siblings (Stephen Carroll and Judy Bullington).  At the time of death, the total estate tax owed was $2,554,547.  That’s a big liability.

Federal tax law permits an estate tax to be paid in installments pursuant to 26 U.S.C. section 6166.  The administrators of the estate contracted to pay the estate tax in installments.  The final installment would have been due on December 17, 2012.  However, the estate stopped making payments in 2004.  Through 2004, Mr. Carroll and his sister paid approximately $1.2 million of the tax debt.

Between 1998 in 2006, the executors distributed various assets of the estate to themselves.  Judy Bullington received real property (including her father’s primary residence) and cash.  Stephen Carroll and George Carroll received stock held by the estate in two close corporations: United Gunite, Inc. and Pressure Concrete, Inc.  The brothers “planned to use the profits from these two entities to make the necessary installment payments to the United States.”

Now, I don’t know about the construction industry in Alabama.  However, gunite is used in the pool contracting business.  And pool contracting in Fresno has tanked in the last 18 months.  Tanked to a level that is almost unbelievable.

So the economy didn’t help the Carroll brothers.  Even worse, in 2001 Stephen Carroll pled guilty to a count of “felony bribery of a public official.”  Thus, things went from bad to worse for the Carroll brothers.

Apparently seeing the end, “on February 28, 2004, George Carroll, in his capacity as an executor of his father’s estate, transferred the last of the estate’s liquid assets – $733,613 in cash – to a bank account owned by Pressure Concrete.”  The cash infusion was not sufficient to revive the business, and in 2006, George Carroll bought out his brother’s interest in the company for $29,500.  Shortly thereafter, the company failed.

In 2007, George Carroll filed a bankruptcy petition, along with approximately 1.2 million other Americans.  The government disputed his request for discharge with respect to the unpaid estate taxes.  The court agreed, in a decision affirmed on appeal.

Explained the court, “executors of an estate become personally liable for the estate tax owed to the United States if they distribute property to beneficiaries before fully satisfying the estate’s tax debt.”  The tax regulations add that, “if the executor distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the payment or distribution, for so much of the estate tax as remains due and unpaid.”

George Carroll attempted to escape liability, arguing that the value of the estate was artificially inflated for tax assessment purposes, and that the corporation failed because he “was not prepared to handle the business that he inherited from his father.”  The court rejected these arguments, instead of focusing on the transfer of $733,613 in cash to the struggling corporation.  The court deemed the transfer to be a “willful” act within the meaning of the bankruptcy laws, such as to deny a bankruptcy discharge to George Carroll.

Thus, the case is a word of caution to all persons who administer an estate, whether by way of probate or pursuant to a trust.  If an estate tax is owed, and if the administrator transfers assets to the beneficiaries before the tax is paid in full, the administrator can be held personally liable, and the estate tax liability will not be discharged in bankruptcy.  Think twice before you distribute assets when an estate tax is unpaid.

(The court adds a humorous aside.  In 2006, the failing corporation, Pressure Concrete, “acting at George Carroll’s direction, issued two separate checks, totaling $25,000, drawn and payable to the University of Alabama athletic department for the purchase of football tickets – a fact proving only (if proof were needed) that, in this State, Alabama football is a secular religion promoting misplaced and false values.”)

Carroll v. United States, 2009-2 USTC ¶ 60,577 (N.D. Ala. 2009)