Estate Planning Newsletter – January 2017
THE IRS GETS PAID BEFORE THE EXECUTOR
In the case of U.S. vs. Spoor, the 11th Circuit United States Court of Appeals held that the special estate tax lien on property under Code Section 6324A is not subject to an executor’s claim for administrative expenses, and therefore the executor’s expenses do not take priority over the tax lien so imposed.
By way of background, IRC Section 6324A imposes a special lien for estate tax deferred under IRC Section 6166. IRC Section 6166 allows an executor to pay the estate tax attributable to a closely held business in up to ten (10) equal annual installments starting no later than five (5) years after the due date for the payment of the estate tax. Section 6324A provides that if the executor makes an election to pay estate tax in installments under Section 6166, there is a lien in the amount of tax owed in favor of the United States on the business property for which tax was deferred.
In the Spoor Estate, the executor filed the Federal Estate Tax Return and elected to pay the estate tax attributable to the closely held business in ten (10) equal installments pursuant to Section 6166. Seven (7) years later, before the estate tax was paid in full, the value of the closely held business had become less than the unpaid portion of the deferred estate tax and interest. At that time, the IRS demanded additional collateral from the estate. When the estate was unable to provide additional collateral, the IRS accelerated the remaining deferred estate tax obligation.
The executor claimed $1,086,000.00 for fees for administering the estate, to be paid ahead of the estate tax lien. The 11th Circuit United States Court of Appeals concluded that Section 6324A does not allow an executor’s administrative expenses (including fees) to take priority over a Code Section 6324A estate tax lien. The Court reasoned that in not allowing an administrative expense to take priority over the estate tax lien (as other related IRC sections do), Congress refused to grant such a priority to administrative expenses. Thus the special property lien in favor of the IRS on the closely held business should not be subject to the executor’s claim for administrative expenses.
MY RECOMMENDATION: In large estates with very complicated businesses, it is not unusual that executor’s fees can become quite large. Even if approved by a state probate court, the priority taxing statutes under the Internal Revenue Code take priority over the executor’s fees. The executor should, to the extent liquidity is available in the estate, attempt to get the fees paid as early as possible as opposed to deferring those fees for a number of years.
Yours very truly,
RAINEY, KIZER, REVIERE & BELL, P.L.C.
William C. Bell, Jr., Attorney at Law
