In a Chief Counsel Advice (201212020) recently announced, the IRS has set forth the situations whereby an executor can be found to be personally liable for the tax liabilities of an estate and the assets of the estate were already distributed to the estate's beneficiaries. If the executor knew or should have known of the tax when the estate still had assets to pay it, her can be held liable for the tax and penalties. He may also be liable as a transferee if he was also a beneficiary of the Estate pursuant to Sec. 6901 of the Internal Revenue Code.
Background - Executor Liability: The United States Code provides that the IRS must be paid tax debts before beneficiaries receive distributions. 31 U.S.C. 3713(b). An Executor who pays an Estate debt before paying debts due to the IRS “shall become answerable in his own person and estate” to the extent of the amount paid to preferred creditors. If an Executor pays other creditors before paying the IRS, the Executor can be held personally liable to the extent of the payments that he turned over to creditors other than the IRS. An Executor is only liable if he had notice of the tax debt (or a reasonably prudent person would be on notice) before making a distribution to another creditor.
Background - Transferee Liability. Sec. 6901(a) of the Code provides that the liability of a transferee of a taxpayer's property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” The IRS is thus authorized to collect taxes from transferees of Estates that failed to pay taxes.
Ruling. The Chief Counsel advice makes clear that the penalties asserted against the Decedent for failure to file the appropriate information returns required for foreign trusts can cause liability to the Executor if he paid out any money or assets to beneficiaries or other creditors.
Lesson. If you become an Executor / administrator of an estate with any foreign holdings or trusts, be certain that all information returns were properly filed and do not distribute to any beneficiaries or even pay other debts, until potential liability for failure by the Decedent to properly file all information returns is made.