IRS Estate Tax Liens Might Not be as Helpful/Harmful as One Would Think
It can take years (if not decades) to resolve property disputes resulting from a taxpayer’s demise. The IRS uses the general unfiled estate tax lien to protect its interest in a decedent’s assets during this period. The federal estate tax lien is by far the IRS’ primary estate tax collection tool, yet the estate tax lien system is not as efficient as many taxpayers would expect.
The general estate tax lien arises when the estate does not pay an estate tax liability that is due and owing. This tax lien does not have to be filed or perfected in order to be valid and it attaches to all property that is included in the decedent’s gross estate (The general estate tax lien does not attach to property that is outside of the decedent’s gross estate or to assets that are included in the decedent’s gross estate that are expended for court-approved estate expenses).
Very few taxpayers end up with a gross estate that has a large enough value to incur an estate tax liability; however, owners of small (or large) businesses often do have taxable estates due to their business ownership (many wealthy non-business owners tend to hold their investments in business entities for the estate tax savings; entities which do qualify as legitimate businesses).
Congress has provided relief to business owners whose estates (i.e., whose businesses) are not able to immediately pay the full amount of their estate tax liability. Specifically, Congress has provided that executors for business owners can elect to pay the estate’s estate tax liability over a number of years if the primary asset of the estate is an interest in a closely-held business. The IRS imposes a Section 6324A special estate tax lien in these cases.
This type of special estate tax lien is only valid with regard to the specific assets agreed upon by the executor and the IRS, which usually consists of a security interest in the business entity (which, in many cases, is the only substantial estate asset). The special estate tax lien must generally be filed or otherwise perfected to be valid against third parties.
Once a special estate tax lien is filed, there is some uncertainty with regard to whether the general estate tax lien is extinguished. In a footnote in Chief Counsel Advice Memorandum 20070801F the IRS Office of Chief Counsel explains that “The Service’s position is that the general estate tax lien continues to attach all estate property except the property subject to the section 6324A [special estate tax] lien.” This may or may not be correct (The IRS attorneys also admit that this issue has never been directly decided by the courts).
Section 6324A(d)(4) does provide that “If there is a [special estate tax] lien … on any property with respect to any estate, there shall not be any [general estate tax] lien … on such property with respect to the same estate.” This section does not address whether the general estate tax lien survives the filing of a special estate tax lien.
As a practical matter, a filed or perfected special tax lien has the potential to mislead third parties who search the applicable records if the general estate tax lien is not extinguished by the filing of the special estate tax lien. Even though the special estate tax lien identifies the property that the lien attaches to, third parties may assume that the estate has resolved or fully addressed its estate tax obligations via this special estate tax lien and/or that the IRS does not intend to pursue any estate assets other than those listed in the special estate tax lien.
The IRS could easily remedy this situation by filing the general estate tax lien at the time that it files the special tax lien. The IRS should be required to make this additional filing given that it is the party who is in the best position to remedy the situation. The IRS should not be entitled to reap any benefits of an unfiled general estate tax lien if the IRS fails to make this filing.
At some point a taxpayer is going to litigate this tax issue, and there is some chance that the courts may not agree with the IRS’ current position.
This type of estate tax collection issue has not received as much fanfare as estate tax repeal; however, this type of tax collection issue can go a long way in reducing the impact, and ultimately the perceived injustice, of the federal estate tax regime. If opponents of the estate tax cannot secure a full repeal of the federal estate tax, they might be able to modify the tax collection rules to achieve their aims....
The general estate tax lien arises when the estate does not pay an estate tax liability that is due and owing. This tax lien does not have to be filed or perfected in order to be valid and it attaches to all property that is included in the decedent’s gross estate (The general estate tax lien does not attach to property that is outside of the decedent’s gross estate or to assets that are included in the decedent’s gross estate that are expended for court-approved estate expenses).
Very few taxpayers end up with a gross estate that has a large enough value to incur an estate tax liability; however, owners of small (or large) businesses often do have taxable estates due to their business ownership (many wealthy non-business owners tend to hold their investments in business entities for the estate tax savings; entities which do qualify as legitimate businesses).
Congress has provided relief to business owners whose estates (i.e., whose businesses) are not able to immediately pay the full amount of their estate tax liability. Specifically, Congress has provided that executors for business owners can elect to pay the estate’s estate tax liability over a number of years if the primary asset of the estate is an interest in a closely-held business. The IRS imposes a Section 6324A special estate tax lien in these cases.
This type of special estate tax lien is only valid with regard to the specific assets agreed upon by the executor and the IRS, which usually consists of a security interest in the business entity (which, in many cases, is the only substantial estate asset). The special estate tax lien must generally be filed or otherwise perfected to be valid against third parties.
Once a special estate tax lien is filed, there is some uncertainty with regard to whether the general estate tax lien is extinguished. In a footnote in Chief Counsel Advice Memorandum 20070801F the IRS Office of Chief Counsel explains that “The Service’s position is that the general estate tax lien continues to attach all estate property except the property subject to the section 6324A [special estate tax] lien.” This may or may not be correct (The IRS attorneys also admit that this issue has never been directly decided by the courts).
Section 6324A(d)(4) does provide that “If there is a [special estate tax] lien … on any property with respect to any estate, there shall not be any [general estate tax] lien … on such property with respect to the same estate.” This section does not address whether the general estate tax lien survives the filing of a special estate tax lien.
As a practical matter, a filed or perfected special tax lien has the potential to mislead third parties who search the applicable records if the general estate tax lien is not extinguished by the filing of the special estate tax lien. Even though the special estate tax lien identifies the property that the lien attaches to, third parties may assume that the estate has resolved or fully addressed its estate tax obligations via this special estate tax lien and/or that the IRS does not intend to pursue any estate assets other than those listed in the special estate tax lien.
The IRS could easily remedy this situation by filing the general estate tax lien at the time that it files the special tax lien. The IRS should be required to make this additional filing given that it is the party who is in the best position to remedy the situation. The IRS should not be entitled to reap any benefits of an unfiled general estate tax lien if the IRS fails to make this filing.
At some point a taxpayer is going to litigate this tax issue, and there is some chance that the courts may not agree with the IRS’ current position.
This type of estate tax collection issue has not received as much fanfare as estate tax repeal; however, this type of tax collection issue can go a long way in reducing the impact, and ultimately the perceived injustice, of the federal estate tax regime. If opponents of the estate tax cannot secure a full repeal of the federal estate tax, they might be able to modify the tax collection rules to achieve their aims....
Labels: estate tax, IRS tax collections, IRS tax lien
 
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