Estate of Georgia M. Spenlinhauer v. Commissioner

The $5 Million Bill: Executor Held Liable After 11-Year Delay

An executor who waited 11 years to file an estate tax return has been held personally liable for millions in taxes and penalties, according to a recent Tax Court decision. The court sustained a $3.9 million deficiency, nearly $1 million in late filing penalties, and accuracy-related penalties against the Estate of Georgia M. Spenlinhauer and her son/executor Robert Spenlinhauer. The case took a turn when the son, acting as executor, stripped the estate of its assets, triggering transferee liability and ultimately making him responsible for the hefty bill.

From Probate to Bankruptcy: A Chronology of Neglect

The saga began on February 4, 2005, with the death of Georgia M. Spenlinhauer. Her will designated her son, Robert Spenlinhauer, as the executor of her estate and the recipient of the residuary estate. Following the distribution of specific bequests and payment of expenses, Robert transferred the remaining assets to himself. These assets included $535,000 in cash from a life insurance policy, $377,000 from the conversion of the decedent's 1% interest in Spencer Press, $1,500 from her personal bank account, $13,000 worth of jewelry and personal effects, and real property in Hingham, Massachusetts. With the exception of the Hingham property, these assets were reported to the Massachusetts Probate and Family Court. The probate court closed the case on March 28, 2009, as the estate possessed no remaining assets.

The estate tax return, Form 706, was originally due in 2006. Robert requested and received an extension until May 4, 2006, to file the return. Despite advice from his estate planning attorney, Robert Galvin, and his accountant, David Erb, he chose not to file. The record shows that Mr. Erb cautioned Robert that he lacked expertise in estate tax matters. Years passed, and on December 16, 2013, Robert filed for bankruptcy protection. The Internal Revenue Service (IRS) became aware of the unfiled estate tax return through these bankruptcy proceedings. It wasn't until February 8, 2017, after the IRS initiated contact, that Robert, acting as executor, finally filed Form 706. On it, he reported a "Total gross estate less exclusion" of $4,385,251, electing an alternate valuation, and "total allowable deductions" of $3,338,029.

Late Filing Kills Valuation Elections

Continuing from the previous section, Robert filed Form 706 on February 8, 2017, reporting a "Total gross estate less exclusion" of $4,385,251, electing an alternate valuation, and "total allowable deductions" of $3,338,029. This attempt to minimize the estate tax liability through strategic elections would ultimately fail due to the extensive delay in filing the return.

The estate had attempted to elect an alternate valuation date for the Hingham Property and the Spencer Press stock. Section 2032 governs the election of an alternate valuation date for estate assets. Ordinarily, under Section 2031(a), the gross estate is valued as of the date of the decedent's death. However, Section 2032 allows the executor to elect to value the assets as of six months after the decedent's death. But Section 2032(d)(2) mandates that this election must be made on the estate tax return no later than one year after the prescribed due date (including extensions) for filing the return. Here, the estate tax return was due on May 4, 2006, with the granted extension. The executor's attempt to make the election on a return filed on February 8, 2017, was far beyond this statutory deadline. The court therefore sustained the IRS's disallowance of the late election, meaning the gross estate had to be valued at the time of the decedent’s death.

The estate also sought to utilize Section 2031(c) to exclude $200,000 from the value of the Hingham Property, based on a purported qualified conservation easement contribution. Section 2031(c) allows an executor of an estate with land subject to an easement to elect to exclude a percentage of the land's value from the gross estate if the election is made on the estate’s tax return on or before the due date (including extensions) for filing. As the court noted, because Robert failed to file the estate tax return before the due date as extended, he was barred from making this election. The court upheld the IRS’s disallowance of this late election as well, further increasing the taxable estate.

Battle of Appraisals: Assessments vs. Experts

The previous section highlighted the disallowance of a late election regarding a conservation easement under Section 2031(c). Section 2031(c) allows an executor of an estate with land subject to an easement to elect to exclude a percentage of the land's value from the gross estate if the election is made on the estate’s tax return on or before the due date (including extensions) for filing. As the court noted, because Robert failed to file the estate tax return before the due date as extended, he was barred from making this election. The court upheld the IRS’s disallowance of this late election as well, further increasing the taxable estate. The next area of contention was the valuation of estate assets, specifically the Hingham property and the Spencer Press stock.

Regarding the value of the Hingham Property, the Executor argued it was worth $3.9 million in 2005, the year of the decedent's death. In support, he presented an email from the Town of Hingham's Assessing Technician stating the property's assessed value for fiscal year 2005 was $3,821,400. The IRS countered with an expert appraisal from Mr. Hart, who valued the property at $5,815,000 at the time of death, based on sales of comparable properties and the income produced by the property.

The court sided with the IRS, citing Treasury Regulation § 20.2031-1(b), which defines fair market value as the price at which property would change hands between a willing buyer and seller, both informed and uncoerced. The court also referenced Lippincott v. Commissioner, 27 B.T.A. 735, 740 (1933), which established that local tax assessments are not necessarily reliable indicators of fair market value. The court emphasized that the Executor presented no evidence demonstrating the assessment represented the fair market value at the decedent’s death. The Executor’s own appraisal from May 2006 valued the property at almost double the assessment. Finding Mr. Hart’s testimony credible, the court valued the Hingham Property at $5,815,000, thus sustaining the IRS’s inclusion of the property in the gross estate at that value.

A similar battle unfolded over the value of the decedent’s 1% interest in Spencer Press. The Executor initially reported the value of the shares as $377,000, but also reported an alternate value of $150,000 on the estate tax return. The IRS seemingly accepted the $377,000 value. The Executor, however, argued the shares were worth little to nothing at the time of death.

The court again sided with the IRS, pointing to the Executor's own prior actions. In December 2004, Spencer Press received an offer to purchase its shares, which would have resulted in a $350,000 pro rata share for the decedent’s interest. The Executor rejected this offer as too low and countered with a demand of $3 million. He also rejected offers from other shareholders of $500,000 and $750,000. Later, when the other shareholders proceeded with a cash-out merger offering $375,000 for the estate’s share, the Executor initiated litigation against the other shareholders. Citing these actions, the court stated the Executor’s behavior “unmistakably show that even he did not believe at the time that the shares were worth as little as he now contends.” Having presented no evidence indicating the shares were worth less than the $377,000 eventually received, the court sustained the IRS’s adjustment of the value of the decedent’s interest in Spencer Press, in effect using the Executor’s aggressive negotiating tactics against him.

Phantom Debts and Retained Interests

The court then turned to the IRS's argument that the value of the Milton property should be included in the gross estate under Section 2036(a)(1). This section states that a decedent's gross estate includes the value of property transferred during their life if they retained an interest in it, unless the transfer was a bona fide sale for adequate consideration. In simpler terms, if someone 'sells' property but continues to benefit from it until death, the IRS can include that property in their estate for tax purposes.

Here, the decedent had transferred the Milton property to her son but continued to live there until her death. The central question was whether the son paid "adequate and full consideration" for the property. The Executor argued the transfer was a bona fide sale supported by a promissory note.

The court, however, sided with the IRS, noting that the existence of a note doesn't automatically prove a legitimate debt. The court emphasized the need to demonstrate that both parties genuinely intended to create a debtor-creditor relationship. Citing expert testimony, the court noted the value of the Milton property was around $510,000 at the time of transfer, while the promissory note, even if payments had been made according to its terms, would have been worth only $164,581. The Executor failed to provide evidence of consistent payments. He even testified the 'sale' was structured to avoid the property being in his mother's name at death, suggesting the lack of a true debtor-creditor relationship.

Further undermining the Executor's position was the fact that a few months before the decedent's death, the note was amended to include a self-canceling provision. This meant the remaining debt would be forgiven upon her death. The court highlighted that Self-Canceling Installment Notes (SCINs) between family members are presumed to be gifts, not bona fide debts. Given this, and the fact that the decedent would have needed to live to 125 years old for the note to be paid in full, the court concluded that neither party ever intended to create a true debtor-creditor relationship. The court found the decedent did not receive adequate consideration for the Milton property. Therefore, the IRS was justified in including the property's value, set at $850,000 based on the IRS's expert appraisal, in the gross estate.

The court also addressed the Parsonsfield Note. Treasury Regulation § 20.2031-4 states that the fair market value of notes is the unpaid principal plus accrued interest, unless the executor proves a lower value or worthlessness. The Executor claimed the debt had been satisfied, but provided no evidence beyond his own testimony to support this. Consequently, the court sustained the IRS’s inclusion of the Parsonsfield Note in the gross estate.

Unsubstantiated Expenses & Penalty Sustained

The court also considered deductions claimed under Section 2053(a), which allows a deduction from the gross estate for items such as administration expenses. However, tax deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed.

The Executor sought to deduct executor commissions and attorney's fees, but the court found the estate lacked substantiation. Treasury Regulation § 20.2053-3(b) allows for the deduction of executor’s commissions if the IRS is reasonably satisfied the commissions will be paid, the amount is allowable under local law, and the amount aligns with usual practice for similar estates. The Executor presented no evidence to support the deduction. Similarly, while Treasury Regulation § 20.2053-3(a) permits deducting reasonable attorney's fees actually and necessarily incurred in administering the estate, the Executor provided no substantiation for the $75,000 in attorney's fees reported on the estate tax return. While he submitted some evidence of Peabody & Arnold litigation fees, the court determined that this litigation, concerning the sale price of a 1% interest in Spencer Press, primarily benefited the Executor personally and was not essential for settling the estate. The court therefore sustained the IRS's disallowance of these deductions.

Finally, the court addressed the Section 6651(a)(1) penalty for failure to file a timely return. Section 6651(a)(1) authorizes a penalty when a required tax return is not filed by the specified filing date, including extensions. While the IRS bears the initial burden of production to show the return was filed late, the taxpayer must prove the failure was due to reasonable cause and not willful neglect. The estate tax return was due May 4, 2006, but was filed nearly 11 years late on February 8, 2017, satisfying the IRS's initial burden. The Executor argued he relied on his accountant's advice that no estate tax return was due. However, the court noted that the accountant cautioned he lacked expertise in estate tax matters and did not file estate tax returns as part of his practice. The court concluded that reliance on such advice was not "reasonable cause," particularly because the Executor failed to provide the accountant with necessary information like the 2006 Hingham Property appraisal. The court sustained the Section 6651(a)(1) penalty.

Transferee Liability: The Executor Pays the Bill

The court's final action was to hold the executor personally liable for the estate's unpaid taxes under Section 6901, which provides a mechanism for the IRS to collect unpaid taxes from a transferee of property. Importantly, Section 6901 does not create the underlying liability; rather, it provides the procedure for the IRS to pursue a transferee if a basis exists under state law or equity principles. The court explained that the IRS stands in the same position as any other creditor under state law.

The IRS argued that the executor was liable as a transferee because, after distributing specific bequests and paying expenses, he transferred the remaining estate assets to himself, rendering the estate insolvent. The court agreed, applying the Massachusetts Uniform Fraudulent Transfer Act (MUFTA). Under MUFTA, a transfer is fraudulent if the debtor (here, the estate) made the transfer without receiving reasonably equivalent value and was insolvent at the time or became insolvent as a result of the transfer. The court noted that a tax deficiency exists from the date a return is due, even if the exact amount is not yet known. The court found the transfer to the son met this definition, as the estate received no value in exchange for the transfer and was left insolvent because its debts (primarily the estate tax liability) exceeded its assets. MUFTA defines "insolvent" as the sum of debts being greater than the fair market value of all assets.

The court concluded that because the transfer of the estate's remaining assets rendered it insolvent under MUFTA, the IRS could recover the estate's tax liability from the executor personally. The court clarified that the executor's personal liability was limited to the value of the assets actually transferred to him, which included the Hingham Property, jewelry and personal effects, cash, the life insurance policy, and the converted interest in Spencer Press. The Parsonsfield Note, however, was not shown to have been transferred to the executor, and thus its value did not increase the limit on his personal liability.

This case serves as a warning to executors: mishandling estate assets and prioritizing distributions to beneficiaries over tax obligations can lead to personal liability for the unpaid taxes.