• United States v. Tyler, --- F.3d --- (3rd Cir. 2013)
  • September 18, 2013
  • Law Firm: Proskauer Rose LLP - New York Office
  • The Third Circuit Court of Appeals held that co-executors of a deceased taxpayer's estate are personally liable for the cash proceeds of the taxpayer's 1/2 interest in real property that the co-executors sold without applying the proceeds to the taxpayer's federal tax debt.

    The IRS assessed the taxpayer in 2002 for income tax from prior years. The taxpayer and his wife owned their residence as tenants by the entireties, but in 2003, the taxpayer transferred his interest in the residence to his wife for $1, which severed the tenancy by the entireties. The IRS filed a notice of federal tax lien on the property in 2004. The taxpayer died in 2006 and his wife died shortly after. The Tyler court affirmed that the lien attached to the property when the taxpayer was assessed and remained with the property when it became part of the estate of the taxpayer's wife because the tenancy by the entireties was severed and because she did not pay "adequate and full consideration" for her interest under § 6323(h)(6). The court acknowledged that the lien would not have survived the taxpayer's death had the tenancy by the entireties not been severed.

    The couple's son (the sole heir and a co-executor) sold the residence in 2008 and lost the proceeds investing in the stock market. The Tyler court affirmed that the co-executors were required under the federal insolvency statute, 31 U.S.C. § 3713, to pay the U.S. government "first when ... the estate of a deceased debtor ... is not enough to pay all the debts of the debtor." Therefore, the co-executors were personally liable for the cash proceeds from the sale of the deceased taxpayer's property that was encumbered by a federal tax lien.