Reliance on Counsel to Avoid Tax Liability

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We regularly see taxpayers asserting reliance on advice of counsel as a basis for removal of penalties.  Not too many cases involve an argument that the tax liability itself should be removed due to reliance on counsel.  A recent unsuccessful case, US v. Shriner, making that argument caught my eye as did the name of the judge deciding the case, Marvin Garbis.

Tax practitioners like to describe district court judges as generalist to distinguish them from the tax specialists who populate the Tax Court.  Occasionally, a tax specialist slips onto the district court just as occasionally a lawyer with a more general practice slips onto the Tax Court.  Judge Garbis on the district court in Maryland is a tax practitioner with a capital T.  When he writes a tax opinion, it deserves notice although this one did not “tax” his abilities.  Prior to becoming a district court judge he practiced tax law in Baltimore for more than two decades and was well known for his knowledge of tax procedure.  He wrote “Cases and Material on Tax Procedure” published by West which may have been the first case book on tax procedure as the topic gained prominence and he wrote “Federal Tax Litigation” published by Warren Gorham and Lamont.  He practiced with Tax Court Judge Paige Marvel and with former Deputy Assistant Attorney General and Acting Assistant Attorney General of the Tax Division of the Department of Justice Paula Junghans in the Baltimore firm of Garbis, Marvel and Junghans.  I was always glad I worked for the Chief Counsel office in Richmond rather than Baltimore so I did not have to regularly face the heavy hitting tax litigation lineup presented by that firm.


So, into Judge Garbis’ court comes a pro se litigant who wants to argue that his lawyer messed up and he, the executor and beneficiary of an estate in which the decedent had significant tax liabilities still owing at death, did not need to pay the estate taxes of the decedent because he received bad advice from his lawyer.  The facts were clear that the decedent had assets of about $470,000 and federal tax liabilities of about $231,000.  The IRS had told the estate’s lawyer who had a proper filed power of attorney the existence and the amount of the liabilities.  Yet, the estate’s assets were distributed without paying the taxes.  The litigant here was one of two executors of the estate who became personally liable for the unpaid taxes as a result of the distribution by virtue of 31 USC 3713.

Section 3713(b) provides that “[a] representative of a person or an estate … paying any part of a debt of the person or Estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”  This statute not only applies to tax debts but to all debts owed to the federal government.  It is not found in title 26.  It traces its lineage back to the earliest of statutes passed in the United States and back past that to English common law and the maxim that “The King’s debtor dying the King comes first.”  Although Section 3713 imposes this personal liability and is often enough to allow the IRS to collect in these circumstances, it is not the only mechanism for collection of the federal tax debt where pre death liabilities of the decedent go unpaid while estate assets get distributed.  The federal tax lien imposed under title 26 will continue to attach to the property distributed and the transferee liability provisions of 6901 could come into play as well.

Most executors come to the IRS with a request to find out if the decedent had federal taxes before making a distribution of estate assets in order to avoid these problems.  Pursuant to IRC 6905 the IRS can discharge the executors from personal liability for the unpaid taxes of the decedent – of course, that requires paying the taxes with available assets from the estate.  Somehow the person holding the power of attorney for Estate of Carol Shriner did not seek the discharge of personal liability before the distribution of the estate’s assets were made.  The IRS sought to hold the executors personally liable and the executors, or at least one of the two, sought to remove the proposed liability based upon reliance on counsel.

The IRS filed a motion for summary judgment.  The judge granted it.  The case is not remarkable in its outcome but it provides an opportunity to think again about the limits of blame that can be shifted to counsel.  We have blogged before about this issue.  Individuals serving as executors have an especially high duty to “get it right.”  That duty applies to the timely filing of the return as the Supreme Court made clear in Boyle and to the payment of liabilities of the estate as the 5th Circuit recently made clear in Renda.  If the representative has actual knowledge of a federal claim that knowledge is sufficient to trigger the liability of the executor even where the representative gives erroneous advice on how to address the federal claim.  Executors should seek the safe haven of IRC 6905 by obtaining a statement of any tax liabilities, satisfying them and requesting a discharge.  Finding and obtaining a discharge of other federal liabilities may not come as easy as tax liabilities.  The IRS is set up to meet these requests and the opportunity for this relief should not be missed.

The executor made one final argument that Judge Garbis rejected.  He argued that the Tax Court case of Little v. Commissioner provided relief.  In that case, the decedent’s representative was absolved of personal liability under 31 U.S.C. §3713(b) for the estate’s unpaid income tax liabilities.  The court found that while the representative had been placed on inquiry notice after receiving Forms W-2 and 1099 for the estate’s liabilities, he acted in a prudent and reasonable manner by bringing the forms to the attention of the estate’s attorney and relying on the attorney’s mistaken advice that, because of the estate’s size, it owed no income taxes.  Judge Garbis found that the Little case differed because the estate’s counsel had told the executor no tax liabilities existed.  Here, the undisputed facts showed that the representative, and thus the estate, knew that some income tax liability existed.

The outcome here did not turn on the tax procedure expertise of Judge Garbis but his knowledge of tax procedure no doubt made the outcome more certain and more straightforward.



  1. Eric Rasmusen says

    It will be interesting to read LIttle v. Comm. if I have time. I don’t see how lack of knowledge could absolve an executor from liability for unpaid taxes, whether he consulted counsel or not.

    Sounds like we should lobby for Judge Garbis for the Supreme Court, since we got the wrong Ginsburg on the last try.

    I have two question:

    1. It is clear the executor is liable to the IRS for the unpaid tax. Is the inheritor liable to the executor, so he can get compensation?

    2. I have been following Marshall v. IRS, which will shortly be decided in the 5th circuit. It involves the interpretation of a statute which says that if the donor does not pay gift tax, all of his donees are liable, though the tax a donee pays cannot exceed the value of the gift to him. But it sounds as if this statute might be redundant. In its absence, if a donor failed to pay gift tax and then went bankrupt, could the government go after the donee for the tax on his personal gift?

  2. Eric Rasmusen says

    I don’t know if a District Judge can overrule a Tax Court precedent (I would think he’d able to), but Little seems to me wrongly decided. If I’ve got it right, Mr. Little was executor for an estate, and didn’t pay the estate’s income taxes. The IRS sent him letters saying the estate had to pay income taxes. Mr. Little asked his lawyer, who told him, with amazing but credible-to-the-Tax-Court-judge incompetence, that small estates don’t have to pay income tax. The Estate was closed, and Mr. Little argued to Tax Court that he wasn’t liable personally for the unpaid tax, because he’d satisfied his duty of prudent inquiry into debts of the estate by asking his lawyer. The Court agreed.

    But is it really prudent to trust one’s lawyer when the IRS says you owe taxes? I bet if you close an estate in the middle of litigation over disputed debts, you can’t say, “Well, I asked my lawyer, and he said the estate didn’t owe the debt.”

    Furthermore, and separately, the legal question in Little was so easy that the executor had a duty to use his own knowledge. If he’d bought a book on how to be an executor, or asked any friend or relative who’d been an executor, he would have gotten the right answer. If you know— or should know— something is false, it shouldn’t be an excuse to say that your lawyer told you it was true.

    • Little seems to me correctly decided.
      ….”But is it really prudent to trust one’s lawyer when the IRS says you owe taxes”….
      Why, would it have made a difference if he had consulted 2 or 3 and by chance they had given him the same “expert” opinion ?? What is your definition of prudent ?
      Further your assumption that hypothetically knowing, should be knowing or assuming a fact precludes satisfying the duty of prudent inquiry is incorrect. (speculation as to Little`s improper motives which of course do not rise to the level of evidence sufficient to state a triable issue of facts)

    • I would say that the district court judge is not bound by Tax Court precedent just as the Tax Court is not bound by precedent from the District Court. So, the district court decision does not overrule the Tax Court it simply operates on a parallel plane. Both courts are subject to the decisions of the applicable circuit court.

  3. Bob Kamman says

    Judge Garbis, who turns 78 this year, was appointed by Bush 41 in 1989. He took senior status a decade ago. His 1958 undergraduate degree from Johns Hopkins is in environmental studies. Who knew, there were environmentalists back then? A career in tax law certainly produced more economic stability.

    The law is settled, when there is a probate estate, but those are increasingly rare. What if the decedent’s assets were in a revocable trust? An irrevocable trust? Life insurance policies, annuities or retirement accounts with beneficiaries named? Let’s say a decedent leaves one IRA with a $200K balance to a son, and another IRA with a $200K balance to a daughter. Can IRS collect from either, or both? In equal shares? If the decedent owed $400K in taxes, do the IRA beneficiaries pay all of it, or just what they had left after paying federal and state income taxes on their distributions?

    • Lots of good questions. I am not sure I will have answers for everything. With property passing outside of probate the critical issues concerning collection from the property will turn on the federal tax lien. The decedent’s assets in a revocable trust will almost certainly be encumbered by the federal tax lien. What will the beneficiary of the trust have to do to part with the assets? Was a notice of federal tax lien filed prior to death? These questions will determine how effective the lien is with respect to the assets in the trust. If the trust contains real property titled to the taxpayer or transferred to the trust after the lien arose, the trustee may need to address the lien before turning the property into cash for the beneficiary to use. That process will generally allow the IRS to obtain the value of its lien. If the property is bank accounts, cash, cash equivalents or stock, the lien may provide the IRS little protection since these assets are described in 6323(b) and have a superpriority even over the filed federal tax lien. They are subject to the federal tax lien but can defeat the federal tax lien by transfer. The answer will generally be the same for all of the types of assets described.

      Then you would look to the transferee provisions to determine if the recipients of the property encumbered with the federal tax lien who were able to divest themselves of the property without first paying the IRS could be held liable as transferees under state law through 6901 or some other provision. Many could be held liable if they disposed of the assets without paying the tax encumbering the assets they received. Whether the IRS would go to the trouble of pursuing the potential transferee liability, will depend on the amount at issue and other factors which may include the knowledge of the transferee.

      The federal tax lien issues will always be present when a decedent dies owing taxes. These issues give the IRS the opportunity to collect some or all of the tax owed aside from the personal liability on the executor. The personal liability provisions give the IRS another chance to collect and provide an incentive for the executor to make sure that the taxes are paid prior to any distribution but are not the only way for the IRS to obtain payment on these pre-death liabiilties.

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