Estate Fails to Qualify for Innocent Spouse Relief

The 10th Circuit Court of Appeals has held that a decedent’s estate cannot initiate an innocent spouse claim for relief under IRC Sec. § 6015(c). Jonson, CA-10 (12/30/03).

[The spouses claimed deductions attributable to the husband’s interest in a limited partnership. IRS denied the deductions and the taxpayers sought a redetermination of the deficiency in Tax Court. After his wife’s death, husband, on behalf of the estate, filed a request for innocent spouse relief under IRC § 6015(c), which provides relief from joint or several liability if the “innocent” spouse is no longer married to, or is legally separated from, the culpable spouse.]

The estate argued that the wife became entitled to innocent spouse relief the day she died because death ended the marriage. While agreeing that the marriage terminated on the decedent’s death, the court denied relief because the IRC § 6015 applies to “individuals” — a term not defined in the Code — but which according to its “ordinary, everyday” meaning, could only include a living person. The court noted however that a decedent’s executor may continue an innocent spouse claim initiated while the taxpayer was still alive.

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The Middle District Court of Pennsylvania has held that minimum pension benefits payable to a designated beneficiary are not “property” of the deceased taxpayer to which a federal tax lien could attach. Asbestos Workers v. U.S., (1:01-CV-2253; 1/12/04).

[The taxpayer participated in a pension benefit plan that offered several payment options. In 1996, the taxpayer selected the 10-year guaranteed payment option, payable in 120 monthly installments, and named his son as designated beneficiary (DB). After the IRS tax lien filed in 1997, the pension fund reduced the taxpayer’s payments by one-half and sent the balance to the IRS. Upon the death of the taxpayer, the IRS advised the pension fund that the tax lien still applied to the benefits payable to the son as DB. The pension fund placed the balance allegedly due the IRS in escrow and sued to resolve the conflicting claims.]

In determining the validity of the tax lien, the court considered (i) the asset which the IRS sought to attach; (ii) the interest of the taxpayer in the asset under state law; and (iii) whether the taxpayer derived sufficient benefits from the asset for it to constitute “property” of the taxpayer.

The court found that the “asset” was the right to receive minimum benefit payments under the pension plan. The taxpayer’s interest was limited to his right to collect those payments during his lifetime. The pension plan did not grant the taxpayer the power to obtain or reject funds during his lifetime, nor did it permit early payment or the option of surrendering the value of the annuity for a lump-sum payment.

Only the DB has the power to compel payment of minimum payments or of taking the payments as a lump sum. Therefore, payments to the DB did not constitute “property” of the taxpayer to which the lien could attach. The decision appears to make a perceptible inroad into the creditor rights of the IRS. In general, IRS may levy on pension benefits once they are in “pay status.” The decision appears to carve out an exception.

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