Take Away: A recent federal District Court decision reminds us that if the donor of a gift fails to pay the federal gift tax that is due, the IRS can demand payment of the gift tax from the donee, even if more than ten years have passed since the gift was made. In this reported decision the gift was made in 2004, yet the lawsuit against the donees to collect the unpaid gift tax was filed in 2018.

Decision: United States v. Estate of Elson (D. N.J., 2019) Civ. No. 18-11325 (October 9, 2019)

Facts: In 2004 Sid Elson may several large gifts. Sid gave to Sheila real estate valued at $345,000 and a 15% interest in a Tool Company worth $164,000, for  total gifts to her of $509,000. In the same year Sid made a gift of real estate to Mitch worth $455,000. Sid did not file a Form 709 Federal Gift Tax Return reporting these 2004 gifts. Sid died in 2006. In 2009, Sheila, acting as Personal Representative of Sid’s estate, entered into an agreement with the IRS. Sheila then filed a ‘late’ federal gift tax return on behalf of Sid’s estate; that return reported a gift tax liability of $80,300. After an audit of that filed gift tax return the IRS claimed that Sheila had failed to report all of Sid’s 2004 gifts, so an additional gift tax assessment of $374,131 was made. In 2011, notice of that gift tax deficiency was sent to Sheila, as Personal Representative of Sid’s estate. In her capacity as Personal Representative Sheila then started to make payments towards that assessed gift tax deficiency. Sheila paid $150,000 in 2009,  $60,000 in 2011, and $136,000 in 2015 (using the proceeds from the sale of the real estate that Sid had given to Sheila back in 2004.) No further payments towards the gift tax liability were made by Sheila. At the end of 2017, a total of $684,217 in gift taxes (including penalties and interest) allegedly remained outstanding. In July, 2018 the government sued both Sheila and Mitch for Sid’s unpaid gift tax liability.

Donee’s Legal Position: Sheila and Mitch asked the Court to dismiss the lawsuit against them, citing the IRS’ failure to provide to them a required notice of an individual assessment for taxes owed [26 U.S.C. 6901], and that the 10-year statute of limitations on the statutory gift tax lien had expired so that the government could not move forward to collect the unpaid gift tax from them. [26 U.S.C. 6324(b).]

Court’s Decision: The District Court judge held that the 10-year lien limitation period did not apply, deciding that the donee personal liability statute was not protected by the 10-year lien limitation period. In addition, the judge held that the IRS was not required to provide an individual Section 6901 assessment notice to the donees in order to file its lawsuit and collect the unpaid gift taxes from them, since the notice of assessment was given to Sid’s estate Personal Representative.

Donee Liability-Section 6324(b): A donee is personally liable for federal gift taxes to the extent of the value of the property that he/she receives as a gift. This statute imposes liability on the donor’s estate and personal liability on transferees or donees when the estate fails to pay the federal gift taxes that are due. Thus, Section 6324(b) provides both: (i) a special lien used to collect the gift tax,  and (ii) imposes personal/transferee liability for federal gift taxes on the donee. [Aside: Section 6324(a) provides personal liability on transferees for unpaid federal estate taxes.]

Statute of Limitations v. Donee Personal Liability: The key question the judge had to answer was whether a 10-year statute of limitations with regard to the government’s lien also applied to a donee’s personal liability for unpaid gift taxes. The judge focused on two separate sentences of Section 6324(b).

  • The first sentence of the Section provides: “ Unless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made.”
  • The second sentence of the same Section provides: “If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift.”

Specifically the question before the judge was whether the first sentence (10-year statute of limitations with regard to the lien as a tax collection enforcement tool) applied to the second sentence (which imposes on the donee’s personal liability for the unpaid gift tax.)

Statute of Limitations: The judge agreed that because 10 years had passed since Sid’s 2004 gifts, the government could not enforce its lien, i.e. it was ‘time-barred.’

Personal Liability: The judge found that the personal liability of the donee under the second sentence was not subject to the 10-year statute of limitations with regard to the use of a collection lien. Relying on prior court decisions, the judge found that the statute of limitations with regard to the donee’s personal liability depends upon the statute of limitations that would apply if the government sought to collect the unpaid gift taxes against the donor. “In short, the ordinary statute of limitations, not the 10-year limit of the life of the lien, governs a claim under Sentence 2, the donee personal liability provision.”

Applicable Limitations Period to Collect from Donees: The judge then had to identify the correct limitations period to use with respect to the personal liability of the donees for the unpaid gift tax under Section 6324(b). The judge relied upon the statute that permits the assessment of unpaid gift taxes against the donor’s estate as the applicable period in which to pursue unpaid gift taxes from the donees. With regard to collections of an assessed gift tax against a donor, there exists a 10-year limitations period during which the collection action must be commenced. However, this statute prescribes that the collection must begin “within 10 years after the assessment of the tax.”  [26 U.S. C. 6502(a)(1).]

Because the assessment of the additional $374,131 in gift taxes was timely filed in 2011 by the IRS with Sid’s estate  [within 10 years from Sid’s death], the government had an additional 10 years, calculated from 2011, in which to collect under that gift tax assessment from the donees of Sid’s gifts. The government’s collection lawsuit was filed well within that 10-year period. Consequently,  the lawsuit was timely filed against Sheila and Mitch.

Conclusion: Fourteen years after the gifts were made, Sheila and Mitch now have to pay the gift taxes that Sid should have reported. While the donee personal liability statute refers to a 10-year period in which to file a lien to collect the unpaid gift tax, that 10 year period does not begin when the gifts were made, but 10 years from the time the donor, or the deceased donor’s estate, is given notice of the tax assessment. Under the facts of this case, the government could have waited until 2021 in which to file its lawsuit against Sheila and Mitch- 17 years after the taxable gifts were made. This exposure to pay the gift tax is something that donee’s should be made aware of, and might justify their inquiry of the donor to confirm if he/she reported their gift on a timely filed Form 709 Federal Gift Tax Return.