Insolvent Estate's Personal Representative Was Liable for Disbursements Made, to Extent of Tax Liability Known.

J and F were married, but had lived apart since 1979. In 1987, J died and F was appointed as personal representative of J's estate.

Prior to his death, J had filed a petition in bankruptcy; his case spanned nearly four years without his ever receiving a discharge.

J's gross estate consisted of assets with a fair market value of $69,700. At the time of his death, he was liable for Federal taxes for 1979-1984, totaling approximately $30,000. In January 1988, Filled an inheritance tax return with Pennsylvania, stating that J owed the IRS $30,000, but made no payments of these taxes.

Between April and November 1988, F made five distributions from J's estate, totaling $49,000.

In 1996, the Service issued a liability notice to the estate of F (who had died), determining that F was personally liable as a fiduciary for the disbursements made from J's estate, under 31 U.S.C. Section 3713, for J's unpaid taxes.

In a memorandum decision, the Tax Court (opinion Laro, J.) holds that F is personally liable, but only .to the extent of J's tax liability known to F ($30,000) and not for the full amount of the disbursements ($49,000).

Sec, 6901 provides for the assessment, payment and collection of the liability of a fiduciary under 31 U.S.C. Section 3713(b). A fiduciary includes a personal representative, administrator or any other person acting in a fiduciary capacity. Section 3713 requires that a claim of the U.S. Government be paid first when a decedent's estate is insolvent. Federal income taxes qualify as a claim of the U.S. Government for purposes of the priority statute. When a personal representative of an estate distributes its assets in derogation of the priority of debts owed to the U.S., the personal representative is personally liable for the unpaid claims to the extent of the distributions. For this liability to ripen, a fiduciary must have had actual or constructive knowledge of the debt owed the U.S. The fiduciary must have notice of the claim,, which has been defined to include actual knowledge of such facts as would put a prudent person on inquiry as to the existence of the claim. This knowing disregard of the debt owed the U.S. serves to impose liability on a fiduciary.

F has the burden of proving that she lacked knowledge of the taxes. On this record, we hold F is personally liable as a fiduciary to the extent of $36,000. J's outstanding taxes were a claim of the U.S. Government under 31 U.S.C. Section 3713. J's estate was insolvent at all times. F knew about the taxes owed by J to the extent of $30,000. F should have paid this amount to the IRS before making each of the five disbursements.

F argues that she did not know about any of the taxes when she made the disbursements: she was "estranged" from J; they were involved in contentious and litigious divorce proceedings; and she generally knew nothing about J's finances. We disagree with F. F knew J owed the Service $30,000 as of Jan. 8, 1988. On that date (which preceded each of the five disbursements), F signed and filed J's inheritance tax return for Pennsylvania. The return specifically stated that J owed $30,000 to the IRS. F should have faithfully discharged her duties as personal representative and paid the Service the $30,000 debt of which she was aware.

ESTATE OF FLORENCE JOHNSON, TC MEMO 1999-284