United States District Court, Central District of Illinois, DanvilleUrbana Division
February 19, 2002
UNITED STATES OF AMERICA, PLAINTIFF,
ELIZABETH BARTLETT, INDIVIDUALLY, AS EXECUTRIX OF THE ESTATE OF CHARLES E. GRIMES, AND AS TRUSTEE OF THE ELIZABETH J. BARTLETT FAMILY TRUST; BEVERLY J. DRUMMOND, CARL E. GRIMES, DAVID C. GRIMES, AND ALAN GRIMES, DEFENDANTS.
The opinion of the court was delivered by: Michael P. McCUSKEY, U.S. District Judge.
On August 16, 2000, the Plaintiff filed an Amended Complaint (#17) in
this matter seeking to reduce to judgment the unpaid portion of the
assessment of transferee gift tax and statutory additions made against
the estate of Charles
E. Grimes. Charles E. Grimes was the husband of Elizabeth Bartlett and
the father of the remaining defendants. On January 29, 30, and 31, 2001,
the court held a bench trial on the Plaintiff's claims. As ordered by
the court at the trial's conclusion, the parties have each submitted
proposed findings of fact and conclusions of law. The court has
thoroughly reviewed the parties' respective filings, as well as a
transcript of the proceedings. For the following reasons, judgment is
entered in favor of the Plaintiff and against Defendants.
The tax liability which forms the basis of this action arose as the
transferee gift tax liability of Charles E. Grimes ("Charles") upon the
death of his mother, Ressie Grimes ("Ressie"). Ressie and Jesse Grimes
("Jesse"), Charles' father, executed a joint and mutual will on January
2, 1975, and a codicil to that will on March 20, 1979. On Ressie's
death, the joint will and codicil created a life estate for Jesse,
Ressie's surviving spouse, in the real property passed under the will.
Charles was entitled to a remainder interest in six of the nine parcels
of real estate in which Jesse held a life estate.
On December 25, 1980, Charles died testate, and his will was admitted
to probate in DeWitt County, Illinois on January 14, 1981. Elizabeth
Bartlett ("Elizabeth"), widow of Charles, was appointed executrix of
Charles' estate under their joint and mutual will. On Form 706, the
United States Estate Tax Return, the Estate of Charles included in its
gross estate only the value of one half of the remainder interest in the
parcels of property passed upon Ressie's death.
On June 22, 1984, the Internal Revenue Service ("IRS") sent a Notice of
Deficiency to Jesse. This notice of deficiency pertained to a gift tax
deficiency of $164,308.43 for the year 1979. This deficiency arose as a
result of the contractual obligation under Illinois law imposed on Jesse
under the joint will to make a present gift to Charles of his remainder
interest in the six tracts of land in which Jesse was to have only a life
estate. The IRS valued the remainder interest Jesse gifted to Charles at
$628,698.45. Jesse challenged the gift tax deficiency in the United
States Tax Court. Jesse died on November 2, 1985, while the case was
On June 2, 1984, the IRS sent a Notice of Deficiency to the Estate of
Charles because the remainder interests in real estate which resulted in
the gift tax deficiency should have been included in the gross estate of
Charles.*fn1 As a result of this notice of deficiency, the Estate of
Charles filed a petition with the United States Tax Court. To expedite
the disposition of the Tax Court cases filed by the Estate of Jesse and
the Estate of Charles, the parties entered into a Stipulation to Be
In the stipulation, the parties agreed that the resolution of the case
brought by Jesse would control the issue of whether the Estate of Charles
was required to include in its gross estate the remainder interest in
real property formerly owned by Jesse alone or by Jesse and Ressie
jointly. On August 3, 1987, the Tax Court found that the IRS correctly
attributed $160,136.00 in gift tax liability to Jesse as a result of the
present gift of the remainder interest in real property to Charles upon
the death Ressie.*fn2 This
decision was upheld by the Seventh Circuit Court of Appeals on July 13,
1988.*fn3 Prior to the decision of the Seventh Circuit, Elizabeth
quit-claimed to the Elizabeth J. Bartlett Family Trust all of her interests
in the real property devised to her under the mutual will she executed
with Charles. Elizabeth testified that she established this trust "to get
away from will and probate . . . and avoid all of this mess we're in now."
The Certificate of Trust for the Elizabeth J. Bartlett Family Trust allows
Elizabeth, as trustee to "sell at public or private sale or to exchange
any property which may at any time be in their hands, without application
to court, on any terms which they may consider advisable or proper,
including terms involving an extension of credit for any period of time
and with or without security."
Pursuant to the Stipulation to be Bound, the Estate of Charles was
required to include in its gross estate the value of the remainder
interest Jesse was deemed to have given Charles. Before computing the
estate tax deficiency of the Estate of Charles after the decision of the
tax court, the IRS allowed the estate an estate tax deduction pursuant to
26 U.S.C. § 2053. This deduction was allowed because of the Estate
of Charles' liability as transferee for the gift tax deficiency due from
the Estate of Jesse. As part of the agreement between the estate and the
IRS to allow the deduction, Elizabeth was required to execute a Form
870, Waiver of Restriction on Assessment and Collection of Deficiency in
Tax and Acceptance of Overassessment. By signing the Form 870, Elizabeth
accepted liability as transferee of Jesse's gift tax deficiency.*fn4 As
a result of this acceptance, the transferee gift tax liability of
$160,136.00 and interest in the amount of $298,082.12 were assessed
against the Estate of Charles. Following this assessment, notice of the
assessment and a demand for payment was made upon Elizabeth as executrix
of Charles' estate.
On April 3, 1989, the Tax Court entered a decision with respect to the
case brought by the Estate of Charles.*fn5
The Tax Court found a
deficiency of $159,054.00 in estate taxes owed by the estate. This
deficiency reflected an allowance by the IRS of a deduction from the
estate tax liability of the transferee gift tax that Elizabeth, as
executrix of the Estate of Charles, agreed to pay. This estate tax
deficiency was assessed against Charles' estate on August 7, 1989.
Subsequent to the decision of the Tax Court, Charles' estate sought
administrative relief pursuant to Regulation § 301.9100-1T with
respect to the assessment of these estate taxes. This relief was granted
by the IRS. As a result, all but approximately $10,000.00 of the estate
tax deficiency of Charles' estate was abated. This administrative relief
did not include the transferee gift tax liability owed by Charles'
On April 17, 1989, the IRS filed a proof of claim with the DeWitt
County Probate Court in the amount of $458,218.72. This amount consisted
of the Estate of Charles' transferee gift tax liability in the amount of
$160,136.60 plus interest in the amount of $298,082.12. Elizabeth
testified that she saw the proof of claim filed by the IRS and
immediately called her attorney. No proof of claim was filed with regard
to the estate tax liability of the Estate of Charles. On September 15,
1989, the Probate Court entered an Order allowing the IRS claim for
transferee gift tax liability and interest.*fn7
Revenue Officer Maureen Maloney testified that the IRS did not actively
seek collection of the allowed claim. Rather, the case was monitored by
the Insolvency Unit and Special Procedures Branch of the Collection
Division of the IRS in Springfield, Illinois. Maloney testified that
monitoring the case consists of pulling the case for periodic reviews to
insure that the case is still pending in the Probate court and sending
periodic status letters to the probate attorney asking for the status of
the proceedings. According to Maloney, no collection efforts were made
because the IRS cannot enforce collection after the claim is filed in the
probate court. The IRS simply waits to be paid through distribution of
the assets of the estate once probate is complete. A transaction code of
"520" is entered into the computer system to indicate that no collection
action is to be initiated. This transaction code indicates that the
claim is in "litigation."
The claim filed in the Estate of Charles was monitored by Revenue
Officers Joe Nolan, Karla Bartels, and Maureen Maloney. Bartels
testified that she reviewed a status letter which was sent to Maurice
Barry ("Barry"), counsel for Defendants, on February 15, 1995. Bartels
indicated that she received Barry's name from the circuit clerk's office
in the county in which the probate estate was pending.*fn8 Bartels
testified that this letter was a "request for payment, or at least a
status of when we [the IRS] can expect payment," and the letter served as
a reminder to the attorney that payment was owed.
Bartels testified that she received a letter from Barry in response to
the status letter. This letter stated as follows:
I have received your letter of February 15, 1995, and
upon review of all relevant documents am somewhat
confused. I was under the understanding that the
contingent liability has been resolved upon proper
correction being made. I understand you had dealt
with Rex L. Schaeffer*fn9 of our office who was
successful in obtaining a relinquishment of the
indebtedness.*fn10 If the records I have reviewed are
incorrect or if you have access to additional
information please transmit same to my office as
soon as possible so that we may address this problem
In response to this letter, Bartels sent a second letter to Barry, stating:
We are in receipt of your February 28, 1995, letter.
A review of our file still shows an outstanding
liability on the above case for gift taxes. A proof
of claim was filed April 17, 1989, in the amount of
$458,218.72. The executrix agreed to the assessment
of this deficiency. I believe the liability you refer
to in your letter was for the estate tax. This has
been abated. Enclosed please find a transcript for
the gift tax liability. Again, we would request an
update on the status of this case and the date you
will pay the related proof of claim . . . .
Bartels further testified that she had phone conversations with Schaeffer
and Barry regarding the gift tax liability. Revenue Officer Maureen
Maloney testified that she also sent a status letter to Schaeffer on May
7, 1997. According to Maloney, she had several conversations with
Schaeffer in which he expressed his belief that the gift tax liability of
Charles' estate had been abated with the resolution of the estate tax
As a result of reorganization of the IRS, the case involving Charles'
estate was transferred to the IRS collection division in Chicago,
Illinois in 1998. Probate was still open at this time. On January 20,
1998, David Choi, an attorney at the District Counsel's office in
Chicago, sent a letter to Shaeffer regarding the continued liability of
Charles' estate for the transferee gift tax. This letter set forth in
detail the basis for the estate's liability. In response to the letter,
Schaeffer asserted that the closing letter issued to Charles' estate in
1995 resolved the gift tax issue, that the final payment of the estate
tax covered the gift tax as well, and the estate had been closed.
However, the estate was not closed at that time.
The docket sheet from the probate court indicates that Barry failed to
appear on numerous occasions before the probate court. In April 1998,
Barry requested a hearing for a final accounting of the probate estate.
At a subsequent hearing in August 1998, Barry indicated that there were
problems with the final accounting. On October 15, 1998, Elizabeth filed
a Motion for Leave to File Final Accounting and Report Without All
Corresponding Documentation. In the motion, Elizabeth asserted that the
probate proceedings involved a significant claim by the IRS for estate
taxes, and all claims to the estate had been paid. Elizabeth made no
reference to the allowed claim for gift taxes. On October 30, 1998, the
Probate Court granted Elizabeth's motion, discharging her as executrix
and closing the estate.
In January 1999, the case was assigned to Karen Van Note ("Van Note")
for collection. Van Note testified that, when assigned a case, she looks
to see whether an assessment is correct, whether a notice has been
issued, and whether assets to affect collection are available. Based
upon the Certificate of Assessments and Payments, Van Note determined that
an audit deficiency in the amount of $160,136.60 and interest in the
amount of $298,098.12 were assessed and a first notice issued on March
22, 1989. Van Note testified that this first notice, which consists of a
demand for payment and contains the balance due, was sent to the address
on the account for the Estate of Charles Grimes. According to IRS
records, this address never changed from Rural Route 2, Farmer City,
Illinois, the former residence of Charles and Elizabeth and the current
residence of David.
Van Note checked the files of the probate court action to determine
whether the proof of claim filed by the IRS was in the file and whether
probate was still open
because the deficiency had never been paid. Van Note learned that
probate had been closed without a final accounting having been filed and
attempted to obtain a copy of the final accounting from Elizabeth and
Schaeffer. However, neither person ever provided this documentation.
Darlene Ederer, an employee of the Department of Justice Tax Division,
also testified that she was unable to locate a final accounting of the
estate of Charles after reviewing the complete probate file with the
assistance of the clerk's office. Ederer was also unable to locate any
notice of hearing served on Plaintiff with respect to a hearing on the
motion to close the estate.
On March 1, 1999, Elizabeth remitted to the IRS a payment in the amount
of $160,136.00, requesting that this amount be applied to the gift tax
liability. On April 30, 1999, Plaintiff filed a Verified Petition for
Relief from Order and to Reopen the Probate Estate of Charles E. Grimes
and Reinstate Elizabeth J. Bartlett as Administrator of Said Probate
Estate. After a hearing, the Probate Court ordered the probate estate
reopened. As of June 30, 2000, Van Note testified that the amount due
from the estate consisted of assessed interest in the amount of
$298,082.12, accrued interest in the amount of $772,467.98, and accrued
penalty of $40,034.15.
On August 16, 2000, the Plaintiff filed an Amended Complaint in this
matter seeking to reduce to judgment the unpaid portion of the assessment
of transferee gift tax and statutory additions, made against the estate
of Charles E. Grimes on March 22, 1989. Plaintiff seeks to collect the
amount owed by foreclosing liens that arose in favor of Plaintiff and
selling this property*fn11 and to hold Elizabeth Bartlett, the executrix
of Charles Grimes' estate, personally liable for the debt.
I. Motion to Amend Complaint to Conform to the Evidence
On August 6, 2001, Plaintiff filed a Motion to Amend the Complaint to
Conform to the Evidence (#40). Plaintiff seeks to amend its complaint to
plead a cause of action for breach of fiduciary duty. Plaintiff contends
that the testimony of Schaeffer "introduced previously unknown facts that
strongly support a cause of action for breach of fiduciary duty since,
under Illinois law, Elizabeth Bartlett may be responsible for
mismanagement by her agents."
Rule 15(b) of the Federal Rules of Civil Procedure provides that
"[w]hen issues not raised by the pleadings are tried by express or
implied consent of the parties, they shall be treated in all respects as
if they had been raised in the pleadings." "The decision as to whether
the issue which is the subject of the tendered amendment was actually
tried by the express or implied consent of the parties, however, rests
within the district court's discretion." Ippolito v. WNS, 864 F.2d 440,
456 (7th Cir. 1988). "A court will not imply consent to try a claim
merely because evidence relevant to a properly pleaded issue incidentally
tends to establish an unpleaded claim." Ippolito, 440 F.2d at 456,
quoting Quillen v. International Playtex, Inc., 789 F.2d 1041, 1044 (4th
Cir. 1986). The testimony of Schaeffer, whom this court has already
found to not be a credible witness, was introduced as a result of this
court allowing Defendants to amend their answer to plead laches
and equitable estoppel as affirmative defenses. It is apparent to this
court that the testimony of Schaeffer was introduced in a last minute
attempt to provide some sort of defense to this action. While his
testimony may have tended to support a breach of fiduciary duty claim,
this court will not imply the Defendants' consent to try such a claim
from his testimony. Therefore, Plaintiff's Motion to Amend the Complaint
to Conform to the Evidence (#40) is DENIED.
II. Applicable Law
Plaintiff seeks $1,215,519.86 plus statutory interest from August 2,
2001, from Estate of Charles Grimes. This amount is comprised of
statutory interest and a failure to pay penalty. The estate's liability
for the gift tax, as well as the amount of the tax, including interest,
are no longer at issue in this case. Prior to trial, this court granted
Plaintiff's motion in limine finding that the decisions of the United
States Tax Court and the Probate Court's order allowing Plaintiff's claim
are entitled to preclusive effect under the doctrine of res judicata.
The claim allowed by the Probate Court consisted of the original gift tax
liability in the amount of $160,036.00, plus assessed interest in the
amount of $298,082.12, as well as statutory accrued interest.
A. Imposition of Interest and Failure to Pay Penalty
Pursuant to 26 U.S.C. § 6601, "[i]f any amount of tax . . . is not
paid on or before the last date prescribed for payment, interest on such
amount at the underpayment rate established under section 6621 shall be
paid for the period from such last date to the date paid." This interest
is calculated pursuant to the provisions of 26 U.S.C. § 6621(a)(2).
Interest, for purposes of collection, assessment, and payment, is treated
in the same manner as the original unpaid tax. 26 U.S.C. § 6601(e).
In addition to interest, Plaintiff seeks a failure to pay penalty in
the amount of $40,034.15. Failure to pay penalties are governed by
26 U.S.C. § 6651. Pursuant to this provision of the Internal Revenue
Code, a failure to pay tax on or before the date prescribed for payment
results in a penalty of "0.5 percent of the amount of such tax if the
failure is for not more than 1 month, with an additional 0.5 percent for
each additional month or fraction thereof during which such failure
continues, not exceeding 25 percent of the aggregate."*fn12
26 U.S.C. § 6651(a)(2).
Defendants dispute the amount of interest and penalties to which
Plaintiff is entitled. Defendants contend that this court must read
26 U.S.C. § 6324(b) together with 26 U.S.C. § 6601(f)(1). In
support of this contention, Defendants cite Poinier v. Commissioner of
Internal Revenue Serv., 858 F.2d 917 (3rd Cir. 1988) and Baptiste v.
Commissioner of Internal Revenue Serv., 29 F.3d 433 (8th Cir. 1994).
However, these cases involve the assessment of a different type of
interest than that sought in the instant case. In Poinier and Baptiste,
the Commissioner sought the imposition of independent interest on the
transferee arising from the time of service of a notice of transferee
liability under 26 U.S.C. § 6901. As discussed above, this is not
the type of interest sought by Plaintiff.
B. Reduction of Assessments to Judgment
In a somewhat unclear fashion, Defendants first argue that the tax
assessments made against the Estate of Charles cannot be reduced to
judgment by this court because (1) the Estate of Charles Grimes is not
named as a party to this litigation; (2) Plaintiff should have proceeded
in probate court; and (3) Defendants did not receive proper notice of the
claim or were confused by documentation received by the IRS.
While the Estate of Charles Grimes is not named as a defendant in this
litigation, Elizabeth Bartlett, in her capacity as Executrix of the
Estate of Charles E. Grimes, is a named defendant.
Pursuant to Fed.R.Civ.P. 17(b), the capacity to sue or be sued when
acting as an executor is governed by the law of the state where the
district court is held. In Illinois, "a claim against an estate must be
brought through its executor or administrator, who must be named as a
party." Bank of N. Ill. v. Nugent, 584 N.E.2d 948, 958 (Ill.App.Ct.
1991). Elizabeth Bartlett is the court-appointed executrix of the Estate
of Charles Grimes. Therefore, she is the appropriate party to be sued.
Defendants argument that Plaintiff was required to file its claim in
the probate court is equally without merit. 26 U.S.C. § 7403(a)
In any case where there has been a refusal or neglect
to pay any tax, or to discharge any liability in
respect thereof, whether or not levy has been made,
the Attorney General or his delegate, . . . may direct
a civil action to be filed in a district court of the
United States to enforce the lien of the United States
under this title with respect to such tax or liability
or to subject any property, of whatever nature, of the
delinquent, or in which he as any right, title, or
interest, to the payment of such tax or liability.
Defendants cite Forrest v. Jack, 294 U.S. 158 (1935) for the
proposition that "collection from a claim in an estate is to be made in
accordance with state laws governing claims against estates of decedent's
persons, at least [to] the extent that such laws are not inconsistent with
enforcement of the liability imposed by national authority." This court
finds Forrest, a case concerning a stock assessment made by the
Comptroller of the Currency following the close of an estate, to be
inapposite. Further, Defendants argue that "the Plaintiff has a claim
against the Estate of Charles E. Grimes which has, as of yet, not been
resolved." This is true only to the extent that Elizabeth has failed to
pay all but a small percentage of the deficiency owed the Plaintiff.
Plaintiff's claim against the estate was allowed by the Probate Court,
and Elizabeth was notified of the allowed claim. Had Elizabeth paid the
claim at the time it was allowed by the Probate Court, this suit would
not have been necessary.
Finally, Defendants seem to argue that Plaintiff is not entitled to a
judgment against Defendants based upon some exhibits introduced at
trial. First, Defendants point to an exchange of letters between
Congressman Thomas Ewing and John Wendorff, Assistant District Director
for the IRS. Ewing sent a letter to the IRS at the urging of Schaeffer
in an effort to remove federal tax liens on estate property. Wendorff
responded to this letter with a thorough explanation of the status and
history of the Charles Grimes' tax issues. See Joint Exhibit 47. Part
of this letter states, "Following the allowance of a deduction for the
estate's transferee liability, and in light of the Government's complete
victory on April 3, 1989, the Tax Court entered a Decision in the Estate
of Charles E. Grimes case." In their post-trial brief, Defendants ask
is he talking about?" If counsel would have read the entire letter, he
would have learned that the deduction Mr. Wendorff references is the
estate tax deduction allowed the Estate of Charles Grimes for the
estate's liability, as transferee, for the gift tax deficiency due from
the estate of Jesse Grimes.
Defendants next question the court as to why the Estate Tax Closing
Letter was written in such a manner as to not address the transferee
liability incurred from Jesse Grimes' estate. Defendants point out that
"the Estate Tax Closing Letter itself identifies what is required to be a
credit for the tax liability, that line is zero." Michael Bitner, who
served as trial attorney in the Tax Court matter, clarified this matter
through his testimony. Bitner pointed out that the reason the aggregate
gift taxes payable line indicated "0" on the Estate Tax Closing letter
was because "that's a credit that's available to the estate for taxes
made on gifts by the decedent. Charles Grimes did not make these gifts.
He was not the donor. Therefore, he's not entitled to a credit." The
reason the closing letter did not address the pending gift tax liability
was because it was an estate tax closing letter.
Therefore, despite defense counsel's confusion as to the meaning of
certain exhibits, this court finds that it should reduce to judgment the
assessment made against the Estate of Charles E. Grimes on March 22,
C. Plaintiff's Entitlement to Liens on Real Estate
Plaintiff next argues that liens arose in its favor and attached to
property of Charles' estate to the extent of the debt owed to Plaintiff.
26 U.S.C. § 6321 provides:
If any person liable to pay any tax neglects or
refuses to pay the same after demand, the amount
(including any interest, additional amount, addition
to tax, or assessable penalty, together with any costs
that may accrue in addition thereto) shall be a lien
in favor of the United States upon all property and
rights to property, whether real or personal,
belonging to such person.
Pursuant to 26 U.S.C. § 6322, the lien arises "at the time the
assessment is made and shall continue until the liability for the amount
so assessed . . . is satisfied or becomes unenforceable by reason of
lapse of time." To determine whether the property at issue is subject to
a tax lien, this court must "look initially to state law to determine
what rights the taxpayer has in the property the Government seeks to
reach, then to federal law to determine whether the taxpayer's
state-delineated rights qualify as property or rights to property within
the compass of the federal tax lien legislation." Drye v. United
States, 528 U.S. 49, 58 (1999) (citations omitted). "[O]nce it has been
determined that state law creates sufficient interests in the [taxpayer]
to satisfy the requirements of the [statute], state law is inoperative,"
and the tax consequences are controlled by federal law. United States
v. Bess, 357 U.S. 51, 56-57 (1958).
Illinois law creates rights to property in the decedent's estate until
the debts of the estate have been paid. Pursuant to 755 ILCS 5/18-14,
"[a]ll the real and personal estate of the decedent and the income
therefrom during the period of administration are chargeable with the
claims against the estate." Therefore, "under Illinois law, a devisee
does not acquire absolute title to real property devised to him under the
terms of a will until all indebtedness of the decedent is fully
discharged." Gumm v. Commissioner of Internal Revenue, 93 T.C. 475, 482
(1989), aff'd, 933 F.2d 1014 (9th Cir. 1991). Under federal law,
26 U.S.C. § 6321
"is broad and reveals on its face that Congress meant to reach every
interest in property that a taxpayer might have." Drye, 528 U.S. at 5,
quoting United States v. National Bank of Commerce, 472 U.S. 713, 719-720
(1985). Thus, 26 U.S.C. § 6321 operates to impose a lien on this
interest created under Illinois law.
In the instant case, Elizabeth held a life estate in the property
disposed of under her joint and mutual will with Charles, even the
property she held in her own name before Charles' death. Elizabeth was
deemed to have made a gift of a remainder interest to her children at
that time. Thus, Elizabeth holds the property subject to the statutory
charge created by Illinois law described above. The gift tax liability
was assessed against Charles' estate on March 22, 1989. At the time of
the assessment, a notice and demand for payment was sent to Elizabeth.
As a result, a lien arose under 26 U.S.C. § 6321 on March 22, 1989,
and attached to the right held by the estate to property necessary to pay
off the debts of the estate. The only debt remaining to be paid by the
estate is the debt owed Plaintiff. Thus, a federal tax lien exists as to
all property and rights to property of the estate.*fn13 This includes
the real property contained in Stipulation 3 to the parties' Final
Defendants argue that Plaintiff cannot assert any liens because it
failed to provide notice to parties who claim an interest in the parcels
of real estate. Defendants cite three cases in support of this argument.
Two cases come from Illinois state courts, one concerning a mechanic's
lien and one concerning unpaid real estate taxes. Defendants also cite a
United States Supreme Court case concerning the sufficiency of
publication to known beneficiaries of a common trust fund. This court
finds these cases inapposite. 26 U.S.C. § 6323 provides the
following types of persons are entitled to notice of a tax lien:
purchasers, holders of a security interest, mechanic's lienors, and
judgment lien creditors. Defendants are not included in any of these
categories. Therefore, no notice was required.
D. Personal Liability for Elizabeth Bartlett
Pursuant to 31 U.S.C. § 3713(b), 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." Plaintiff seeks to hold Elizabeth
personally responsible for the unpaid tax debt of the Estate of Charles,
including statutory additions, pursuant to this provision. "The basic
elements of § 3713(b) and of its predecessor statutes is that (1) a
fiduciary (2) make a distribution which (3) leaves the estate with
insufficient funds to pay (4) a debt owing the United States where (5)
the fiduciary had knowledge or notice of the debt due to the United
States at a time when the estate had sufficient assets with which to
satisfy the debt owing to the United States." United States v. First
Midwest Bank/Ill., N.A., 1997 WL 675192 *13 (N.D.Ill. 1997). The burden
is on Elizabeth to show that these elements are not met. First Midwest,
1997 WL 675192 at *13.
The first and fourth elements are not disputed. The executor of an
estate has a "fiduciary duty to act with the highest degree of fidelity
and utmost good faith in handling estate assets." In re Estate of
634 N.E.2d 314, 317 (Ill.App.Ct. 1994). See also First Midwest, 1997 WL
675192 at *13 ("The first and fourth elements are clearly met, for an
executor may be found liable under § 3713(b) for a failure to pay
estate taxes."). Furthermore, as discussed above, there is a debt owed
to Plaintiff in unpaid transferee gift tax liability plus statutory
additions. With regard to the second element, Elizabeth
established the Elizabeth J. Bartlett Family Trust, naming herself as
trustee and sole beneficiary. Elizabeth made a distribution by
quit-claiming to the Elizabeth J. Bartlett Family Trust her interests in
the real property devised to her under the mutual will she executed with
Charles, naming herself as trustee and sole beneficiary. This real
property was valued at $956,035.94 on the death of Charles Grimes.
Furthermore, she retained $50,000.00 per year in annual rental payments
from David for the farm house which formerly belonged to Charles. The
third and fifth elements are likewise met. Elizabeth was clearly aware
of the Tax Court cases which dealt with the issue of tax liability
because she references the cases in her reports to the Probate Court
concerning Charles' Estate. In three of these reports, Elizabeth states
that "until final determination is made in said Federal estate and gift
tax cases . . . nothing further can be done to proceed to close this
Estate." However, prior to the tax court decisions, Elizabeth established
the Elizabeth J. Bartlett Family Trust, making herself trustee and sole
beneficiary. Elizabeth testified that she established this trust "to get
away from will and probate . . . and avoid all of this mess we're in
now." It is therefore apparent that she had knowledge of the debt due to
Plaintiff at the time when the estate had sufficient assets with which to
satisfy the debt. Furthermore, after distributing the estate assets,
there were insufficient assets to pay the Plaintiff's claim.
Defendants argue that Elizabeth made significant inquiry regarding the
tax liability of Charles' estate, had no reason to know that the claim
against the Estate was not resolved with the estate tax issue, and
"relied mostly on the advice of her attorney with regard to the handling
of Estate matters." Defendants argue that, as a result, Elizabeth cannot
be held personally responsible. In support of this argument, Defendants
cite Little v. Commissioner of Internal Revenue, 113 T.C. 474 (1999). In
Little, the executor had no prior experience with the administration of
estates when he received notice of potential income tax liabilities of
the estate. The executor forwarded this information to the estate's
attorney and asked for advice. The attorney, however, repeatedly and
erroneously told the executor that there was no tax liability. When he
learned that the taxes were indeed owed, the executor offered to pay the
remainder of the estate's assets to the IRS in settlement of the claim.
The Tax Court determined that the executor of the estate could not be
held personally liable for the debt owed the government because he did
not have "the requisite knowledge at the time he was dispersing funds to
have knowingly disregarded debts due to the United States." Little,113
T.C. at 481. The court in Little described the requisite knowledge to
establish personal liability as follows:
It has long been held that a fiduciary is liable only
if it had notice of the claim of the United States
before making the distribution. Whether the fiduciary
had notice is determined by whether the executor knew
or was chargeable with knowledge of the debt. The
knowledge requirement of . . . 31 U.S.C. § 3713
may be satisfied by either actual knowledge of the
liability or notice of such facts as would put a
reasonably prudent person on inquiry as to the
existence of the unpaid claim of the United States.
To be chargeable with knowledge of such a debt, the
executor must be in possession of such facts as to put
him on inquiry.
Little, 113 T.C. at 480.
Unlike the situation in Little, this court is convinced that Elizabeth
had actual knowledge of the debt owed to Plaintiff. Elizabeth signed a
Form 870 acknowledging that the Estate of Charles was liable for the
transferee gift tax. As discussed above, Elizabeth also advised the
Probate Court between 1984 and 1986 that potential tax liability arising
from tax court litigation prevented the estate from being closed. After
she learned of the decision of the tax court, she did not take steps to
pay the debt. Rather, she transferred the real property to the Elizabeth
Bartlett Family Trust. Unlike Little, the record does not indicate that
Elizabeth did not know about the viability of Plaintiff's claim and
blindly relied upon the advise of counsel, particularly in light of the
fact that she signed a form acknowledging liability for the tax.
Defendants next argue that the doctrines of equitable estoppel and
laches preclude a verdict in favor of Plaintiff. The doctrine of
equitable estoppel "precludes one party from asserting a claim or defense
against another party who has detrimentally altered her position in
reliance on the former's misrepresentation or failure to disclose a
material fact." Kennedy v. United States, 965 F.2d 413, 417 (7th Cir.
1992). In the Seventh Circuit, a private party is allowed to assert
equitable estoppel against the government only "in a very narrow category
of cases — when the traditional elements of estoppel are shown and
there is affirmative misconduct on the part of the government."
Kennedy, 965 F.2d at 417. See also United States v. McGaughey,
977 F.2d 1067, 1074 (7th Cir. 1993), cert. denied, 507 U.S. 1019 (1993).
This court allowed Defendants to amend their answer to include this
affirmative defense to provide an opportunity for facts supporting this
defense to be adduced at trial. However, this court has found absolutely
no basis for finding that the government engaged in affirmative
misconduct upon reviewing the record. Therefore, Defendants' equitable
estoppel defense must fail.
With regard to the doctrine of laches, it is a general rule that "the
United State is not subject to the equitable defense of laches in
enforcing its rights." Martin v. Consultants and Adm'rs Inc.,
966 F.2d 1078, 1090 (7th Cir. 1992). Even if the laches doctrine could
be applied to the United States based upon the circumstances of this
case, its application is not warranted. "Courts are often hesitant to
apply laches where a plaintiff has sued within the time period expressly
provided by the applicable statute." Martin, 966 F.2d at 1090.
26 U.S.C. § 6502(a)(1) provides a ten year statute of limitations to
collect on tax after the assessment of the tax. Defendants do not
dispute that this action was filed within the statute of limitations.
Finally, laches is defense where defendants suffer prejudice as a result
of delay. Reich v. Sea Sprite Boat Co., Inc., 50 F.3d 413, 418 (7th
Cir. 1995). Defendants seem to argue that they are prejudiced due the
interest which has been assessed on the unpaid gift tax liability. As
discussed above, Defendants were aware of their liability for the
transferee gift tax long before Plaintiff initiated this suit.
Defendants cannot effectively argue that they suffered prejudice where
they could have paid the tax liability at any point prior to the
initiation of this action. For all of these reasons, the laches defense
is also inapplicable.
E. Liability of Transferees of the Estate
Finally, Plaintiff seeks to hold the transferees of Charles' estate
liable for the
outstanding debt to the extent of the value of the property they
received. As discussed above, Elizabeth received a life estate in the
real property devised under her joint and mutual will with Charles.
Her children and co-defendants, Beverly Drummond, Carl E. Grimes, David
C. Grimes, and Alan Grimes hold remainder interests. To hold these
transferees liable for unpaid taxes, "there must be a basis under state
law or state equity principles for imposing transferee liability."
Berliant v. Commissioner of Internal Revenue, 729 F.2d 496
499 (7th Cir. 1984), cert. denied by Kraft v. Commissioner of Internal
Revenue, 469 U.S. 852
(1984). "As a matter of equity, Illinois has long
imposed on estate transferees liability to creditors . . . because the
latter have a priority of right to satisfaction out of assets."
Berliant, 729 F.2d at 500. Furthermore, "[i]t is an established doctrine
of equity that creditors who have not been guilty of laches may pursue
assets into the hands of distributees, where distribution has been made
without discharging their debts." Berliant, 729, F.2d at 500, quoting
Union Trust Co. v. Shoemaker, 101 N.E. 1050 (Ill. 1913). As discussed
above, there is no basis for a claim of laches against Plaintiff.
Therefore, Elizabeth is liable for the total amount of the debt because
she holds a life estate in all of the assets of Charles' estate and has
distributed to herself over $1,000,000 from the estate.*fn14
remainder interest of the co-defendants would be affected by a sale of
this property, but they are also liable for the unpaid debt since their
vested interests are subject to the debt of the estate under Berliant.
Besides raising laches and equitable estoppel arguments, which this
court has already ruled are without merit, Defendants argue that "a
transferee who is innocent of an underlying continuing obligation
generally takes the property free of the alleged prior obligation." In
support of this argument, Defendants cite a case concerning the bulk
transfer notice provisions of the Uniform Commercial Code and a case
concerning the Illinois Consumer Fraud and Deceptive Business Practices
Act. This court finds these cases inapposite and Defendants' argument
IT IS THEREFORE ORDERED:
(1) Plaintiff's Motion to Amend the Complaint to Conform to the
Evidence (#40) is DENIED.
(2) Judgment is entered in favor of Plaintiff in the amount of
$1,215,519.86, plus interest according to law from August 2, 2001.
(3) Plaintiff is entitled to liens on the real property of the Estate
of Charles E. Grimes as listed in Stipulation 3 of the parties' Final
(4) Elizabeth Bartlett is held personally responsible for the unpaid
debt of the Estate of Charles E. Grimes to the extent of the value of the
distribution she made.
(5) Elizabeth Bartlett, Beverly J. Drummond, Carl E. Grimes, David C.
Grimes, and Alan Grimes are ordered to pay over to Plaintiff the value of
the assets they received from the Estate of Charles E. Grimes, including
interests in real property and income generated therefrom, to satisfy
(6) This case is terminated. The parties shall be responsible for
their own costs.