The Shifting Sands of the Tax Burden

A U.S. Court of Appeals ruling underscores the importance of paying attention to the tax implications of selling or transferring property before a testator's death

Originally published in the Trusts & Estates magazine (August 2010)

On Jan. 20, 2000, James Guyton, Sr. sold his McAlpin, Florida poultry farm operation, known as Guyton Farms, for $190,000. The sale resulted in a taxable gain of approximately $160,000. James Sr. used a portion of the gain to pay off two mortgages, and then deposited nearly $100,000 in a joint farm-checking account that he maintained with his son, Blake. James Sr. died six months later, and his son, James Guyton, Jr. was named as executor of his estate. On the tax form 1040 filed in connection with the estate's tax liability for 2000, James Jr. listed the taxable gain of approximately $160,000 and the outstanding tax liability as approximately $132,000. He made tax payments in 2001, but by 2004, over $29,000 remained outstanding; with interest and penalties, James Jr. owed approximately $50,000. The Internal Revenue Service went after James Jr. in tax court asserting that he was personally liable as his father's executor.

James Jr. (who appeared pro se) argued that he shouldn't have to pay taxes on funds that went directly to Blake without passing through the probate estate. He claimed that Blake should be liable for the taxes as income with respect to a decedent (IRD) under Internal Revenue Code Section 691. In affirming the lower court's decision to grant the government's motion for summary judgment, the U.S. Court of Appeals for the Eleventh Circuit held that the farm-sale proceeds weren't IRD. The court's rationale was that, because James Sr. realized the gain from the sale of his farm prior to his death (and, actually received the sale proceeds prior to his death), his estate was liable for the tax rather than Blake. In other words, under IRC Section 691, IRD is income earned before death but not received until after death. Although James Sr. deposited the proceeds into the joint account with Blake, this didn't relieve the estate of its...