Practitioner note on estate tax liens

March 7, 2007 | Roger McEowen


Concerning the federal estate tax, much of the focus in recent years has been on whether the Congress will repeal the tax. The U.S. House has passed several “full-repeal” bills, but the Senate has not gone along. So, for the present time, we’re stuck with a great deal of uncertainty in the estate planning realm due to the gradual phase-up in the federal estate tax exemption, the phase-down in the top federal estate tax rate, the elimination of the tax in 2010 (along with elimination of complete basis step-up at death), and the resurrection of the tax in 2011 with only a $1 million exemption and a 55 percent top rate (but with complete basis step-up).

A federal estate tax issue that largely escapes discussion is how the IRS goes about collecting the tax - in other words, the collection process. When a taxpayer dies, it can sometimes take years to settle property disputes. IRS uses the general estate tax lien (which is not filed anywhere and does not have to be perfected) to protect its interest in a decedent’s assets while the estate is being settled, and it attaches to all of the property in the decedent’s gross estate. This general lien is the IRS’ primary estate tax collection tool, and it arises when an estate does not pay an estate tax liability that is due and owing. The only property the general estate tax lien does not attach to is property that is not included in the decedent’s gross estate or assets that are included in the gross estate, but are expended for court-approved estate expenses.

While less than two percent of all estates owe any federal estate tax upon death, owners of businesses may have a slightly higher possibility of having a taxable estate at death. Consequently, the Congress has created special rules for business owners whose estates (i.e., the business property) are not able to pay the full amount of their estate tax within nine months after death. For example, if the primary asset of the estate is an interest in a closely-held business, an election can be made to pay the estate tax in installments over 15 years. When the installment payment election is made, the IRS utilizes a special estate tax lien (known as an I.R.C. §6324A lien). This special lien must generally be filed or perfected to be valid against third parties, and it is only valid against specific assets that the executor and the IRS agree upon.

But, here’s the unresolved issue - when the IRS files the special estate tax lien, does that extinguish the general estate tax lien?  The answer to the question is not very clear. The issue has never been squarely addressed by any court, although two bankruptcy courts and a federal district court have come close. In a recent Chief Counsel Advice Memorandum IRS stated in a footnote that their position is that the general lien “continues to attach to all property except the property subject to the section 6324A [special estate tax] lien.”  IRS also admitted that the issue has never been decided directly by the courts. Also, the statute is not entirely clear on the issue. The practical problem is that a special lien (which must be filed or otherwise perfected) could mislead third parties who search the records. The special lien will show up in the records, but the general lien won’t since it isn’t filed anywhere. So, if the general lien is not extinguished (in its entirety) when the special estate tax lien is filed - third parties may assume that the estate has completely taken care of its estate tax obligations (or that the IRS will not pursue any estate assets except those subject to the special estate tax lien).   

Is there a way around this problem?  One approach might be to require IRS to file the general estate tax lien at the same time it files the special lien. That would eliminate the chance that IRS could benefit from a “secret” general estate tax lien. One thing is for sure – if Congress doesn’t amend the statute it is practically a certainty that the issue will eventually get litigated. If that occurs, there is always the chance that the courts won’t agree with the IRS’ position.