Personal Liability for Estate Taxes

 

Here is a greeting card for a bad day:

… the Internal Revenue Service … determined that the … Estate of Georgia M. Spenlinhauer (estate) is liable for an estate tax deficiency of $3,984,344.”

In general, when I see estate tax numbers of this size, I presume that there are hard-to-value assets. The estate will argue that the assets are illiquid, near unmarketable, and that it would be fortunate to get a thousand or two thousand dollars for them. The IRS of course will argue that the real numbers approach the GDP of many small countries. The Court will often decide somewhere between and call it a day.

Let me see what was at play.

• Whether the estate timely elected an alternative valuation date;
• Whether the estate may exclude $200,000 pursuant to a qualified conservation easement; 
• Whether the value of (yada, yada) was $5.8 million or $3.9 million.

So far it looks like another valuation pay per view Friday night fight.

• Whether the petitioner is liable as transferee for the estate tax deficiency.

That was unexpected.

What happened here?

In February 2005, Georgia Spenlinhauer passed away at the age of ninety-five. She appointed her son as executor. After paying expenses and specific bequests, the son/executor received the residue of the estate. Probate was closed in March 2009.

The executor/son requested and received an extension for the estate tax return until May 2006.

The accountant cautioned the executor/son that he did not have expertise in estate taxation and did not prepare or file estate tax returns as part of his practice.

As a practitioner myself, I get it. The executor/son had to find another practitioner – attorney or CPA – who did estate work.

The executor/son decided not to file an estate return.

COMMENT: I believe we have pinpointed the genesis of the problem.

In 2013 the executor/son filed for bankruptcy.

Through the bankruptcy proceeding, the IRS learned that he had never filed a tax return on behalf of the estate.

In 2017 he finally filed that estate tax return.

The return was audited.

In January 2018, the IRS disagreed with the numbers. It wanted money. It issued a Notice of Deficiency.

Of course.

In March, the IRS made a jeopardy assessment against the estate.

COMMENT:  Whoa! A jeopardy assessment usually indicates that the IRS suspects concealed assets or otherwise anticipates that a taxpayer will make collection difficult. Jeopardy makes the tax, penalty, and interest immediately due and payable. The IRS is authorized to begin immediate collection, without the usual taxpayer safeguards baked into the system.

A jeopardy assessment is not routine, folks.

Did I mention that the IRS was also simultaneously pursuing the assessment against the executor/son personally? Why? Because he had drained the estate to zero with the distribution to himself.

This would not turn out well. There are certain elections - such as an alternate valuation date - that must be made on a timely-filed return. Filing 11 years late is not a timely filing. There were the usual valuation disputes (I can use municipal assessment amounts as asset values! No, you cannot!). There was even a self-cancelling promissory note that got added to the estate (to the tune of $850 grand).

COMMENT: I have not seen a self-cancelling note in a moment. The attorneys worked hard on this estate.

A brutal audit adjustment involved certain litigation fees on an estate asset. The Court decided that the litigation benefited the executor/son and not the estate itself, meaning the estate could not deduct the fees. There went a quick half million dollars in deductions.

Yep, up the asset values, disallow certain deductions. The estate was going to owe - a lot.

And penalties.

The executor/son protested the penalties. To be fair, he had to. His argument?

He had relied on his accountant.

The same accountant who told him that he did not do estate work.

You gotta be kidding, said the Court. They approved the penalties in a hot minute.

There were no assets left in the estate, of course. How was the IRS to collect?

Oh no.

Oh yes.

The executor/son had exhausted the estate by distributing assets to himself. He had transferee liability to the extent of the assets distributed.

Personal liability.

This was not the routine valuation case that I first expected. This instead was closer to a Greek tragedy.

But why? The estate was large enough to obtain creative legal advice. A reasonable person must have suspected that there would be tax reporting, which work was beyond the skill set of the family’s regular accountant. Heck, the accountant was clear that he did not practice in this area. Rather than seek out another accountant (or attorney) with that skill set, the executor/son did … nothing.

Granted, the tax was the tax, whether the return had been timely filed or not. The additional weight was the penalties and interest. What were the penalties? I saw them near the beginning ….

$524,520.

Wow.

Our case this time was Estate of Spenlinhauer v Commissioner, T.C. Memo 2025-134.

Failing To Update A Plan Beneficiary Designation

 

Technically it is not a tax case, but it is so tax-adjacent it might as well be.

Let’s talk about beneficiaries on a retirement account – and, more specifically, an employer-sponsored retirement account.

Carl Kleinfeldt participated in the Packaging Corporation of America (PCA) Thrift Plan for Hourly Employees. In 2006 he designated his (then) wife – Dena Langdon – as his primary beneficiary.

Kleinfeldt and Langdon divorced in 2022. The divorce included a Qualified Domestic Relations Order (QDRO). A QDRO is a court order authorizing distribution to the nonparticipating (ex) spouse. The PCA Benefits Center distributed to Langdon as directed.

However, even after the QDRO there is one more step: has the ex-spouse been formally removed as beneficiary?

Kleinfeldt faxed a request to the Benefits Center to remove Langdon from both his health and life insurance as well as his retirement plan. The Benefits Center updated her status on the retirement account to “ex-spouse.” Mind you, this was not the same as removing her as a beneficiary altogether.

Why not?

There were written plan procedures to follow. Kleinfeldt’s fax was a good start but was not quite enough.

You can guess that Kleinfeldt died.

You know that Langdon wanted that retirement money.

You also know the matter went to court.

And we are in legal weeds immediately.

We are talking here about an employer-sponsored plan, which (almost always) makes the plan subject to ERISA.

ERISA in turn uses a “substantial compliance” doctrine when reviewing actions required under a plan document. It is what it sounds like: if you miss a minor clerical step, the law presumes that responsible parties know what was meant and are expected to act accordingly.

The Kleinfeldt Estate argued the substantial compliance doctrine with a white-knuckle grip.

The Court observed that substantial compliance has two steps:

1.  Was there intent to make the change?
2.  Was the attempt to make the change similar (in all material aspects) to the proper procedures required by the plan?

There was no argument about the first test: the fax was clear evidence that Kleinfeldt intended to remove Langdon as a beneficiary.

On to the second test.

The plan documents wanted Kleinfeldt to either (1) call the Benefits Center or (2) update his beneficiary designation online.

The plan documents nowhere stated that he could update beneficiaries by fax.

The Court did not consider this a minor clerical step.

Kleinfeldt did not follow the rules.

Meaning that Langdon won.

And fair had nothing to do with it.

Our case this time was Packaging Corporation of America Thrift Plan v Langdon, No 25-1859 (7^th Cir. Feb. 2, 2026)