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Divestment

Federal Tax and Tax Liens

Section 6324(a) of the Internal Revenue Code, even as amended,[1] does not provide that all property is divested of the federal estate tax lien upon the transfer by the beneficiary thereof. It is only non-probate property that is so divested of the lien upon such transfer.

The difficulty here is occasioned by reading subsection (2) of Section 6324(a) out of context. Section 6324(a)(2) provides as follows:

Any part of suchproperty [emphasis added] transferred by (or transferred by a transferee of) such spouse, transferee, trustee, surviving tenant, person in possession of property by reason of the exercise, nonexercise or release of a power of appointment, or beneficiary, to a purchaser or holder of a security interest shall be divested of the lien provided [herein] and a like lien shall then attach to all the property of such spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary, or transferee of any such person, except any part transferred to a purchaser or holder of a security interest.

The words "such property" are crucial to the proper interpretation of subsection (2), which, of course, is preceded by subsection (1). Section 6324(a)(1) provides as follows:

If the estate tax imposed by Chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employee's trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under sections 2034 to 2042, inclusive, [emphasis added] to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax.

It is the property which is included in the federal estate by reason of sections 2034 to 2042 which is the property divested of the lien upon its transfer, and which is referred to in subsection (b).

To see how the misinterpretation of the statute developed into a malpractice suit, read Fall River Savings Bank v. Callahan, 18 Mass.App.Ct. 76, 463 N.E.2d 555 (1984).

For your information, the types of property included in sections 2034 through 2042 are:

SectionType of Property
2034Dower and Curtesy
2035Adjustment to Gifts Made Within 3 Years of Death
2036Transfers with Retained Life Estate
2037Transfers Taking Effect at Death
2038Revocable Transfers
2039Annuities
2040Joint Interests
2041Powers of Appointment
2042Proceeds of Life Insurance

With respect to probate property the federal lien is divested from property transferred to a subsequent purchaser, but only if the estate's executor has been discharged from personal liability (i.e., a final account has been filed and allowed and the executor discharged). See United States v. Vohland, 675 F.2d 1071 (1982). 

1 The only things the amendment did were to correct a typographical error in the statute regarding trusts under section 401(a) of the Internal Revenue Code and also to eliminate the requirements that a transferee bona fide and have paid an adequate and full consideration. See Federal Tax Liens—Statute Text in these notes. [Back to Text]