Government Had Valid Lien for Estate Tax (Bennett vs. Bascom (DC KY)

The IRS had priority over the proceeds of the sale of an estate’s partnership interest. The IRS had a valid estate tax lien. The decedent’s partnership interest was sold to another entity and the sale proceeds were held in escrow. The other limited partners claimed that they were entitled to the proceeds as either repayment of loans made to the decedent by the partnerships or as excessive distributions. The purchasing entity asserted that the proceeds belonged to it because it had purchased the loans when it bought the partnership assets.

Decedent Loans

Because the payments to the decedent by the partnership were loans, the limited partners were not entitled to any of the sale proceeds. The estate did not implicitly consent to the purchasing entity’s foreclosure of the estate’s partnership interest, which would have resulted in the entity receiving its portion of the sale proceeds free and clear of any tax lien. Therefore, the federal tax lien attached to the sale proceeds as assets belonging to the estate.

Valid Estate Tax Lien

In addition, the tax lien was valid against any holder of a security interest in accordance with Code Sec. 6323(a). The entity argued that it had a security interest in the estate’s partnership interest, and was a protected holder of a security interest within the meaning of Code Sec. 6323(h)(1). Citing applicable state (Kentucky) law, the entity claimed that a creditor cannot obtain judgment lien on a debtor’s partnership interest. However, the IRS had a tax lien against the sale proceeds, in which the entity did not have a competing security interest. As a result, the court awarded the IRS the sale proceeds held in escrow.

B.R. Bennett et al. vs. S.B. Bascom et al., DC Ky.

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CCHTaxGroup

All stories by: CCHTaxGroup