Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
STRICT DIVESTITURE REQUIREMENTS IN SECTION 6324(a)(1): FIRST AMERICAN TITLE V. UNITED STATES AND THE HAZARD OF THE SPECIAL ESTATE TAX LIEN
In First American Title Insurance Company v. United States,1 a federal district court addressed the requirements for divestiture of special estate tax liens. Under section 6324(a)(1), a special estate tax lien divests when the sale proceeds are used to satisfy charges against the estate or expenses of its administration and a court with proper jurisdiction allows the satisfaction.2 The court applied the careful tracing requirement set out in Northington v. United States3 and determined that the title companies could not affirmatively demonstrate that the payments were used for charges against the estate.4 Further, the court held that the taxpayer must petition a court for allowance and that non-intervention powers do not qualify as allowance.5 In so concluding, the court granted the Service’s motion for summary judgment.6 Case law regarding section 6324(a)(1), the special estate tax lien, is sparse, and courts have almost uniformly favored a strict interpretation of divestiture requirements. The decision is noteworthy precisely because of the dearth of decisions interpreting section 6324(a)(1).7 The special estate tax lien attaches to an estate automatically upon the decedent’s death and the Service is not required to record or give notice of the lien.8 First American holds that the special lien attaches even after a sale to third parties, and where all parties are unaware of the lien.9 This Note examines current judicial interpretation of section 6324(a)(1) as described in First American and highlights the danger of overlooking the special estate tax lien when purchasing property from an estate. Further, this Note argues that the court’s unwillingness to address what would qualify as “charges against the estate and expenses of its administration”10 obscures the problem and requires prudent attorneys to be quite cautious in advising property buyers. Because of the vagueness in the statutory language, practitioners must not only trace administrative costs extremely carefully, but must also ensure advance independent court approval.Part I of this Note covers the background and relevant statutes in First American. Part II discusses the court’s ruling and analysis of 6324(a)(1). Part III examines the two prongs of the divestiture test: (1) charges against the estate and expenses of administration, and (2) a court with proper jurisdiction allowing the charges. Part III also addresses general public policy concerns arising from section 6324(a)(1). Part IV concludes that imprecise standards about what qualifies as an administrative expense and strict interpretation of court allowance thereof makes section 6324(a)(1) an important and potentially dangerous provision. 11