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Individual Tax

Eleventh Circuit analyzed estate tax lien under Supreme Court’s Summerlin principle

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Saccullo v. U.S., (CA11 1/11/2019) 123 AFTR 2d 2019-344

The Court of Appeals for the Eleventh Circuit, reversing and remanding the district court, has held that a State (Florida) law provision cured a defective deed of property by operation of law, such that the property was validly transferred to a trust. By the time IRS asserted its tax lien based on the transferor’s estate tax liability, the property no longer remained in the estate. Accordingly, the Supreme Court’s Summerlin principle was inapplicable, and the lien was invalid.

Background. In U.S. v. Summerlin, (S Ct 1940) 310 U.S. at 414, the Supreme Court stated that when a state statute of limitations invalidates a claim of the U.S., so that it cannot be enforced at all, that time bar is unenforceable against the government (the Summerlin rule or principle). The Court stated that, “[w]hen the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.” This rule is derived from the old English legal tradition which holds that, as a general matter, the sovereign is not bound by statutes of limitation or subject to laches

But the Summerlin principle has its limits. In Bresson v. Comm., (CA 92000) 85 AFTR 2d 2000-1901, the Ninth Circuit explained that if the U.S. comes into possession of a valid claim, that claim cannot be cut off later by a state statute of limitations, but, if a claim already has become infirm (for example, when a limitations period expires) by the time the U.S. acquires the purported right, the Summerlin rule will not operate to revive the claim. In short, the Summerlin principle can’t create rights that do not otherwise exist.

Florida Statute § 95.231, which operates to cure certain defective deeds after the passage of five years, applies to a parcel on which the U.S. has asserted a federal estate-tax lien. It states, in relevant part, that absent exceptions that don’t apply in this case, “[f]ive years after the recording of an instrument required to be executed in accordance with s. 689.01…from which it appears that the person owning the property attempted to convey [the property],… the instrument… shall be held to have its purported effect to convey [the property]…as if there had been no lack of… witness or witnesses.” (Fla. Stat. § 95.231(1))

Fla. Stat. § 95.231(2) goes on, in a separate section, to state that “no person shall assert any claim to the property against the claimants under the deed or will or their successors in title” after 20 years.

Facts. In ’98, Mark Saccullo’s aging father, Anthony Saccullo, executed a deed conveying property to a trust created for the Mark’s benefit. For the most part, the deed conformed to the necessary formalities, and it was properly notarized and recorded in December ’98. However, the deed bore the signature of only one witness, not the two required by Fla. Stat. § 689.01.

When Anthony died in December 2005, Mark Saccullo became the trustee of his father’s irrevocable trust. Mark filed an estate tax return and included the property among the estate’s assets.

In 2007, IRS assessed an estate tax of almost $1.4 million based on the assumption that the estate still owned the property. Shortly thereafter, Mark, acting in his capacity as trustee, conveyed the property via quitclaim deed to himself and his wife. As the tax remained unpaid, IRS imposed a series of liens — one against the estate in 2012, and another against the property in 2015.

Later, as the estate tax liability increased to $1.6 million, IRS administratively seized the property and unsuccessfully sought to sell it. In response, Mark filed a quiet title action in the district court, contending that the liens didn’t cover the property because it was not part of his father’s estate when he died. IRS counterclaimed, seeking to foreclose on its liens.

District court. The district court granted IRS’s summary judgment motion. It held that despite Fla. Stat. § 95.231(1), the property remained in the estate and that IRS could therefore foreclose on its liens. The court reasoned that the witness related defect was not the kind of technicality that Fla. Stat. § 95.231(1) operated to rectify. The court concluded that the statute “cannot be used to create title where none existed” and that the absence of the prescribed number of witnesses rendered the deed statutorily incurable. Further, the district court held that Fla. Stat. § 95.231(1) was essentially a statute of limitations which under Summerlin did not bind the U.S. (i.e., IRS).

On appeal, both IRS and the taxpayer agreed that the district court, in part, had erred. In its brief to the Eleventh Circuit, IRS conceded that the absence of a required witness signature did not “invalidate[] the 1998 deed beyond the reach of [the] statute.” Fla. Stat. § 95.231(1) expressly states that, after the requisite five-year period, a recorded deed “shall be held to have its purported effect” despite the “lack of… witness or witnesses.” Thus, at least in the ordinary case, a missing witness was precisely the kind of defect that the statute was designed to cure.

The issue. The question before the Court was whether Summerlin forestalled enforcement of Fla. Stat. § 95.231’s five-year-cure provision to defeat the U.S.’ estate tax claim, that is, how did the Summerlin principle interact with the Florida law designed to correct technical flaws in property conveyance deeds.

Parties’ positions. Mark Saccullo argued that by dint of Fla. Stat. § 95.231(1), the deed would have had any defects cured by operation of law in December 2003, five years after the deed’s initial recording. Mark contended that the statute’s curative properties were automatic and self-executing, resulting in the once defective ’98 deed being rendered valid by operation of state law in 2003.

On the other hand, IRS argued that, under Fla. Stat. § 95.231(1)’s language, a valid cure requires some form of formal adjudication — either judicial or administrative — before marketable title transfers. IRS asserted that the language “shall be held” in Fla. Stat. § 95.231(1) requires a holding of some sort.

Appellate decision. The Eleventh Circuit concluded that Fla. Stat. § 95.231 cured the deed in question, thereby effectuating the intended conveyance and transferring the property out of the father’s estate, well before the U.S.’s claim could have vested. The Florida statute didn’t cut off a preexisting claim in a way that might offend Summerlin; rather, it validly prevented that claim from coming into being in the first place.

Looking to Florida State law, the Eleventh Circuit found that no “holding” was required. While this case turned on the statute’s first clause (Fla. Stat. § 95.231(1)), when read in conjunction with the second clause (Fla. Stat. § 95.231(2)), it was clear that Fla. Stat. § 95.231 was not a traditional statute of limitation but was, in fact, a curative act with a limitation provision. The Court determined that Mark Saccullo didn’t have to go to court to enforce Fla. Stat. § 95.231(1)’s curative provision. Instead, the deed was “held” — as in “considered” — to have its purported effect by operation of law in December 2003, five years after it was initially recorded.

The Court further reasoned that having held that the statute was self-executing, the question of Summerlin‘s effect was easy. Summerlin was inapplicable. If a valid claim never materializes or comes with a pre-existing infirmity, then Summerlin doesn’t come into play. IRS’s claim to Anthony Saccullo’s estate accrued, at the earliest, when he died in December 2005. But by operation of Fla. Stat. § 95.231(1), Mark had acquired good title to the property two years earlier, in December 2003—yes orfive years after the defective deed was recorded. Accordingly, this was not a situation in which a valid cause of action had accrued to the U.S. only to perish later through the passage of time. Rather, Fla. Stat. § 95.231(1) prevented the property from becoming part of the U.S.’s claim in the first place.

The Eleventh Circuit found that not only was this case not within the letter of the Summerlin rule, it was not within its spirit, either. This wasn’t a situation in which the U.S. missed out on a claim because some government employee was asleep at the switch and negligently let a clock run out. Because Mark Saccullo’s father didn’t die until 2005, no amount of diligence on the part of the IRS could have made it possible for the government to acquire a valid estate tax claim before the deed was statutorily cured in 2003.

References: For tax lien priority, see FTC 2d/FIN ¶V-6400United States Tax Reporter ¶63,234.

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