IRS levy outweighs deceased’s children’s claim to money held in usufruct
The Fifth Circuit upheld a district court ruling that an IRS levy on a deceased’s estate for unpaid taxes took precedence over his children’s claims to money, which the deceased held in usufruct under of Louisiana law, since the children were essentially unsecured. creditors.
Facts: Henry and Tonia Goodrich, a married couple who lived in Louisiana, owned community assets that included shares and stock options of Goodrich Petroleum Co. (the Goodrich securities). When Tonia died in 2006, she bequeathed her interest in part of the community property to the couple’s three children, subject to usufruct for the benefit of Henri. During his lifetime, Henry sold $857,914 worth of Goodrich securities. A–half of this amount belonged to Henry outright and the other half to the children but held in usufruct by Henry.
Henry died in 2014 and owed over $560,000 in income taxes for 2012, 2013 and 2014. His executor opened a bank account for the estate and placed estate funds in it. The IRS took a levy from the account and the bank returned the remaining funds, nearly $240,000, to the Service. After that, with penalties and interest, a combined outstanding tax balance of $472,000 rest.
The children filed a lawsuit, claiming the IRS wrongly withheld the funds under Sec. 7426(a)(1) and claiming that they owned nearly $500,000 of Goodrich securities which Henry held subject to usufruct. A magistrate judge ruled that the IRS claims took priority over the children’s claim because the children were essentially “unsecured creditors” of disputed funds in Henry’s estate. The children appealed the decision to the Fifth Circuit.
Issues: Because Henry held the titles in usufruct, the question was whether Louisiana law assigned the Goodrich children a primary interest in the titles as owners or a secondary interest as creditors. Under Section 535 of the Louisiana Civil Code, a usufruct is “a real interest of limited duration in the property of another”. According to article 538, “If the things subject to usufruct are consumable goods [including money], the usufructuary becomes the owner. … At the end of the usufruct, he is obliged either to pay to the bare owner the value which the things had at the beginning of the usufruct, or to deliver to him things of the same quantity and quality.”
While carrying: The Fifth Circuit found that the Goodrich children were the bare owners of consumables held in usufruct. Application of Louisiana case law (Capture Succession, 35 So. 3d 449 (La. Ct. App. 2010)), the court found that the children had a claim on Henry’s estate in connection with the titles, but did not immediately become owners of the titles upon his death . Therefore, they were unsecured creditors in respect of the claim and therefore did not legally own the property at the time the IRS seized it. Under Dry. 6323, the IRS has priority over other creditors, and thus the Fifth Circuit upheld the magistrate’s granting of summary judgment in favor of the IRS.
- GoodrichNo. 20–30422 (5th Cir. 01/25/22)
— Alistair M. Nevius, JD, is the Jofa‘s Editor, Tax.
To comment on tax issues or to suggest an idea for a story, contact Alistair M. Nevius at [email protected].