The U.S. Sixth Circuit Court of Appeals released their opinion in U.S. v. Chicorel, No. 17-2321, slip op. (6th Cir. Oct. 25, 2018) and held that the federal government satisfied the ten-year statute of limitations on tax collection when it filed a proof of claim in a probate proceeding in Michigan, despite the fact that government did not file a collections proceeding in the U.S. District Court until 11 years after the tax was originally assessed.
The facts of this case are not disputed. On September 12th, 2005, Albert Chicorel was assessed $140,903.52 in income tax due for the 2002 tax year by the Internal Revenue Service. He died on October 26th, 2006 without ever paying this tax. Mr. Chicorel’s nephew filed a petition for probate in the Oakland County Probate Court in Michigan and was appointed the estate’s personal representative on April 27th, 2007.
The personal representative, according to Michigan law, filed a notice to creditors on May 4th, 2007, in the legal newspaper to start the four-month period where Mr. Chicorel’s creditors can present claims for payment. Although the personal representative was aware of the federal government as a creditor, he nevertheless failed to send a direct notice to this known creditor within 4 months of publishing notice to other creditors, pursuant to MCL 700.3801(2)(a). As a result, the federal government has three years from the date of Mr. Chicorel’s death to present a claim to the personal representative and the probate court, pursuant to MCL 700.3803(1)(c). The government ultimately filed a proof of claim in the probate proceeding on January 29th, 2009 regarding the tax assessment.
Seven additional years passed and the estate remained unsettled, so the federal government filed suit on March 11, 2016 in the Eastern District of Michigan federal court to obtain a judgment. The personal representative responded that the government waited too long to fill collection proceedings and their claim should be barred because 10 years have passed. The tax was assessed in 2005 and the collection proceeding was filed in 2016, so they were one year too late. 26 U.S.C. §6502(a) states that, after the government assesses a tax, “such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun – “(1) within 10 years after the assessment of the tax.”
The federal government stated that they did “begin a proceeding” within the 10-year statute of limitations, so they are not barred. The government’s theory is that the proof of claim filed in the Oakland County Probate Court is a “proceeding” for the purpose of 26 U.S.C. §6502(a) and, once a proceeding has “begun”, the government was free to file additional proceedings later at any time in any other court (e.g. the instant collections action). The U.S. District Court agreed and granted the government’s motion for summary judgment for the 2005 tax assessment, holding that the 2009 proof of claim tolled the 10-year statute of limitations.
The personal representative appealed this decision to the Sixth Circuit Court of Appeals, maintaining that the 2009 proof of claim is NOT a “proceeding in court”. He argues that the proof of claim only serves to provide notice to the estate, but does not amount to a formal complaint or lawsuit. The U.S. Court of Appeals considered many factors in deciding whether the proof of claim under Michigan law can be considered a “proceeding in court”, including whether “it will necessarily lead to a final disposition of the claim”. The appellate court noted that Michigan’s MCL 700.3802(3) states “[f]or the purposes of a statute of limitations, the proper presentation of a claim… is equivalent to commencement of a proceeding on the claim.” Furthermore, filing a proof of claim requires the estate to take action upon it. According to MCL 700.3806(2), the submission of a proof of claim requires the estate to file notice that the claim is disallowed (otherwise, the claim is automatically allowed). “By filing the proof of claim, the creditor puts the claim on the path towards final disposition.” Slip op. at 3. In sum, the U.S. Court of Appeals determined that the proof of claim is a “proceeding in court” for the purposes of 26 U.S.C. §6502(a).
As a result of this determination, the U.S. Court of Appeals also held that the federal government satisfied the 10-year statute of limitations and was free to take further court action to resolve the matter. “Where the government has initially chosen to collect a tax by a proceeding in court, it is not barred from attempting to do so again, even more than ten years after the assessment.” Slip op. at 6. “Once the government has brought a proceeding on the assessment… the government is not forced to bring every conceivable collections proceeding within ten years.” Slip op. at 4. Since the government filed the proof of claim in state court within the ten-year statute of limitations period after the assessment, the U.S. Court of Appeals held the government is not barred from taking further additional action to collect the tax debt in federal court.
What does this decision mean for Michigan decedents with tax debt? For living people, a typical strategy to deal with an IRS tax assessment is to either acquire “currently not collectible” status or otherwise shift assets around in a way to avoid seizure by IRS levies and run out the clock on the ten-year statute of limitations. For personal representatives of decedent estates, the problem is when the federal government timely files a proof of claim, the ten-year statute of limitations no longer constrains the government from taking collection action at any point in the future. The personal representative cannot simply delay administration and wait for ten years to pass in the hopes that the Internal Revenue Service is out of luck. At some point, this claim will have to be dealt with. Under Michigan law, federal tax claims have priority over all other claims against the estate except for costs and expenses of administration, funeral and burial costs, homestead allowance, family allowance and exempt property. MCL 700.3805(1)(f).
It is worth noting that, regarding Albert Chicorel’s estate, the personal representative did not file a notice of disallowance after the federal government filed a proof of claim. A personal representative has 63 days from presentment to disallow a claim against the estate or else it will be deemed allowed. MCL 700.3806(2). If the claim is disallowed, the creditor has 63 days from the date of the disallowance to commence a proceeding or else the claim is barred. MCL 700.3804(2). If the tax claim was disallowed and the federal government did not commence a proceeding in 63 days, then the claim against the estate would be barred under state law. However, the Supremacy Clause of the U.S. Constitution holds that state courts are bound by the supreme law (e.g. the Constitution, federal law and treaties) and, in the event of conflict, the federal law must be applied. Even if the federal government was barred from pursuing a claim against the estate under state law, the Supremacy Clause would not prevent the federal government from collecting the tax assessment in federal court.
If you have any questions about Michigan probate proceedings or federal taxation, do not hesitate to contact the probate lawyers and tax professionals at Kershaw, Vititoe & Jedinak PLC.