ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. D.C. Civil Action No. 92-01045.
Before: Becker, Nygaard and Weis, Circuit Judges.
Brian and Marilyn Geniviva appeal from an order of the district court granting summary judgment to the United States in its action to impose transferee liability against them for unpaid taxes of the estate of Helen Geniviva. The district court held that the suit was not time-barred, even though no assessment was filed under 26 U.S.C. § 6901 and the time for doing so had passed. Because a section 6901 assessment is not a prerequisite to an action against transferees under 26 U.S.C. § 6324 (a)(2) and this case was filed within the statutory period for claims under the latter section, we will affirm.
Helen Geniviva died in 1981, leaving an estate valued at approximately $446,000 in equal shares to her three children, Cosmo, Brian and Marilyn. Cosmo Geniviva was appointed as the executor. Unbeknownst to Brian and Marilyn, who had already received their distributions from the estate and were apparently under the impression that the matter had been properly closed, Cosmo failed to file an estate tax return until January 1985. The IRS audited the return a few months later and determined that a substantial additional tax was due. In June or July of 1987, all three children met in the office of Nicholas A. Frisk, Jr., the attorney for the estate, to discuss the matter. Apparently, this was when Brian and Marilyn learned of the estate's tax problems. As a result of that meeting, the children agreed to sell some real estate to raise money,*fn1 and the estate agreed to the immediate assessment of approximately $275,000 in back taxes, interest and fraud penalties.
Despite this purported agreement, only a small fraction of the assessed amount was ever paid by the estate. In March 1989, Brian and Marilyn sued Cosmo and Attorney Frisk, alleging fraudulent and negligent mismanagement of the estate. Plaintiffs alleged that the defendants had dissipated the estate's assets by charging excessive fees and making poor investments in the stock market. No decision has been rendered in that case. Moreover, counsel informed us at oral argument that Cosmo has filed a petition in bankruptcy and Attorney Frisk appeared to lack either malpractice insurance or substantial assets. Meanwhile, the estate's liability continued to grow; by February 1993, it had risen to a staggering $420,833.
In April 1992, the Government filed this suit against all three Geniviva children, seeking to impose transferee liability against them pursuant to 26 U.S.C. § 6324(a)(2). This section provides that if estate taxes are not paid when due, the beneficiaries are liable up to the amount received from the estate. Because of the penalties and interest that had accrued over the years, the Government sought to hold each child responsible for the full $110,000 he or she received. Cosmo settled with the Government, while Brian and Marilyn continued to litigate.
Both the Genivivas and the United States moved for summary judgment. Brian and Marilyn admitted liability as transferees, but argued that the suit was time-barred. They acknowledged that an action to impose transferee liability is subject to a ten-year limitations period, but argued that the Government was first required to file assessments against them individually under 26 U.S.C. § 6901. Because the limitations period for making such an assessment had run, Brian and Marilyn argued that the entire case was untimely. The district court, however, adopted the Report and Recommendation of the United States Magistrate Judge and granted summary judgment in favor of the United States. This appeal followed. The district court had jurisdiction under 28 U.S.C. §§ 1340, 1345 and 26 U.S.C. §§ 7402(a), 7404. We have appellate jurisdiction under 28 U.S.C. § 1291. Our scope of review over this issue of law is plenary.
26 U.S.C. § 6324 (a)(2) imposes liability on the transferees of decedents' estates when the estate itself fails to pay its federal taxes. Essentially, it affords the Government a separate remedy against the beneficiaries of an estate when the estate divests itself of the assets necessary to satisfy its tax obligations. 26 U.S.C. § 6901, on the other hand, permits the Government to assess tax liability against a transferee in the same manner as it assesses the estate itself. Section 6324, the older of the two sections, was enacted as part of the Revenue Act of 1916.
Before 1926, when section 6901 was enacted, the only means by which the Government could impose liability against a transferee was by a bill in equity or an action at law brought under the precursor to section 6324. Phillips v. Commissioner, 283 U.S. 589, 592, 51 S. Ct. 608, 610, 75 L. Ed. 1289 (1931). Section 6901 did not eliminate or limit such an action; rather, it provided an additional means by which the Government could enforce the collection of taxes. Leighton v. United States, 289 U.S. 506, 507-08, 53 S. Ct. 719, 720, 77 L. Ed. 1350 (1933). Thus, in Leighton, the Supreme Court held that a failure by the Government to personally assess the shareholders of a defunct corporation did not bar an action to impose transferee liability against them. Id. at 509, 53 S. Ct. at 720-21. Leighton has never been overruled, either by the Court or by statute, and is binding upon us.*fn2
Appellants attempt to distinguish Leighton because it was bought in equity, while this is an action at law. One district court has accepted that rationale, but was later reversed on appeal. United States v. Russell, 327 F. Supp. 632, 633-34 (D. Kan. 1971), rev'd, 461 F.2d 605, 608 (10th Cir. 1972). The Tenth Circuit Court of Appeals, however, applied Leighton and held that a section 6901 assessment was not a prerequisite to an action under section 6324, but that the two sections were merely "cumulative and alternative -- not exclusive or mandatory."*fn3 It did not deem the distinction between law and ...