Generally, until a tax has been assessed, the tax may not be collected. An Internal Revenue Service (IRS) assessment officer creates a recording of the amount a taxpayer owes the government, and this recording is known as an “assessment.”¹ Once a timely assessment has been made, the IRS has 10 years from the date of assessment to collect the tax, subject to certain exceptions and tolling events. After 10 years, barring any tolling event, the liability expires and any lien self-releases. One such tolling event is a court proceeding. Specifically, Internal Revenue Code (IRC) §6502(a) states that after the government timely assesses a tax, “such tax may be collected by levy or by a proceeding in court [emphasis added], but only if the levy is made or the proceeding begun . . . within 10 years after the assessment of the tax . . . .”²
On October 25, 2018, in U.S. v. Chicorel,³ the Sixth Circuit Court of Appeals decided that the 10-year tax collection statute of limitations is tolled by the government’s proof of claim filed in a state probate proceeding. The court specifically determined that the proof of claim qualified as an IRC §6502 “proceeding in court.” Thus, although the Government did not file a collections proceeding in the U.S. District Court until 11 years after the assessment, the government’s collection effort was not barred.
In 2005, the government assessed taxpayer over one hundred thousand dollars in income tax for tax year 2002. The taxpayer had not paid the assessed taxes before he died in October of 2006. In 2007, the estate’s personal representative published a notice, according to Michigan law, to creditors of the four-month deadline for presenting claims; however, although the government was a known creditor of the estate, the personal representative failed to mail the notice to the government.
Since notice to the government was not properly provided, Michigan law provided the government three years from the date of taxpayer’s death to file a proof of claim in probate court. In January of 2009, the government filed its proof of claim in probate court concerning the tax assessment. The proof of claim generated no response from the personal representative.
In the Spring of 2016, the estate remained unsettled, and the government filed suit in the Eastern District of Michigan federal court to collect on the 2005 tax assessment. The personal representative argued that the collection proceeding was barred because 10 years had passed between the 2005 assessment and the 2016 filing of the collection proceeding. The district court granted the government’s motion for summary judgment, finding that the 2009 proof of claim filing tolled the statute of limitations.
The Sixth Circuit Court of Appeals turned to federal law to determine whether or not a proof of claim is a “proceeding in court.” Citing United States v. Silverman⁴ and United States v. Saxe,⁵ the court stated that “[w]hether a proof of claim is a ‘proceeding in court’ is a question of federal law that necessarily turns on the nature, function, and effect of the proof of claim under state law.”
So, with this principle in mind, the court focused its attention on how Michigan treats the filing of a proof of claim and determined that the government’s proof of claim in the state’s probate court qualified as an IRC §6502 proceeding in court. Specifically, the court considered factors such as whether in Michigan, “the proof of claim serves merely to provide notice to the estate, if it works to toll state statutes of limitations, and if it will necessarily lead to a final disposition of the claim.”⁶ The court noted that under Michigan law, a proof of claim tolls the state statutes of limitations. Additionally, the court stated that the relevant Michigan statue expressly “equates presentation of the claim with a proceeding.”⁷ Furthermore, the court considered it significant that a proof of claim requires the estate to act, and, as such, “puts the claim on the path towards final disposition.”⁸
Thus far, the decision effects Michigan decedents with tax liabilities—whether or not other jurisdictions approach this issue similarly remains to be seen. However, for those living in Maryland, the District of Columbia, or Virginia, the personal representative of a decedent’s estate must understand that the 10-year statute of limitations may be tolled by the government’s filing of a proof of claim in probate court. If such claim is filed, the personal representative may not be able to delay administration and sit idly by—he or she may have to address the claim.
If you have questions or concerns about a tax matter, please feel free to contact us at Frost Law today.