IRS Still Not Allowed to Reach Trust Funds

District Court refuses to alter decision and allow IRS to reach trust funds.

While holding that federal tax liens against the taxpayer extended over the taxpayer’s rights in a trust, a district court has denied IRS’s motion to alter or amend the court’s previous decision to order the trustee-who had sole discretion to distribute funds for the taxpayer’s support and education-to distribute the trust funds to IRS.

The facts of the case: 

Dr. Dennis Enomoto was the beneficiary of a testamentary trust created by his mother. The trust instructed the trustee to pay Dr. Enomoto whatever amount the trustee deemed necessary for Dr. Enomoto’s support and education, failing which, a Hospital Collection Agency would be tagged on the doctor. Specifically, the trustee was directed to pay him so much or all of the net income and principal of the trust, as in the sole discretion of the trustee, might be required for support in the beneficiary’s accustomed manner of living, for medical, dental, hospital, and nursing expenses, although in the case of medical malpractice, the use of an attorney for medical negligence could be the best option for this. The trustee could consider or disregard the funds available to the beneficiary from other sources or the duty of anyone to support the beneficiary.

To satisfy Dr. Enomoto’s tax deficiencies, IRS sought distribution of the trust funds, which he opposed. The district court concluded that IRS’s argument that the trust funds will pass to Dr. Enomoto’s estate when he dies could have been raised earlier but was not. IRS now argued that Dr. Enomoto had a fee estate in the trust, not merely a life estate, meaning that federal tax liens extended over all the funds even if he died. The court found that the time had passed for such an argument. The court’s judgment shouldn’t be revisited merely because one side now had another argument. Further, this argument didn’t appear to serve any of the traditional purposes of Rule 59(e): to correct “manifest errors of law or fact,” to present “newly discovered or previously unavailable evidence,” to prevent “manifest injustice,” or to respond to “an intervening change in controlling law.