IRS Files Lien Against Anna Nicole Smith’s Estate For Back Taxes

The Estate of Anna Nicole Smith is finding out the hard way that taxes are as certain as death.  It seems that the IRS has filed a lien against the late Ms. Smith’s estate seeking back taxes in the amount of $289,123.48.  Smith, a former actress, model, and playmate, passed away on February 8, 2007, from an accidental prescription drug overdose.  At that time she had been locked in a longstanding legal battle with the estate of her late husband, Texas oil billionaire J. Howard Marshall.  The Smith estate would ultimately go on to lose this contest.

A review of the lien documents would indicate that the bulk of the tax deficiency was incurred by Smith’s estate after she passed.  The supporting documentation lists a Form 1041 obligation in the amount of $140,513.30.  Form 1041 is used to report income,  deductions, gains, and losses of an estate, trust, or bankruptcy estate.  Trust and estate income is figured in almost the same way as individual income and many of the same deductions and credits are allowed (although not always in the same amounts as for individuals).  The biggest difference is that a trust or decedent’s estate may take an income distribution deduction for distributions to beneficiaries.  Thus, a trust or estate which distributes all of its income may have none to report, and the income tax obligations will pass on to the beneficiaries’ personal returns.

Income earned by an estate is distinguishable from income in respect of a decedent (“IRD”).  Generally speaking, IRD is the term given to income that was earned by the decedent during their lifetime, but not yet received at the time of the decedent’s death.  IRD is usually reported on the decedent’s final Form 1040.  Estate income is income that is both earned and received after the decedent’s death, which is reported on the aforementioned Form 1041.

It will be interesting to see who steps forward to satisfy the IRS’ claim in regards to the estate.  The personal representative of Smith’s estate, Howard K. Stern, could be held responsible if he oversaw payment to other creditors or beneficiaries without satisfying the estate’s obligation to the IRS.  31 U.S.C. 3713 states that “a representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”