Drug lord Carl Williams' murder in prison is not the tax office's fault and should not be the reason why his family's debt is wiped clean so his widow and daughter can keep their home, the ATO says.
But Williams' widow, Roberta, says the tax debt is linked to a deal her husband struck with Victoria Police for information about a series of murders during the "underbelly war" between 1999 and 2006.
"Carl Williams was promised his father's tax debt would be wiped off and the reason that was done was so George Williams would be capable of giving that house to Carl William's daughter," Roberta's barrister John Selimi told the Victorian Supreme Court on Tuesday.
Roberta has launched an appeal to try to stop the tax office selling the Essendon house - worth more than $1 million - that was bequeathed to her daughter by Carl's father, George.
George died in 2016 and left the property to his granddaughter Dhakota, who lives there with her mother.
But the Australian Tax Office, owed about $740,000 in unpaid taxes from George, launched a legal battle over George's will.
In March the Supreme Court ruled Roberta had no claim to the house and made orders for it to be sold and the proceeds used to pay the debt.
Mr Selimi on Tuesday said their appeal was about enforcing the deal made between Carl and Victoria Police.
As part of the deal, police agreed to wipe George Williams' tax debt, but Carl was bashed to death inside Barwon Prison in 2010 before he could testify in court.
Victoria Police later cancelled their offer to pay George's tax debt.
In 2013 George agreed to mortgage his Essendon home to the ATO in a settlement deal, but Roberta's lawyer said the grief-stricken father was not in the right state of mind at the time.
"He expressed anguish over the alleged tax debt and he told them he was very sick and suffered from heart problems and depression," Mr Selimi said.
In a sworn affidavit, Roberta said George was "extremely depressed and anxious every time we saw him and always complained about the tax office chasing him for the debt".
But the ATO also says Carl's deal with Victoria Police has nothing to do with them.
"It's unfortunate that Carl Williams, having entered this agreement, is killed in custody," lawyer James McKay said.
"Because of a breach of that agreement by Victoria Police, a different entity, somehow that affects the position of my client."
Roberta's barrister wants the battle over the Williams family home to go to trial.
"Carl Williams would not jeopardise his life by lagging to police for nothing," Mr Selimi said.
"The enforcement of bargains between criminals and Victoria Police, upon which persons rely, is in the public interest."
Justice Joanne Cameron has reserved her decision.