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.
Williams' widow, Roberta, is trying 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.
"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 a Victorian Supreme Court appeal hearing on Tuesday.
George died in 2016 and left the property to his granddaughter Dhakota, where she lives 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 is about enforcing the deal made between Carl and Victoria Police.
"Carl Williams would not jeopardise his life by lagging to police for nothing," he said.
The barrister wants the battle over the Williams family home to go to trial.
"The enforcement of bargains between criminals and Victoria Police, upon which persons rely, is in the public interest," Mr Selimi said.
But counsel for the deputy commissioner of taxation say the alleged deal between Carl and Victoria Police is not their concern.
"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 claims that George's tax debt should have been wiped under a 2009 deal that Carl struck with Victoria Police to provide information about a series of murders committed during the "underbelly war" between 1999 and 2006.
But Carl was bashed to death inside Barwon Prison in 2010 before he could testify in court.
Victoria Police later cancelled their offer to to pay George's tax debt.
In 2013 George agreed to mortgage the 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.
Justice Joanne Cameron has reserved her decision.