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Federal Circuit Affirms Estate's Reliance on Bad Advice Was Reasonable Up to a Point.
(Parker Tax Publishing July 2, 2014)

An estate had reasonable cause to delay filing its tax return until the decedent's spouse became a U.S. citizen so that the estate could take the marital deduction; however, there was no reasonable cause for waiting nine months after the wife became a citizen and all ancillary matters were resolved. Liftin v. U.S., 2014 PTC 276 (Fed. Cir. 6/10/14).

Morton Liftin died on March 2, 2003, and his son, John, was appointed executor of the estate. The decedent's will provided for direct bequests to, among others, his surviving spouse, Anna Liftin, who was a U.S. resident and a citizen of Bolivia at the time of the decedent's death.

Under Code Sec. 6075(a), the estate was required to file a federal estate tax return by December 2, 2003, nine months after the decedent's death. Code Sec. 6081(a) grants an extension of time of up to six months for the filing of a return, and Reg. Sec. 20.6081-1 provides that the total allowable time for filing, including extensions, is 15 months from the decedent's death. The executor hired his former law partner, John Dadakis, an estate and gift tax planning expert, to assist with the estate's federal estate tax return. Dadakis advised that the estate tax marital deduction is not available if the surviving spouse is not a U.S. citizen. However, Code Sec. 2056(d)(4) provides that, if the spouse becomes a citizen before the estate tax return is filed and has been a resident of the United States at all times after the decedent's death and before becoming a citizen, the estate may take the marital deduction.

On November 26, 2003, six days before the estate's return and taxes were due, the estate requested a six-month extension to file its return and pay the taxes due. The IRS granted the estate's request, setting a new deadline of June 2, 2004. On January 20, 2004, the estate made a tax payment of $877,300, an amount the estate estimated would be sufficient to satisfy the taxes due even if it were unable to claim the marital deduction.

Subsequently, the executor and Dadakis became aware that Mrs. Liftin intended to apply for U.S. citizenship. The executor knew, however, that Mrs. Liftin's naturalization process might not be completed before the June 2, 2004, tax return deadline. Based on his interpretation of Reg. Sec. 20.2056A-1(b), Dadakis advised the estate that its late filing of the tax return in order to claim the marital deduction would not trigger a penalty as long as the return was filed within a reasonable time after Mrs. Liftin became a naturalized U.S. citizen and other ancillary matters were completed. The executor found this advice to be reasonable, particularly because the estate had already paid more than the amount of tax the executor believed would ultimately be due.

Mrs. Liftin became a U.S. citizen on August 3, 2005. In February of 2006, the estate entered into an agreement settling certain claims Mrs. Liftin had against the estate. On May 9, 2006, the estate filed its tax return claiming the marital deduction in the amount of the value of the property passing to Mrs. Liftin and reflecting a tax due of approximately $679,000 and an overpayment of approximately $199,000.

The IRS did not contest the marital deduction, but did assess a penalty under Code Sec. 6651 of almost $170,000 for late filing and late payment. The estate filed a refund claim, which the IRS denied. After an administrative appeal, the IRS granted a partial refund of $34,000, leaving a claim of approximately $136,000. In its administrative appeal, the estate argued that the statutes and regulations related to the marital deduction provided reasonable cause for the estate's late filing.

The Court of Federal Claims divided that two-year delay into two periods the 14 months up to the August 2005 grant of U.S. citizenship to Mrs. Liftin, and the nine months from then until the May 2006 filing. The court held that the executor's reliance on Dadakis' erroneous advice was reasonable to the extent the advice was to wait until Mrs. Liftin became a U.S. citizen. That advice, the court noted, concerned a substantive question of tax law regarding the interaction between the statutes and regulations providing for the marital deduction and the statutes and regulations setting the deadline for filing the estate's return. The executor had no basis to question Dadakis' advice; moreover, the court said, there was no evidence to suggest that the executor was acting in bad faith. Requiring the executor to challenge Dadakis, the court said, would nullify the very purpose of seeking the expert's advice in the first place.

However, the Federal Claims Court concluded that once Mrs. Liftin was naturalized, there was no reasonable cause for the estate to wait an additional nine months to file its estate tax return. Because Dadakis' advice that the estate could delay filing until all the ancillary matters were resolved was not an interpretation of substantive tax law, there was no reasonable cause for the delay in filing the estate tax return. The estate appealed to the Federal Circuit.

The Federal Circuit affirmed the Federal Claims Court decision and held that the penalty assessed on the nine-month period before the May 2006 filing was appropriate. The court concluded that the executor lacked reasonable cause for the delay in filing during that period.

Though fully able to file, the court noted, the executor simply relied on the advice of counsel that he should wait to file until the resolution of various "ancillary" matters advice for which he obtained no explanation and that rested on the unreasonable assumption that incompleteness of information justified delay in filing.

For a discussion of when a taxpayer has shown reasonable cause to avoid a penalty for late filing of a return, see Parker Tax ¶262,127. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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