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Third Circuit Opens the Door for Reasonable Cause Defense to Late-Payment Penalty; Highlights Split in Circuits. (Parker Tax Publishing May 28, 2014)

Reversing the district court, the Third Circuit held that a taxpayer's reliance on the advice of a tax expert may be reasonable cause for failing to timely pay a tax if the taxpayer can also show either an inability to pay or undue hardship from paying by the deadline. Estate of Thouron v. U.S., 2014 PTC 228 (3d Cir. 5/13/14).


In Estate of Thouron v. U.S., the issue was whether an estate could rely on a tax expert to avoid a failure to pay penalty under the reasonable cause exception. In the case, an executor sought the advice of a tax attorney for the administration of an estate. The attorney and the estate had discussed Code. Sec. 6166, an election to pay the estate tax liability in installments over a period of a few years. On the date the estate return was due, the estate requested an extension to file and remitted a portion of the estimated liability. The estate ultimately did not make a Code Sec. 6166 election for installment payments. Upon the expiration of the filing extension, the estate timely filed its return and also sought an extension to pay the tax due. The IRS denied the extension to pay and imposed a failure to pay penalty because the estate failed to pay the entire liability on the date the return was originally due; an extension to file only extends the filing deadline. The estate proceeded through the administrative process and initiated a refund claim in district court.

Before the district court, the estate argued and lost on the position that a valid defense to the failure to pay penalty is the reasonable cause exception as established in U.S. v. Boyle, 469 U.S. 241 (1985), because the estate relied on erroneous legal advice of an expert regarding have to pay the total liability on the original due date of the return. The court held that under Boyle, expert reliance for a defense of reasonable cause is an invalid excuse for failure to file and pay because the deadlines are clear. The estate appealed.

The Third Circuit reversed the district court reasoning that Boyle was applied too widely and that there are actually three categories of late file/pay cases which Boyle discussed. The court held that reasonable cause could be a valid defense, supported by expert reliance, in cases where legal advice is provided, not merely reliance on the expert for performance of a ministerial task, such as the act of filing a return. The circuit court vacated the district court's decision for further factual inquiry into whether there was expert reliance.

Practice Tip: While the court's decision applies to an estate that failed to pay its taxes on time, it has broad implications for all taxpayers. To the extent a taxpayer has paid a late-payment or late-filing penalty because the taxpayer's reliance on a tax professional was deemed not to be reasonable cause to avoid the penalty, amended returns should be considered.


On February 6, 2007, John Thouron died at age 99. He was predeceased by his wife and only child and was survived by two grandchildren who were not familiar with his financial affairs. Thouron's will appointed Charles Norris as the estate's personal representative. Norris hired attorney Cecil Smith to provide legal services regarding tax compliance of the estate.

The estate's tax return and payment were initially due by November 6, 2007. On that date, the estate requested an extension of time to file its return and made a payment of $6.5 million, which was much less than it would ultimately owe. According to the estate, it did not pay the balance of its liability or, in the alternative, request an extension of time to pay at least in part of the liability, because of advice from Smith relating to the possibility of electing to defer certain liabilities under Code Sec. 6166. This provision allows qualifying estates to elect to pay a portion of their tax liability in installments over several years. As requested, the estate received an automatic six-month extension of time to file the return, which put the filing deadline at May 6, 2008.

The estate timely filed its return in May 2008 and on the same day requested an extension of time to pay the taxes due. It made no election to defer taxes under Code Sec. 6166 because, by that time, it had conclusively determined it did not qualify. The IRS denied as untimely the estate's request for an extension of time to pay and subsequently imposed a failure-to-pay penalty, which the estate unsuccessfully appealed administratively. After losing the administrative appeal, the estate paid all outstanding amounts, including a penalty of approximately $1 million. Three months later, it requested a refund of the penalty and subsequently filed suit in district court arguing that it had reasonable cause i.e., the reliance on a tax expert to avoid the late-payment penalty.

Boyle Decision

In the Boyle case, Robert Boyle was the executor of his mother's estate and he hired an attorney, Ronald Keyser, on behalf of the estate. Boyle relied on Keyser for instruction and guidance. Although Boyle repeatedly checked in with Keyser on the status of the estate's return, the attorney forgot to file the return because of a clerical oversight in omitting the filing date from his master calendar. As a result, the return was not filed until almost three months after the deadline and a late-filing penalty was assessed. When the IRS would not abate the penalty, the estate took the case to court where it lost before the Supreme Court. The Court opined that executors have a fixed and clear duty to ensure that returns are timely filed and that duty cannot be discharged by delegating responsibility to an attorney or accountant. According to the Court, that the attorney, as the executor's agent, was expected to attend to the matter did not relieve Boyle of his duty to comply with the statute.

The District Court's Opinion

The district court, in Estate of Thouron, found in favor of the IRS. Citing Boyle, the lower court rejected the estate's argument that it had reasonable cause for the late tax payment because of its reliance on the erroneous advice of a hired tax professional. According to the district court, the Supreme Court's decision precluded any finding of reasonable cause for the late payment of taxes or the late filing of a return based on reliance on an expert or other agent.

The district court noted that when an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers, the court observed, are not competent to discern error in the substantive advice of an accountant or attorney. By contrast, the court said, one does not have to be a tax expert to know that tax returns have fixed filing dates and taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is common, the court noted; but that reliance cannot function as a substitute for compliance with an unambiguous statute.

The district court also cited a more recent decision of the Ninth Circuit that applied the reasoning in Boyle to a case involving the failure to pay a tax on time. In Baccei v. U.S., 632 F.3d 1140 (9th Cir. 2011), Ronald Baccei was appointed as the trustee for a revocable trust upon Eda Pucci's death on September 17, 2005. Baccei hired a CPA to prepare and file the estate tax return. On June 16, 2006, the CPA mailed to the IRS a Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes, to extend the filing deadline. The accountant completed three of the four sections of Form 4768, but failed to complete Part II, entitled Extension of Time to Pay. The CPA's cover letter enclosing Form 4768 stated that the estate was seeking this extension of time to pay as well as asking that no penalty be assessed. Because the estate did not pay its tax by the June 2006 deadline, the IRS assessed a penalty and interest.

The Ninth Circuit upheld the penalty based on the Boyle decision. The court explained its' rational for applying Boyle in the context of a failure to timely pay a tax as follows:

We extend these determinations of reasonable cause under Sec. 6651(a)(1) to determinations of reasonable cause under Sec. 6651(a)(2). There is no reason to distinguish between reasonable cause for a failure to timely file an estate tax return and reasonable cause for a failure to timely pay an estate tax, and we refuse to do so. Accordingly, we affirm the district court's finding that [the taxpayer's] reliance upon [a professional] to competently file a payment extension request does not constitute reasonable cause excusing [the taxpayer's] failure to timely pay the estate taxes owed.

Baccei v. U.S., 632 F.3d 1140 (9th Cir. 2011).

Third Circuit's Analysis

The Third Circuit had a different take on the Boyle decision. Under its reading of the decision, Boyle identified three distinct categories of late-filing or, by extension, late-payment cases. In the first category, a taxpayer relies on an agent for the ministerial task of filing or paying a tax. In the second category, in reliance on the advice of an accountant or attorney, the taxpayer files a return after the actual due date but within the time the adviser erroneously said was available. In the third category, an accountant or attorney advises a taxpayer on a matter of tax law.

By its facts, the Third Circuit said, Boyle fit into the first category. Thus, when the Supreme Court reached the holding relied on by the district court, the relevant "reliance on an agent" was for the administrative act of filing the return. The Supreme Court specifically did not reach a conclusion regarding the remaining categories. In fact, the Third Circuit observed, the Supreme Court noted a split of authority as to the second category and explicitly declined to resolve the issue.

OBSERVATION: In a footnote, the Third Circuit noted that the definitions of "reasonable cause" for failure to file and failure to pay are not identical. Citing Reg. Sec. 301.6651-1(c)(1), the court said that reasonable cause for failure to file is shown where the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. On the other hand, reasonable cause excuses failure to pay to the extent the taxpayer has made a satisfactory showing that he or she exercised ordinary business care and prudence in providing for payment of the tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship, as described in Reg. Sec. 1.6161-1(b), if he or she paid on the due date.

The Third Circuit concluded that a taxpayer's reliance on the advice of a tax expert may be reasonable cause for failure to pay by the deadline if the taxpayer can also show either an inability to pay or undue hardship from paying at the deadline. The court found at least a genuine dispute of material fact as to whether that reliance occurred with respect to the Thouron estate and sent the case back to the district court to apply the law in light of this analysis. (Staff Editor Parker Tax Publishing)

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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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