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District Court Bucks the Trend of Penalizing Estates for Relying on Expert's Advice

(Parker Tax Publishing March 2017)

A district court went against the grain of several recent court decisions and held that an estate was not liable for a late filing penalty where the estate's executors filed the estate tax return late based on their tax attorney's advice. In reaching its conclusion, the court noted that other courts had ruled the opposite way on substantially similar facts but said it was obliged to follow precedent set by the circuit court to which the case was appealable. Estate of Hake v. U.S., 2017 PTC 74 (M.D. Pa. 2017).


The executors of the estate of Ester Hake filed the estate's tax return approximately six months late. The executors filed the return on the date that their tax attorney advised them that it was due, after the estate had been granted extensions of both its filing and payment deadlines. The executors paid the taxes that they believe were owed well before payment was due and in an amount that later proved to be more than $100,000 in excess of what was actually owed.

However, the executors were incorrectly advised by their tax professionals that they had been granted a one-year extension to file the return and to pay the taxes owed on the estate. This advice was incorrect as the law permits only a six-month extension of time to file an estate tax return for domestic executors, whereas it permits up to a one-year extension to pay the taxes owed. For this error, the executors were assessed a late penalty of almost $200,000 and interest of approximately $18,000.

The executors requested abatement of the penalty, arguing that they had reasonable cause for the late filing because it was the result of legal advice from counsel. After the IRS denied the request, the executors filed a protest with the Appeals Division, again requesting an abatement and refund of the penalty due to reasonable cause. The executors filed additional information, including a citation to the Third Circuit's decision in Thouron v. U.S., 2014 PTC 228 (3d Cir. 2014), for the proposition that erroneous expert advice of a legal professional constitutes reasonable cause for the failure to file. The executors supplemented this information with an affidavit from their tax counsel who attested that he gave the executors inaccurate advice.

The IRS denied the appeal and the estate sued the IRS in a district court. An appeal of the district court's decision would go before the Third Circuit.

Case Law Addressing Impact of Erroneous Expert Advice on Late Filing Penalties

Recently, several appellate cases have dealt with the impact of an executor's reliance on the erroneous advice of a tax expert as far as filing deadlines for an estate tax return. Decisions on whether the executor can avoid late filing penalties have been varied, but most come down on the side of the IRS because the general view is that no reasonable cause exists for missing a filing deadline.

Under Code Sec. 6651(a)(1), when a taxpayer fails to file a tax return by the due date, including any extension of time for filing, a late filing penalty applies unless it is shown that such failure is due to reasonable cause and not due to willful neglect. Reg. Sec. 301.6651-1(c)(1) provides that the reasonable cause exception will excuse a failure to file timely only if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.

In U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that in order to gain the benefit of this exception, an executor bears the burden of proving that the failure to timely file the tax return was due to reasonable cause. In that case, Robert Boyle was the executor of his mother's estate, and retained a lawyer on behalf of the estate to assist with tax matters. Boyle relied on the lawyer's instruction and guidance, and although he repeatedly checked with the lawyer about the status of the estate's return, the lawyer overlooked the timely filing of the estate tax return because of a clerical oversight. As a result, the estate's return was filed three months' late. The Supreme Court held that, in such circumstances, the executor could not hide behind the oversight of his attorney because executors have a clear obligation to make sure that estate tax returns are filed timely and this obligation cannot be discharged by delegating responsibility to an attorney or accountant. The Court further found that the executor's reliance on his tax lawyer was not for substantive tax advice, but for the administrative act of filing the return.

Last year, in Specht v. U.S., 2016 PTC 363 (6th Cir. 2016), the Sixth Circuit, citing Boyle, held that an estate could not recover more than $1.2 million in penalties and interest paid as a result of the late filing of its federal estate tax return, even where the executor was a high-school educated homemaker and her legal counsel was incompetent. The Sixth Circuit held that, although the circumstances in the case were unfortunate, the law was clear that the filing of the estate tax return and the payment of the related taxes are non-delegable. The court concluded that mere good-faith reliance on an expert does not constitute reasonable cause to avoid late filing penalties.

In Liftin v. U.S., 2014 PTC 276 (Fed. Cir. 2014), the Federal Circuit held that 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 to file the estate tax return. The court held that the executor's reliance on a legal expert's erroneous advice was reasonable to the extent the advice was to wait until the decedent's wife 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. However, the court said, the executor had no reasonable cause for waiting an additional nine months to file the estate tax return. The court said that the legal advice that the estate could delay filing until all the ancillary matters were resolved was not an interpretation of substantive tax law. Thus, there was no reasonable cause for the delay in filing the estate tax return and late filing penalties were appropriate.

In Estate of Thouron v. U.S., 2014 PTC 228 (3d Cir. 2014), the Third Circuit addressed the issue of whether an executor had reasonable cause for late payment of tax when the executor relied on the advice of a professional. While Boyle is a late-filing case, the Third Circuit found that the holding in Boyle applied with equal force to a failure to pay a tax because the "reasonable cause" excuse for failing to file a return or pay a tax timely is the same in both Code Sec. 6651(a)(1) and Code Sec. 6651(a)(2).

The Third Circuit read Boyle to have identified three distinct categories of late-filing cases:

(1) Cases that involve taxpayers who delegate the task of filing a return to an agent, only to have the agent file the return late or not at all. The Third Circuit noted that in Boyle, the Supreme Court held that in such cases, reliance upon one's attorney to file a timely tax return was not reasonable cause to excuse the late filing.

(2) Cases where a taxpayer, in reliance on the advice of an accountant or attorney, files a return after the actual due date, but within the time that the taxpayer's lawyer or accountant advised the taxpayer was available.

(3) Cases where an accountant or attorney advises a taxpayer on a matter of tax law.

The Third Circuit expressly noted that Boyle did not rule on when taxpayers rely on the advice of an expert, whether that advice relates to a substantive question of tax law or identifying the correct deadline. In Thouron, the Third Circuit concluded that a taxpayer's reliance on the advice of a tax expert may be reasonable cause for failure to pay tax by the deadline depending on the circumstances. The court held that the estate in that case should be permitted to present evidence to show that it should not have been assessed late payment penalties because of its reasonable reliance on the legal advice of counsel.

The Third Circuit sent the case back to the lower court to apply the law in light of the Third Circuit's analysis. The Third Circuit took care to note that Boyle had recognized a split of authority regarding the second category of cases, where the estate either paid or filed late, but did so by or before the deadline that its lawyer had instructed. In observing that the Supreme Court in Boyle had explicitly declined to resolve this circuit dispute, the Third Circuit noted that the Supreme Court had previously held that "a taxpayer could show reasonable cause where he or she filed (or paid) before what he or she was erroneously advised was the deadline."

The Third Circuit also underscored that in the third category of cases where a taxpayer has relied on erroneous advice of tax counsel regarding a question of law, Boyle found that courts have frequently held that "reasonable cause" is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken.

IRS's Argument

The IRS argued that it was irrelevant whether the executors wholly delegated their duty to administer the estate to their lawyer, since Boyle should be read more broadly for the proposition that the statutory requirement for timely filing a return is solely the duty of the taxpayer, and is non-delegable. The IRS also contended that the district court should read Boyle to foreclose the executors from demonstrating reasonable cause under the undisputed facts in the case.

District Court's Decision

The district court held that the executors had reasonable cause to avoid the penalties assessed by the IRS. Given the Third Circuit's limited interpretation of Boyle's holding in Thouron, and the fact that the Supreme Court itself noted that its holding in Boyle did not reach the very circumstances presented in the instant case, the district court concluded that the executors exercised ordinary business care and prudence in relying upon their counsel's erroneous assertion that the deadline for filing the return and paying taxes owed had been extended.

The district court was not persuaded that Boyle or other binding authority compelled a contrary finding. In fact, the court noted, it was bound to follow the interpretive guidance that the Third Circuit provided in Thouron, which carefully isolated the holding of Boyle and construed it to apply to first-category cases only, where executors have delegated entirely their obligations to prepare and file returns and make payment of taxes owed. The Supreme Court, the district court observed, has not yet held that in the second category of cases - where the executor relied upon the advice of tax counsel when filing a return after the actual deadline but within the period instructed by counsel - an executor may not demonstrate that such reliance was reasonable.

In reaching its conclusion, the court recognized that some other courts have interpreted Boyle in the manner urged by the IRS, and on facts substantially similar to those presented in the instant case. However, the court said, it was obliged to follow Third Circuit precedent unless that precedent has been overruled. The district court noted that in Thouron, the Third Circuit construed Boyle narrowly, concluding that Boyle addresses only cases of "clerical oversight," where a taxpayer has simply relied on a third party to file a return by the prescribed deadline.

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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