Estate was Unsuccessful in Demonstrating Reasonable Reliance on a Tax Expert to Abate a Failure to File Federal Estate Return Penalty
In the estate tax appellate litigation case of Liftin v. U.S., 2013-5103 (U.S.CX.A. Federal Cir.) (June 10, 2014) the U.S. Court of Appeals affirmed the lower court’s finding that a twenty-five percent failure-to-file penalty was mandatory when an estate which filed IRS Form 706 two years after the extended due date was unsuccessful in demonstrating that it had reasonably relied on the advice of a tax professional.
The executor, who was an attorney and the son of the decedent, obtained legal advice from his former law partner on two issues: whether the estate could take the marital deduction only if the decedent’s wife became a U.S. citizen before filing the federal estate tax return, and matters related to litigation concerning a prenuptial agreement signed by the decedent and his wife. Both matters were unresolved as of the extended due date of the return. Before the deadline the executor made an estimate payment to the IRS of an amount sufficient to cover the estate tax even if the marital deduction were not taken. The estate did not file the tax return, relying on the advice of the former law partner that the return could be filed after the open issues were resolved.
The former law partner advised the IRS by letter that the estate was waiting to file the return until the decedent’s wife obtained U.S. citizenship. The letter did not mention the second issue. Even after the wife obtained U.S. citizenship, the executor did not file the return for an additional nine months.
The IRS assessed a late-filing penalty, which the executor contested in the Court of Federal Claims. The court held that the estate’s failure to file up to the date of citizenship was due to reasonable cause under IRC 6651(a)(f) i.e. reliance on the advice of the former law partner. But it found that the estate lacked reasonable cause for the additional nine-month delay in filing. The Court of Appeals agreed with the lower court.
In a detailed dissent, Circuit Judge Pauline Newman argued that, under IRC 6651(b), the combination of the estimated taxes paid by the estate, which resulted in an overpayment of taxes due, and the estate’s letter to the IRS concerning the remaining issues should have averted the imposition of the late-filing penalty.
Reference: Margery J. Schneider, Esquire, Probate and Trust Law Section Newsletter, Philadelphia Bar Association (September 2014, No.137, Page 13)
Filed Under: Federal Estate Tax; Late Filing Reasonable Cause; Reliance on an Expert; Failure to File Penalty
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