Reliance on a Tax Expert is Reasonable Cause for Late Payment of Federal Estate Taxes
In the estate tax litigation appellate case of Estate of Thouron vs. US, 2014 US App. LEXIS 8890 (3rd Cir. Pa 2014) (May 14, 2014) the Third Circuit Court of Appeals ruled that reliance on a tax expert can be considered reasonable cause under Treas. Reg. 301.6651-1(c) (1) for late payment of taxes if the taxpayer can also show either an inability to pay or undue hardship from paying on time.
The Court overturned a District Court ruling that the IRS was barred from refunding a penalty imposed on an estate. The penalty was caused by the erroneous advice of an attorney that led the estate to not timely seek an extension for the payment of federal estate taxes.
The executor of the estate had retained an experienced tax attorney. The estate requested a six-month extension on the due date of the Federal Estate Tax return and made a significant monetary payment that was less than the estate owed. It did not request an extension of time to pay or pay the balance of its liability because the attorney had not yet decided whether a section 6166 election was appropriate. The estate timely filed the extended return but requested another extension of time to pay. The IRS imposed a failure to pay penalty, to which the estate objected because it claimed that the failure to pay resulted from reasonable cause. For a taxpayer to show that the failure to pay is due to reasonable cause, the taxpayer must prove that he exercised ordinary business judgment and either of the following was true the taxpayer was unable to pay on that date, or undue hardship would result from the payment of the taxes on that date.
The District Court, citing Boyle, 1985 (U.S.) 55 AFTR 2d 85-1535, had stated that reliance on an expert was not reasonable cause for late payment. The Third Circuit, however, determined that in this case, the failure to pay arising out of reliance on the advice of a tax expert could be considered reasonable cause if it was accompanied by inability to pay or undue hardship. It remanded the case back to the District Court to decide whether either inability to pay or undue hardship was present.
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 Payment Reasonable Cause; Reliance on an Expert
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