Reliance on Expert's Erroneous Advice for Filing and Payment Dates - Strauss & Malk LLP
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Reliance on Expert's
Erroneous Advice for
Filing and Payment Dates
Can reliance on an expert be reasonable cause that protects against penalties
for late filing of an estate tax return or paying the tax?
MICHAEL S. STRAUSS
he executor of an estate that taxpayer has made a satisfactory Boyle
is required to file a federal showing that he exercised ordinary The Supreme Court addressed this
T estate tax return is obligated,
under Section 6075(a), to file
the return within nine months after
business care and prudence in pro-
viding for payment of his tax lia-
bility and was nevertheless either
issue in Boyle.1 In Boyle, an execu-
tor of his mother's estate retained
an attorney to assist him in the
the date of the decedent's death. preparation of his mother's feder-
unable to pay the tax or would suf-
For a return not timely filed (includ- al estate tax return. The executor's
fer an undue hardship (as described sole experience with federal estate
ing extensions), under Section
6651(a)(1), a penalty of 5% of in § 1.6161-1(b) of this chapter) if taxation was acting as executor
the tax due is imposed for each he paid on the due date." of his father's will 20 years earli-
month (or partial month) of delay What other circumstances sat- er. "It is undisputed that [the execu-
in filing the return, up to a maxi- isfy the reasonable cause require- tor] relied on [his attorney] for
mum penalty of 25%. For a tax not ments, allowing a late filing or late instruction and guidance. He coop-
timely paid (including extensions), payment to avoid the imposition of erated fully with his attorney and
under Section 6651 (a)(2), a penal- penalties? provided [his attorney] with all rel-
ty of one-half of 1% of the tax evant information and records."
due is imposed for each month (or MICHAEL S. STRAUSS is a partner at Strauss & Due to a clerical error at the attor-
partial month) of delay in payment, Malk LLP, with offices in Northbrook, Chicago, and ney's office, however, the return
up to a maximum penalty of 25%. Lake Forest, Illinois. He concentrates his practice in was filed three months late. The
estate and trust planning, including estate tax reduc-
Each of these penalties, howev- executor paid the penalty assessed
tion, asset protection, wealth succession, probate
er, is imposed "unless it is shown and estate administration, and technology-related
and filed suit for a refund. Fol-
that such failure is due to reason- matters, He is a co-author of Post Mortem Tax Plan- lowing the holding of an earlier
able cause and not due to willful ning (Thomson Reuters/WG&L) and Estate and Gift case,2 the district court found for
neglect...." Additional guidance Planning for the Business Owner (Thomson Reuters/ the executor on summary judg-
is found in Reg. 301.6651-1(c), RIA), the current author of Post Mortem Estate
ment, and the Seventh Circuit
Planning (Thomson Reuters/RIA) and is the author of
which states that "[a] failure to pay affirmed. Granting certiorari to
a number of articles for ESTATE PLANNING and
will be considered to be due to rea- THE JOURNAL OF TAXATION. Copyright 2018, Michael S. resolve a split among the circuits
sonable cause to the extent that the Strauss, (but setting the stage for a later cir-
32
•
cuit split, as will be discussed
below), the Supreme Court Services and Information
reversed.
In the words of the Court, "To ESTATE PLANNING
escape the penalty, the taxpayer
TO ORDER
bears the heavy burden of proving
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was 'unable to file the return with-
in the prescribed time." EDITORIAL INQUIRIES
The Court further stated, "The Address to: Estate Planning
time has come for a rule with as Thomson Reuters
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`bright' a line as can be drawn con- Hoboken, NJ 07030 201-536-8189
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menting regulations.... Congress PERMISSION TO PHOTOCOPY
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unambiguous, precisely defined FAX 978-646-8600
Or mail to:
duty to file the return within nine 222 Rosewood Drive
months; extensions are granted fair- Danvers, MA 01923
ly routinely. That the attorney, as ESTATE PLANNING is available on the Internet
the executor's agent, was expected as part of CHECKPOINT from Thomson Reuters Tax & Accounting.
to attend the matter does not relieve
the principal of his duty to comply advisor may constitute reason- returns have fixed filing dates and
with the statute." able cause for failure to file a that taxes must be paid when they
"This case is not one in which return.... When an accountant or are due.... The failure to make a
a taxpayer has relied on the erro- attorney advises a taxpayer on a timely filing of a tax return is not
neous advice of counsel concern- matter of tax law, such as whether excused by the taxpayer's reliance
ing a question of law. Courts have a liability exists, it is reasonable for on an agent, and such reliance is
frequently held that 'reasonable the taxpayer to rely on that advice. not 'reasonable cause' for a late fil-
cause' is established when a tax- Most taxpayers are not competent ing under § 6651(a)(1)." Further,
payer shows that he reasonably to discern error in the substantive "[w]hether the elements that con-
relied on the advice of an account- advice of an accountant or attor- stitute 'reasonable cause' are pres-
ant or attorney that it was unnec- ney. To require the taxpayer to chal- ent in a given situation is a ques-
essary to file a return, even when lenge the attorney, to seek a 'sec- tion of fact, but what elements must
such advice turned out to have been ond opinion,' or to try to monitor be present to constitute 'reasonable
mistaken.... This Court also has counsel on the provisions of the cause' is a question of law."
implied that, in such a situation, Code himself would nullify the very
reliance on the opinion of a tax purpose of seeking the advice of a Specht. Delegation to an agent of
presumed expert in the first place.... the duty to file a return has been
1 469 U.S. 241, 55 AFTR2d 85-1535 (1985).
By contrast, one does not have to held to not constitute reasonable
2 Rohrabaugh, 610 F.2d 211, 45 AFTR2d 80-
1720 (CA-7, 1979). be a tax expert to know that tax cause for failing to timely file, even
APRIL 2018 VOL 45 / NO 4 PENALTY EXCEPTION
34
where the agent actively misled the ject to a guardianship). Also, the Two-part analysis
executor multiple times as to the Ohio Department of Taxation fully One view of the question of what
filing of the return and the admin- refunded the estate's state penal- can be reasonable cause is the view
istration of the estate. In Specht,3 ties due to hardship. The Sixth Cir- expressed by the Ninth Circuit. In
the executor, the decedent's 73- cuit, however, held that there was Knappe,5 the executor engaged an
year-old cousin with no formal edu- no reasonable cause to avoid the accountant to assist him with the
cation past high school and no late filing penalty. "[T]he relevant administration of the estate. The
experience with acting as an execu- question is whether the executor, accountant correctly advised the
tor, engaged the attorney who had not the attorney, was reasonable executor of the requirement to file
drafted the decedent's will to rep- in missing the deadline. Here and the return and the due date of the
resent the estate. in Boyle, the executors blindly return being nine months from
relied on their attorney's repre- the date of the decedent's death.
sentations that the filing would be Prior to the filing deadline, the
completed on time, and in both sit- executor realized that he did not
Delegation to uations the deadline was missed.... have sufficient time to obtain the
an agent of the We acknowledge that [the execu- information required to complete
duty to file a
tor] was the victim of staggering- the return, and the accountant
return has been
held to not ly inadequate legal counsel and advised him that an extension of
constitute there is no evidence of purpose- time could be obtained both for the
reasonable cause ful delay.... Although [the attor- filing of the return and the payment
for failing to ney's] representation was certain- of the estate tax due.
time) file. The accountant, with the execu-
ly an obstacle, [the executor] was
While the executor was able not unable to file the return or pay tor's permission, timely filed Form
to procure tax releases from each the liability on behalf of the 4768 to obtain the extensions,
of decedent's 23 banks, the execu- Estate." which the IRS granted. The
tor otherwise let the attorney han- accountant erroneously believed,
dle the estate. "Unbeknownst to Still undecided. While Boyle, and and advised the executor, howev-
[the executor], [the attorney] was the subsequent cases relying on it, er, that a one-year extension of time
suffering from brain cancer, and answer the question of whether to file and time to pay could be and
her competency was deteriorat- reliance on an attorney or account- was obtained. In fact, only a six-
ing." The attorney continued to ant is reasonable cause for miss- month extension of time to file and
assure the executor that all was ing a filing or payment dead- a one-year extension of time to pay
well, and relying on the attorney, line where the task of filing the could be and was obtained.
the executor took no action despite return or paying the tax has The executor and accountant
receiving multiple notices and been delegated to the attorney or subsequently completed and filed
warnings from the probate court, accountant, it expressly left open the return and paid the tax
friends of the decedent, and the the issue of whether reliance on an due more than six months but
Ohio Department of Taxation. advisor as to the due date of a less than one year after the origi-
Finally, after learning that stock return can be reasonable cause. nal due date. The IRS assessed a
which needed to be liquidated to "Courts have differed over late filing penalty under Section
pay the tax had not been liqui- whether a taxpayer demonstrates 6651(a)(1) which the executor
dated, the executor fired the attor- `reasonable cause' when, in paid and then sought a refund
ney, and hired a new attorney. reliance on the advice of his claiming that he had reasonable
Within the next three months, the accountant or attorney, the tax- cause for the late filing.
estate had liquidated the stock, payer files a return after the actu-
paid the tax, and filed the federal al due date but within the time the
estate tax return. advisor erroneously told him was
3 661 Fed. Appx. 357, 118 AFTR2d 2016-5906
The estate settled a malpractice available.... We need not and do (CA-6, 2016).
action against the attorney, with not address ourselves to this 4 Boyle, footnote 9, supra note 1.
5 713 F.3d 1164, 111 AFTR2d 2013-1531 (CA-
the attorney voluntarily surren- issue."4Prior and subsequent cases 9, 2013), cert den. 134 S Ct. 422 (2013).
dering her law license (and sub- have sought to address this issue, 6 632 F.3d 1140, 107 AFTR2d 2011-898 (CA-
9, 2011).
sequently the attorney was although the circuits have reached
7 717 F.2d 454, 52 AFTR2d 83-6446 (CA-8,
declared incompetent and sub- different conclusions. 1983), cert den. 469 U.S. 1188 (1985).
ESTATE PLANNING APRIL 2018 VOL 45 / NO 4
35
The Ninth Circuit discussed two that [the accountant] erroneously prepared and filed a Form
general categories of reasonable had assured him was available." 4768 but where the Form did
cause: The Ninth Circuit concluded not state the date to which an
• The first category involves that "the question of when the extension of time to pay was
estate-tax return was due once an requested and did not check
"taxpayers who delegate the
extension had been obtained was the box indicating a request
task of filing a return to an
a nonsubstantive one. For that rea- for a payment extension. The
expert agent, only to have
son, [the executor] did not exercise Ninth Circuit held that the
the agent file the return late
ordinary business care and pru- executor's reliance on the
or not at all."
dence when he relied unquestion- accountant to file the exten-
• The second category involves
ingly on [the accountant's] advice sion request was not reason-
taxpayers who rely "on an
about the extended deadline, and able cause for the failure to
agent's erroneous advice that
he unreasonably abdicated his duty timely pay.
no return is due." to ascertain the filing deadline and • Estate of Kerber,7 where the
Relying on Boyle, the Ninth Cir- comply with it.... We conclude that executor's attorney erroneous-
cuit found that the first category the question of when a return is ly advised her that the estate
was not reasonable cause, while the due—even when an executor has tax return was due one year
second category did constitute rea- sought an extension—is nonsub- after the date of the decedent's
sonable cause. In its analysis, the stantive.... Reliance on erroneous death. The executor hired an
Ninth Circuit discussed how the advice about nonsubstantive tax accountant to prepare the
facts in this case did not "fall law issues cannot constitute rea- return, then fired him after
squarely into either category. [The sonable cause for an executor's fail- three months during which he
executor] neither delegated the task ure to file a timely return." did no work, and next hired a
of filing the return to a neglectful Other cases reach similar con- second accountant. The attor-
agent nor received mistaken advice clusions, either in their analysis ney, believing that the estate
that no taxes were due. Rather, he or in their results: had one year to file the return,
personally filed the return after the • Baccei,6 where the executor did not advise the second
actual deadline, but within the time engaged an accountant who accountant of the date of the
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APRIL 2018 VOL 45 / NO 4 PENALTY EXCEPTION36
decedent's death until after the The Third Circuit interpreted ings required to avoid late-payment
return was due, whereupon Boyle as identifying "three distinct penalties and interest."
the second accountant imme- categories of late-filing or, by exten- This seems consistent with Jus-
diately sought an extension of sion, late-payment cases. In the first tice Brennan's concurrence in
time to file and submitted pay- category, a taxpayer relies on an Boyle, where he stated that "[t]he
ment to the IRS. The Eighth agent for the ministerial task of fil- outcome could be different if a tax-
Circuit found that the execu- ing or paying. See Boyle, 469 U.S. payer were able to demonstrate
tor had not demonstrated rea- at 249-50. In the second, 'in that, for reasons of incompetence
sonable cause for the failure to reliance on the advice of his [or her] or infirmity, he understandably was
timely file, although it noted accountant or attorney, the tax- unable to meet the standard of ordi-
that, as it had held in prior payer files a return after the actu- nary business care and prudence....
cases, it had not "establish [ed] al due date but within the time Thus a substantial argument can
a rule of law that a personal the adviser erroneously told him be made that the draconian penal-
representative's reliance on [or her] was available.' Id. at 251 ty provision should not apply where
counsel can never constitute n.9. In the third, 'an accountant or a taxpayer convincingly demon-
reasonable cause...." attorney advises a taxpayer on a strates that, for whatever reason,
matter of tax law[.]' Id. at 251 he reasonably was unable to exer-
Three-part analysis
(emphasis in original)." cise ordinary business care."
A second view of the question of
Another circuit agrees. The Feder-
what can be reasonable cause is
al Circuit reached a similar con-
expressed by the Third Circuit. In
clusion in Liftin.9The decedent was
Estate of Thouron,8 the executor The Third Circuit survived by a spouse who was not
retained an attorney to provide tax interpreted Boyle
a U.S. citizen. The executor retained
advice for the estate, and on the as identifying
"three distinct an attorney to assist in the admin-
due date of the federal estate tax
categories of istration of the estate and timely
return filed a request for extension late-filing or, by sought a six-month extension of
of time to file (but not for an exten- extension, late- time to file and time to pay, which
sion of time to pay) and made a payment cases. the IRS granted.
payment of an amount that was The executor and the attorney
only a portion of the amount ulti- Discussing how the facts in Boyle considered the issue of when the
mately due. The underpayment and covered only the first category and decedent's spouse would become a
lack of a request for an extension how Boyle did not address the sec- U.S. citizen, which would affect the
of time to pay was argued to be due ond and third categories, the Third estate tax due. The spouse agreed
to the attorney's advice that the Circuit held that "a taxpayer's to become a U.S. citizen and began
estate might have been eligible to reliance on the advice of a tax expert the process to apply for citizenship.
defer some of the estate tax under may be reasonable cause for failure However, "[t]he estate was engaged
Section 6166. to pay by the deadline if the tax- in litigation with the decedent's
The estate subsequently timely payer can also show either an inabil- widow relating to her rights under
filed the return and simultaneous- ity to pay or undue hardship from a prenuptial agreement and the
ly requested an extension of time paying at the deadline.... Boyle dealt decedent's will." These issues
to pay, having determined that the with a 'clerical oversight' in fail- remained unresolved by the extend-
estate did not qualify for deferral ing to file a return by the deadline. ed due date to file and pay, although
of a portion of the estate tax under It did not rule on when taxpayers the estate had previously made an
Section 6166. The IRS denied this rely on the advice of an expert, estimated tax payment of "an
extension request as untimely and whether that advice relates to a sub- amount sufficient to cover the taxes
assessed a failure-to-pay penalty stantive question of tax law or iden- due even if the estate could not
under Section 6651(a)(2). The tifying the correct deadline. Our claim the marital deduction."
estate paid the tax, penalty, and case is one of the failure of expert
interest and sought a refund, argu- advice, not (at least on the record
ing that its reliance on the advice before us) the failure of agent task- 8 752 F.3d 311, 113 AFTR2d 2014-2082 (CA-
3, 2014).
of the attorney was reasonable completion. Thus the Estate has the
9 754 F.3d 975, 113 AFTR2d 2014-2462 (CA-
cause for its failure to timely pay. right to make, if it can, the show- F.C., 2014).
ESTATE PLANNING APRIL 2018 VOL 45 / NO 437
The attorney advised the execu- Finding that the advice given by which the court found to be
tor that "a late Form 706 could be the attorney that the filing of the reasonable cause for the late
filed after the extended due date." return could be delayed while ancil- filing. "To sustain [the IRS's]
More than a year after the extend- lary matters were addressed was argument would require a
ed due date, the spouse became a "simply unreasonable," the Fed- holding that an executor may
U.S. citizen. Over six months later, eral Circuit found no reasonable rely upon the advice of an
the estate and the spouse resolved cause for the delay and upheld the expert on substantive tax law
the litigation. The return, filed more imposition of the late filing penal- questions but, as a matter of
than two months after the date of ty. However, by considering the rea- law, may not do so with
the resolution, claimed the marital sonableness of the advice, it would respect to the requirements of
deduction and sought a refund for appear that under this analysis, the law as to the due date of
excess taxes paid. advice that was reasonable could tax returns—that he must
The IRS assessed a late filing be considered reasonable cause for research that question for him-
penalty under Section 6651(a)(1). a late filing or late payment, appar- self. We decline to so hold."
The Court of Federal Claims, in ently including advice regarding the
hearing this issue, divided the delay timing of the filing of a return or
into two periods, the first period the payment of the tax due, in con-
being the 14 months between the trast to the Ninth Circuit's find- The Tax Court
due date and the date that the ing that the determination of the found that the
spouse became a U.S. citizen, for due date of a return is non-sub- executor had
which it found reasonable cause, reasonably relied
stantive (and thus presumably
and the second period being the on the erroneous
reliance on such advice would not advice from the
subsequent nine months from the be reasonable). attorney and thus
date that the spouse became a U.S. the late filing
citizen and the date on which the Other courts. Other cases reach penalty did
return was filed, for which it found similar conclusions, either in their not a • - I
no reasonable cause.lo The Feder- analysis or in their results:
al Circuit also found no reasonable • Sanderling, Inc.,12 where a cor-
cause for the second period. • Estate of Bradley,11 where the
poration dissolved and direct-
In its analysis, the Federal Cir- executor engaged an account- ed its accountant to prepare an
cuit looked at the reasonableness ing firm to prepare the federal income tax return for the final
of the legal advice given to the estate tax return. The account- short tax year. The return was
executor. "In applying the 'rea- ant erroneously advised that filed late, and the IRS assessed
sonable cause' provision of section the return was due 18 months a penalty under Section
6651(a)(1) to the claimed reliance after the date of decedent's 6651(a)(1), but the Third Cir-
on legal advice here, we think it death, believing that the cuit reversed, finding that
appropriate to borrow the relevant executor was inquiring about (under the facts of the case)
component of the IRS's formal reg- the due date of the Kentucky the IRS had failed to prove
ulatory implementation of 'rea- State inheritance tax return. that the taxpayer did not have
sonable cause' in the closely anal- Relying on this advice, the fed- reasonable cause for the delay
ogous setting of section 6664(c)(1). eral estate tax return was filed and discussing how the IRS
The statutory language of 'rea- after the due date but within itself was confused as to the
sonable cause' is the same. That the 18 months that the execu- proper due date of the return.
language readily permits an inter- tor had been advised was • Estate of La Meres,13 where
pretation that asks if the basis available. The IRS assessed a the executor, on the advice of
for the advice clears a threshold of late filing penalty under Sec- counsel, applied for and was
reasonableness." tion 6651(a)(1), but the Tax granted a six-month extension
Court, later affirmed by the of time to file and a one-year
10 Estate of Liftin, 108 AFTR2d 2011-7108 (Ct Sixth Circuit, found that the extension of time to pay, but,
Fed CI., 2011).
11 TCM 1974-17, aff'd511 F.2d 527, 35 AFTR2d
executor had not delegated the when still unable to file the
75-1629 (CA-6, 1975). task of filing the return, but return by the extended due
12 571 F.2d 174, 41 AFTR2d 78-831 (CA-3,
1978).
rather relied on advice as to date, was advised by counsel
13 98 TC 294 (1992). the due date of the return, that the estate could obtain a
APRIL 2018 VOL 45 / NO 4 PENALTY EXCEPTION38
second six-month extension of care and prudence and [were] Conclusion
time to file, which the execu- thus nevertheless unable to file The Supreme Court's decision in
tor applied for prior to the the return within the pre- Boyle made clear that reliance on
extended due date. The federal scribed time[.]' Thouron, 752 an agent to timely file or timely pay
estate tax return was subse- F.3d at 314 n.1 (citing Treas. is not reasonable cause where the
quently filed late, and the IRS Reg. § 301.6651-1(c)(1)). The agent fails to do so. The Boyle deci-
assessed a penalty under Sec- Tax Court has held that rea- sion and the circuits are also con-
tion 6651(a)(1). The Tax sonable cause may be found to sistent in holding that, under appro-
Court found that the executor exist when a taxpayer files a priate circumstances, a taxpayer's
had reasonably relied on the return after the due date, but reliance on the advice of an attor-
erroneous advice from the does so in reliance upon an ney as to a question of law can be
attorney and thus the late fil- expert's erroneous advice. See reasonable cause for late filing or
ing penalty did not apply. Estate of La Meres v. Commis- late payment.
"[T]he Tax Court has consis- sioner.... This case aptly illus- Whether the advice of an attor-
tently held that erroneous trates how such reliance upon ney or accountant as to the due date
legal advice with respect to the or extended due date for filing a
expert advice can be objective-
date on which a return must return or paying a tax can be rea-
ly reasonable." In finding for
be filed can constitute reason- sonable cause for late filing or late
the estate on summary judg-
able cause for failure to file payment is less clear, given the split
ment, the court noted that it is
timely a return if such reliance in the circuits on this issue, and
"bound to follow the interpre-
was reasonable under the cir- depends on whether the advice is
tive guidance that our court of
cumstances."1 4
appeals provided in Thouron, considered non-substantive (and
• Estate of Hake,15 where, under thus presumably not reasonable; see
which carefully isolated the
similar facts as in Knappe, the
holding of Boyle and con- the Ninth Circuit in Knappe), or
executors relied on their tax
strued it to apply to first-cate- whether the reasonableness of the
advisor's erroneous advice that
gory cases only, where execu- reliance on the advice is relevant (see
they had been granted a one-
tors have delegated entirely the Federal Circuit in Liftin and the
year extension of time to file
their obligations to prepare Tax Court in La Meres). ■
and time to pay, when in fact ja111111111
they had obtained only a six- and file returns and make pay- 14 See also Estate of Hinz, TCM 2000-6, where
month extension of time to file ment of taxes owed. The the Tax Court, in discussing the Section
6651(a)(2) penalty and finding reasonable
and a one-year extension of Supreme Court has not yet cause for late payment while not finding rea-
held that in the second catego- sonable cause for late filing (and thus the Sec-
time to pay. "To demonstrate tion 6166 election was ultimately rejected as
that their failure to file a ry of cases—where the execu- untimely), stated that "[b]ecause reasonable
cause must have existed when the tax was
timely return was 'due to tor relied upon the advice of due, the significance of the Internal Revenue
reasonable cause and not to tax counsel when filing a Service's action or inaction regarding a sec-
tion 6166 election [where the Service tenta-
willful neglect,' 26 U.S.C. return after the actual deadline tively approved and later rejected the Sec-
but within the period instruct- tion 6166 election] is in determining the
6651(a)(1), the Third Circuit taxpayer's reasonableness in believing that
explained that the executors ed by counsel—an executor a valid election was made at the time the tax
was due."
would need to show that they may not demonstrate that such
15 234 F. Supp. 3d, 119 AFTR2d 2017-727 (DC
`exercised ordinary business reliance was reasonable." Pa., 2017).
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