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IRS Imposes Penalty For A Late Estate Tax Return – The Estate Blames Its Lawyers

ESTATE OF LIFTIN v. US, Court of Appeals, Federal Circuit 2014 – Google Scholar.

This appeal is slightly off topic, but is relevant to the area of legal malpractice liability. The Estate filed its federal estate tax return five months late. The IRS then assessed a 25% percent penalty, in the amount of $135,714.45.

The Estate claimed that it had a legitimate reason to delay filing the estate tax return, namely that it had received legal advice not to file the return from its lawyers. The issue is whether counsel’s advice gave the executor of the estate “reasonable cause” to delay filing. The trial court found no reasonable cause and the Federal Circuit affirmed. Tax counsel allegedly advised waiting to file the return until the decedent’s widow became a United States citizen. Tax counsel also advised delaying the filing until certain information had become available.

The Federal Circuit found that neither purported basis gave the executor a reasonable basis to rely on the lawyer’s advice, particularly because the tax return was “simple.”

The court explains its reasoning as follows:

What constitutes a sufficiently plausible grounding in tax law should depend on the complexity of the matter. But this case is at the simple end of the spectrum of complexity. The taxpayer has a “fixed and clear” duty “to ascertain the statutory deadline and then to meet that deadline.” Boyle, 469 U.S. at 246. The Court of Federal Claims found no support in tax law for special counsel’s advice that, even after Mrs. Liftin became a naturalized United States citizen in August 2005, the estate could continue to wait until the other “ancillary matters” were resolved. As explained in the trial court, the advice rested entirely on the assumption that the return could be delayed until the ancillary matters were resolved because a fully “accurate” return could not be filed until then. The trial court held that there was no basis in tax law for the assumption that incomplete information justified delay in filing the estate-tax return. Liftin, 111 Fed. Cl. at 22 n.9 (“the law is clear that the need to file an accurate return cannot constitute reasonable cause for late filing”). The executor here does not defend that assumption’s reasonableness.

We likewise conclude that the assumption is simply unreasonable. An IRS regulation, specifically addressing the possibility of incomplete information, declares that “[a] return as complete as possible must be filed before the expiration of the extension period,” adding that, while the return may not be “amended” once the extension period ends, “supplemental information may subsequently be filed that may result in a finally determined tax different from the amount shown as the tax on the return.” 26 C.F.R. § 20.6081-1(d). And courts have long rejected assertions that incompleteness of information excused the missing of a filing deadline, for estate-tax and other returns.E.g., Ferguson v. Comm’r, 568 F.3d 498, 501 (5th Cir. 2009) (upholding Tax Court rejection of such assertion); In re Craddock, 149 F.3d 1249, 1257 (10th Cir. 1998)(rejecting excuse and explaining that “[a] tax return does not have to be completely accurate, but must be based on the best information available”); Estate of Young v. United States, No. 11-11829, 2012 WL 6585327, at *3 (D. Mass. Dec. 17, 2012) (“[T]he Estate has an obligation to file a timely return with the best available information. It cannot claim reasonable cause based on advice that it was necessary to wait for complete information before filing a return.”); Russell v. Comm’r, 101 T.C.M. (CCH) 1363, 2011 WL 1314673, at *8 (2011)Estate of Cederloff v. United States, No. 08-2863, 2010 WL 3548901, at *3-4 (D. Md. Sept. 10, 2010); Jacobson v. Comm’r, 86 T.C.M. (CCH) 204, 2003 WL 21752458, at *2 (2003); Estate of Maltaman v. Comm’r, 73 T.C.M. (CCH) 2162, 1997 WL 90606, at *5 (1997); Crocker v. Comm’r, 92 T.C. 899, 913-14 (1989)Estate of Vriniotis v. Comm’r, 79 T.C. 298, 311 (1982)Duttenhofer v. Comm’r,49 T.C. 200, 206-07 (1967), aff’d, 410 F.2d 302 (6th Cir. 1969). Whatever an objective-reasonableness standard might mean in other circumstances, it is not met by the advice in this case that the executor could wait until various “ancillary matters” were resolved, even after Mrs. Liftin obtained citizenship.”

Edward X. Clinton, Jr.

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