An estate sought relief for $1.189 million in penalties for the late filing of a Form 706 and the late payment of estate taxes when the filing and payment were over a year late. The U.S. District Court granted the government's motion for summary judgment upholding the penalties, and the 6th Circuit Court of Appeals affirmed the lower court. The late filing and payment were principally attributable to the estate attorney who was responsible for the filings. The courts ruled for the government notwithstanding the following favorable facts supporting reasonable cause: (1) the executor was elderly, (2) he only had a high school diploma, (3) he had never interacted with attorneys before serving as executor, (4) he had never served as an executor, (5) the attorney was suffering from brain cancer and her competency was deteriorating during the applicable period, (6) the attorney told the executor that extensions had been obtained whenever questioned about the filing status, but this was a lie, (7) the State of Ohio refunded the penalties as to state estate taxes for reasonable cause, and (8) the government conceded that the executor heavily relied on the attorney.
The penalties for failure to timely file a tax return and pay tax do not apply if the failure is due to reasonable cause and not due to willful neglect. Code §6651(a). Treas. Regs. §301.6651-1(c)(1) requires the taxpayer seeking to avoid the penalties for late filing "to show that the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made "a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date."
The principal case on the issue of reliance on a professional to avoid late filing and payment penalties by an estate is United States v. Boyle, 469 U.S. 241 (1985). There, the U.S. Supreme Court intentionally established a bright line that the burden of prompt filing is on the executor, not on an agent or employee of the executor, with exceptions to apply only in a "very narrow range of situations." The executor has the "obligation to ascertain the statutory deadline and then to meet that deadline, except in a very narrow range of situations." Id. at 249-50. The Court explained that "tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute." Id. at 251. The Court therefore concluded that "Congress has charged the executor with an unambiguous, precisely defined duty to file the return within nine months . . . That the attorney, as the executor's agent, was expected to attend to the matter does not relieve the principal of his duty to comply with the statute." Id. at 250. Thus, executors seeking to avoid responsibility for late filing or late payment based on reliance on a professional begin the process with the weight of the case law against them. A review of the particular facts of this case and the appellate court's treatment of them will illustrate how difficult a burden the executor has.
Boyle leaves open the possibility that an executor's qualifications may impact the reasonableness analysis, with a concurring opinion noting that "senility, mental retardation or other causes" might render an individual incapable of complying with the statutory deadlines. The estate here noted that the executor lacked the sophistication of the executor in Boyle. Nonetheless, the executor in Boyle was not experienced in the field of federal estate taxation and relied on his attorney for instruction and guidance - both of those facts also applied here. Ironically, the actions by the executor in firing the attorney, hiring a new attorney, and then having the return and payment handled, once the failures became known were cited by the appellate court to prove the executor's ability to manage the estate. While not cited in this case, in Baccei v. U.S., 632 F3d 1140 (9th Cir. 2011), trustee was denied relief for late payment of estate taxes when his accountant filed a deficient request for extension of time to pay the estate taxes - citing Boyle and other cases, the court noted that a taxpayer "cannot rely on its employee or agent to escape responsibility for the nonperformance of nondelegable tax duties."
The estate also sought relief based on the attorney's deteriorating medical situation. While sympathetic, the appellate court noted that the question is whether the executor, and not the attorney, was reasonable in missing the deadline. Since the deadline would have been missed whether the attorney acted reasonably or not, that did not impact the reasonableness of the executor in relying on the attorney. The appellate court also relied on Valen Mfg. Co. v. United States, 90 F.3d 1190 (6th Cir. 1996) to demonstrate that the focus is on the taxpayer, and not the agent. There, an employee's active concealment of her failure to file the company's tax return and pay its liabilities was not enough to relieve the taxpayer of late filing and payment penalties. It also cited an unpublished decision in Vaughn v. United States, 635 F. App'x 216 (6th Cir. 2015), where Mo Vaughn, a former Major League baseball player, relied on a wealth-management firm and tax accountant to prepare and file his tax returns and make payments. Rather than pay the taxes, the manager embezzled millions of dollars. The appellate court there found the felonious actions of Mr. Vaughn's agents did not excuse him from the expectation that a taxpayer would know that he must file a return and pay taxes.
This case and the authorities cited therein set a high bar for taxpayers, but not necessarily an impossible one. In this case, the court did note that the executor was aware of the filing deadline, and also had various warnings that the attorney was not properly handling matters. Perhaps the absence of such facts might have resulted in a different finding. The appellate court also noted the case of Brown v. United States, 630 F. Supp. 57 (M.D. Tenn. 1985). While lacking precedential punch since it preceded both Valen and Vaughn, reasonable cause was allowed for an executor when the executor was 78 years old, only had a high school education, lacked experience in tax matters, was in failing health, and relied on an attorney to do the return and the attorney was hospitalized two weeks before the filing deadline. The appellate court noted that in Brown the executor was incapable of replacing the attorney. So, given the right circumstances, reasonable cause for late filing based on reliance on a professional might garner relief - but that will clearly be the exception and not the rule.