In the case of the Estate of Escher v. United States (USDC SD Ohio, Case No. 1:13-cv-00705, 2015 TNT 5-12) the issue involved whether a taxpayer should be found to have reasonable cause for the late filing of a tax return if the client’s attorney misled the estate into believing the attorney had filed an extension for filing the return.
The numbers in question are not small—the estate had been hit with penalties and interest of $1,198,261.38 due to the late filing of the estate tax return.
When Virginia Escher died her estate was worth over $12 million. Her cousin was appointed executor of the estate. Her cousin had never previously served as an executor, did not own any stock (Virginia’s estate consisted principally of stock in UPS) and had never actually been in an attorney’s office. She therefore decided to select Virginia’s attorney to assist her due to her lack of experience in financial and probate matters.
The attorney appeared more than qualified to handle the matter. She had over 50 years of experience in estate planning and had handled Virginia’s planning. However she was privately battling brain cancer, a fact she did not disclose to the executor. Very likely due to issues related to that illness, the quality of the attorney’s representation of the estate was well below the quality she had previously evidenced in her practice.
The attorney indicated to the executor that she had filed for an extension of time to file the estate tax return though, in fact, no extension had been filed. The opinion notes that it’s not clear whether she intentionally misled the estate on this issue or not, but eventually the attorney voluntarily relinquished her law licensed following malpractice claims. As well, she has since been incompetent and is subject to a guardianship over her person and estate.
The attorney had informed the executor that the estate tax return was due on September 30, 2009. She also informed the executor that the estate would owe approximately $6 million in estate tax. In order to pay the tax the estate would need to sell UPS stock, the asset that made up the bulk of the estate.
The executor testified that she was aware that the filing deadline was important and that negative consequences would take place if the deadline was missed. Prior to the September 30 date the executor had received multiple notices from the probate court warning that counsel for the estate was failing to perform her duties and the estate had missed various deadlines.
When she asked the attorney about the missed estate tax return filing deadline, the attorney assured the executor that an extension had been filed and that the attorney was handling the matters related to the estate. The executor accepted this statement, though she never asked to see the extension in question.
However, notices continued to come from the probate court about missed deadlines. As well another family that had hired this attorney to handle an estate contacted the executor to warn her that they were seeking to have this attorney removed from handling their estate because she was incompetent. The attorney again assured the executor that all was going well and there were no issues.
However, now the executor began to get notices from the state warning that the estate’s state tax return had not been filed and was late, and alerted her that the state had not received any responses in letters to the attorney for the estate regarding this matter. The letter also informed her that additional amounts might be due because of the tardiness of the filing.
As well, she received additional warnings from the other family regarding the attorney’s lack of competence. Eventually she did consult with another attorney to consider if the estate’s counsel’s performance was a problem. This attorney advised her that she needed to hire an attorney other than the one she had retained to handle the estate. However, she still did not terminate the services of the attorney.
Finally she received another letter from the state regarding the delinquent filings. At this point she contacted UPS and discovered that, despite having given the attorney documents many months earlier to arrange for a sale of the UPS stock (a sale that had to take place in order to pay the tax), UPS had never received a request to sell the stock.
A few days later she terminated the services of the original attorney, hiring the attorney she had consulted (and who had advised her, it appears very correctly, to terminate the original attorney) to handle estate matters. Within a month the UPS stock was sold and on January 26, 2011 the estate filed its now very delinquent estate tax return.
The estate now sought relief from the penalties imposed due to the late filing, arguing that the failure to file met the requirements for relief found at IRC §6651(a)(1). Those requirements are to show that the failure was:
· Due to reasonable cause and
· Was not due to willful neglect.
Unfortunately, the court found that the estate could not meet either criteria.
Generally the requirement to timely file a tax return cannot be delegated. As the court noted:
Treasury Regulations require the estate to demonstrate that it “exercised ‘ordinary business care and prudence’ but nevertheless was ‘unable to file the return within the prescribed time.’” Boyle, 469 U.S. at 246 (quoting 26 C.F.R. § 301.6651(c)(1)). In Boyle, the Supreme Court held that “[t]he failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing under Section 6651(a)(1).” 469 U.S. at 248. In Boyle, the Supreme Court recognized a distinction between a taxpayer who “has relied on the erroneous advice of counsel concerning a question of law,” and a taxpayer who has retained an attorney to attend to “an unambiguous, precisely defined duty to file” a return by a certain time. Id. at 250. Although a taxpayer may reasonably rely on advice received from an attorney “on a matter of tax law . . . one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due.” Id. at 251.
The opinion concludes:
Accordingly, even though Plaintiff hired counsel to handle the estate, reliance on counsel cannot constitute reasonable cause for the late filing and payment of taxes. Even if Backsman’s [the attorney] medical condition led her to malpractice in the course of representing the Estate, this did not render Mrs. Specht [the executor] “disabled.”
Rather, to put it simply, the executor had a duty to confirm that filing deadlines had been met rather than simply accepting the word of her attorney.
The court also found that there was evidence of willful neglect. The court notes that mere carelessness is enough to deny relief under this standard.
And, unfortunately, there are plenty of items that came to the executor’s attention that suggested there might be major problems with the adviser she had hired. As the opinion summarized:
Mrs. Specht was aware that the Estate’s federal tax return needed to be filed and paid nine months after Ms. Escher’s death on September 30, 2009; that the tax liability was approximately $6,000,000; and that the Estate would need to sell its UPS stock to cover the tax liability. Mrs. Specht further understood that the September 30, 2009 deadline was important, and that missing the deadline would result in consequences. In the months prior to the estate tax deadline, Mrs. Specht received at least four notices from the probate court informing her that the estate was missing probate deadlines. After the deadline, Mrs. Specht received at least two additional noticed from the probate court warning that Backsman had failed to file a first accounting of the Estate’s assets; numerous calls from the Rotterman family informing Specht that Backsman was incompetent; two letters from the Ohio Department of Taxation informing Specht that the state tax return was delinquent; and a warning from another attorney -- whom she eventually hired to replace Backsman -- informing her that she needed to hire another attorney.
The court did close by noting that the result certainly seems harsh and unfair. But as the opinion notes:
Serving as the executor of a probate estate is clearly not an easy task, which is why Mrs. Specht trusted an attorney to guide her through the process. While this Court finds it difficult to hold that Plaintiffs are ultimately responsible for Ms. Backsman’s malpractice, that is what binding precedent requires. Notably, in light of Ms. Backman’s malpractice, the State of Ohio refunded the late filing and payment penalties for Ohio estate taxes without the Estate filing a refund suit. (Doc. 16, Ex. 2 at ¶14). It is truly unfortunate that the United States did not follow the State of Ohio’s lead.