Estate Found to Have Reasonably Relied on Attorney's Erroneous Advice for Extended Due Date

Most often taxpayers who attempt to claim reasonable cause for late filing of a return due to reliance on a tax professional don’t succeed in their case.  But the result was different for the taxpayer in the case of Estate of Hake v. United States, No. 1:15-cv-01382, US District Court, MD PA.

The Supreme Court in 1985 addressed the issue in the case of United States v. Boyle, (469 US 241), finding in that case that the taxpayer could not argue a reasonable cause for late filing due to a mistake by the attorney for the estate.  The District Court opinion summarizes the holding as follows:

In that case, Robert Boyle was the executor of his mother’s estate, and retained a lawyer on behalf of the estate to assist with tax matters. Boyle relied on the lawyer’s instruction and guidance, and although he repeatedly checked with the lawyer about the status of the estate’s return, the lawyer “overlooked the matter because of a clerical oversight in omitting the filing date from [his] master calendar.” Id. at 315 (quoting Boyle, 469 U.S. at 243). As a result, the estate’s return was filed three months’ late. The Supreme Court held that in such circumstances, the executor could not hide behind the oversight of his attorney because executors have a clear obligation to make sure that estate tax returns are filed timely “that cannot be discharged by delegating responsibility to an attorney or accountant.” Id. (citing Boyle, 469 U.S. at 249-50). The Court further found that the executor’s reliance on his tax lawyer was not for substantive tax advice, but “for the administrative act of filing the return.” Id. (citing Boyle, 469 U.S. at 252).

The IRS has interpreted Boyle to mean that the statutory requirement to timely file a return is a duty of the taxpayer which absolutely may not be delegated to any other party—thus, if a return is filed late, the taxpayer cannot argue that his/her reasonable reliance on a tax professional should allow for abatement of the penalty.

In the case before the Pennsylvania District Court the estate had received erroneous advice from its attorney regarding the due date for filing the estate tax return once an extension had been obtained. 

The case outlines the facts that lead to the late filing as follows:

Pursuant to the executors’ direction, France filed a Form 4768 on June 12, 2012, seeking extensions of time to file the return and pay the taxes. (Galloway Dep. at 9; France Dep., Ex. 1.) France advised the executors to seek the longest extension possible, in part because he did not know what the limits on such an extension were, as he had never before filed for such an extension. (Ricky Dep. at 19; France Dep. at 37, 83.) Galloway prepared and filed the Form 4768 and, upon approval, informed France that the deadline to pay the taxes and return had been extended for one year. (France Dep. at 36-38, 41, 60; Galloway Dep. at 9, 12-16, 20, 25, 41; Ricky Dep. at 46-47, 67.) France, in turn, informed the executors that they had been granted a one-year extension of the deadlines. (Ricky Dep. at 55, 68; Randy Dep. at 4, 7, 12; France Dep. at 42, 67, 71.)

France and Galloway’s advice was wrong, as Treasury Regulation 26 C.F.R. 20.6081-1 generally limits any extension to file the Form 706 return to six months for executors in the United States. Indeed, the Form 4768 that Galloway prepared and filed on June 21, 2012, specifically provided for a six-month automatic filing extension and a one-year discretionary payment extension, with the cover letter that accompanied the Form 4768 expressly requesting “an automatic 6 month extension of time to file a Form 706.” (Doc 35 ¶ 18, 20) Pursuant to this request, the estate’s deadline for filing its return was extended until January 2, 2013. (Id. 21.) However, the deadline for payment of taxes had been extended to July 2013.

The estate, in reliance on the advice of the attorneys, filed its Form 706 on July 2, 2013.  The IRS notified the estate the following month that the return had filed late, with the estate facing a late filing penalty of $197,868.26.

The estate unsuccessfully asked the IRS to waive the penalty, based on the mistaken advice it had received from counsel regarding the due date of the return.  The IRS denied those requests to abate the penalty, holding that the timely filing of the return was the absolute responsibility of the taxpayers.

The District Court noted that other courts had agreed with the IRS’s position when faced with similar facts, citing the decisions of the District Court for the Eastern District of Virginia in West v. Koskinen, 141 F.Supp. 3d 498 (2015) and the Ninth Circuit Court of Appeals in Knappe v. United States, 713 F.3d 1164 (2013).  The opinion notes that if it was starting with a blank slate “these cases might have persuasive power” but then notes that the Third Circuit Court of Appeals, which would have jurisdiction to hear an appeal of this case, has a more nuanced view of the breadth of the Boyle decision in its decision in Estate of Thouron v. United States, 752 F.3d 311 (2014).

Like the taxpayer in today’s case, the estate in Thouron received advice on a deadline from counsel:

In Thouron, the court of appeals found that it was presented with distinguishable facts to those at issue in Boyle. Thouron involved the administration of a substantial estate following the death of Sir John Thouron at the age of 99. The executor appointed to administer the estate retained an experienced tax lawyer to advise him. The estate’s tax return and payment were due on November 6, 2007, and on that date the estate requested an extension of time to file the return, and paid $6.5 million, which represented a fraction of what would eventually be owed. The estate declined to pay the entire balance of its tax liability, or to request an extension of its payment deadline, because its tax lawyer had advised that the estate may be able to defer certain liabilities under other sections of the Internal Revenue Code, in order to pay those liabilities in installments over several years.

As requested, the estate received an automatic extension of the time to file the return, making that return due on May 6, 2008. Unlike the case before this Court, the estate in Thouron filed its return timely but on the same day requested an extension of time to pay, having determined by this point that it would not qualify for deferring payment to a later tax year. The IRS denied the requested extension and imposed a penalty for failure to pay the tax owed by the deadline. The estate’s administrative appeals failed, and it filed a complaint seeking a refund, arguing that its failure to pay was reasonable and not willful neglect, since it was based on substantive advice of counsel.

While the District Court hearing the case refused to allow the estate to present evidence with regard to reliance on the attorney’s advice which caused it to fail to timely request an extension for paying the tax, the Third Circuit overturned that ruling and sent the case back to the District Court for a determination if the estate had reasonably relied upon the advice of counsel.

The District Court noted that the Third Circuit views that there are three categories of late-filing cases:

In Thouron, the Third Circuit read Boyle to have identified three distinct categories of late-filing cases. In the first category consists of cases that involve taxpayers who delegate the task of filing a return to an agent, only to have the agent file the return late or not at all. Id. (citing Boyle, 469 U.S. at 249-50). In Boyle, the Supreme Court held that in such cases, reliance upon one’s attorney to file a timely tax return was not reasonable cause to excuse the late filing. Id. The second category of late-filed cases identified in Boyle, as that decision is construed by the court of appeals in Thouron, is where a taxpayer, in reliance on the advice of an accountant or attorney, files a return after the actual due date, but within the time that the taxpayer’s lawyer or accountant advised the taxpayer was available. Id. Finally, in the third category are those cases where “an accountant or attorney advises a taxpayer on a matter of tax law[.]” Id. (quoting Boyle, 469 U.S. at 251) (emphasis in Boyle).

The Third Circuit’s view is that Boyle only addressed the first category of cases which would govern a situation where an attorney or simply fails to file the request for an extension due to a clerical oversight.  While the taxpayer cannot succeed in that case, the Third Circuit finds that, given proper facts, a taxpayer could succeed in the other two classes of cases by reasonably relying on what turned out to be improper advice from a tax professional.

This case fits within the second category outlined by the Third Circuit—while the return was filed late, it was filed within the time that the estate had been advised by counsel was available for the estate to file the return.

The District Court found that the taxpayer’s reliance on the attorneys to advise them on the due date was proper.  As the opinion provides:

This case aptly illustrates how such reliance upon expert advice can be objectively reasonable. As we have noted, there was nothing immediately intuitive about the determination of these deadlines. Instead, in order to ascertain when taxes needed to be paid and returns needed to be filed, the executors would have had first to identify the initial filing and payment deadlines and then navigated a series of extension rules, some of which are automatic and others of which are discretionary. The executors would then have had to recognize that the interplay of these automatic and discretionary extension rules would lead to material differences in payment and filing deadlines. The executors would also have to have been mindful of the fact that the application of some extension rules varies, depending upon their residency status. Given the complexity of these rules it is hardly surprising that even experienced counsel may sometimes become confused.

While this case is good news for the taxpayer, it is important to note that the result depends on precedent handed down by the Third Circuit, precedent which is at odds with that found in other Circuit Court of Appeal.  As the opinion in this case notes, the Supreme Court specifically declined to resolve the conflict among the circuits in those areas, noting:

…in Boyle the Supreme Court expressly declined to address the question of whether a taxpayer demonstrates “reasonable cause” when, in reliance upon the advice of counsel, the taxpayer files a return “after the actual due date but within the time the adviser erroneously told him was available.” 469 U.S. at 251 n.9. The Supreme Court flatly declined to address such a circumstance, while recognizing that numerous courts, including the United States Court of Appeals for the Third Circuit, had found that in such cases a taxpayer demonstrated reasonable cause for the untimely filing. Id. (citing cases, including Sanderling, Inc. v. Commissioner, 571 F.2d 174, 178-79 (3d Cir. 1978)). Given the Third Circuit’s limited interpretation of Boyle’s holding in Thouron, and the fact that the Supreme Court itself noted that its holding did not reach the very circumstances presented in this case, the Court disagrees that Boyle compels a ruling in the government’s favor.

So, for instance, the holding cited above in Knappe v. United States most likely would deny such relief in a case where the appeal would be heard by the Ninth Circuit Court of Appeals.