An S corporation argued that it had reasonable cause for late filing its Forms 1120S for multiple years due to both its CEO and CFO having serious illnesses that in both cases led to their deaths.  However, the corporation was not successful in the case of Hunter Maintenance and Leasing Corp. Inc. v. United States, US District Court ND Ill., Case No. 1:18-cv-06585 in obtaining an abatement of the penalties.

Victor Cacciatore had founded the company, along with a number of others, and was treated as CEO and Chairman of the Board of the Company, controlling and exercising final decision-making authority over all financial and tax matters.

The other party involved was described by the Court as follows:

In 1996 George Tapling, a certified public accountant, was hired by Jos. Cacciatore & Co. According to plaintiff, Tapling “functioned as, possessed and exercised the responsibilities of Chief Financial Officer (“CFO”)” for all the Cacciatore companies, including plaintiff, until his death in May 2016. Despite being called plaintiff's “de facto” CFO, Tapling was never an employee, officer, or director on the books and records of plaintiff, or any company other than Jos. Cacciatore & Co.

Nonetheless, it is undisputed that Tapling was solely responsible for preparing and filing the federal and state income tax returns for all the Cacciatore companies, as well as preparing and issuing the Schedule K-1s to the shareholders. All IRS notices and correspondence issued to any of the companies were given directly to Tapling unopened.

Tapling directly reported to and was supervised by Victor until Victor's death in 2013. After Victor's death, Tapling reported to and was supervised by Peter Cacciatore, President of Jos. Cacciatore & Co.

Both officers had issues with cancers that would prove fatal.  The condition of Victor was described as follows:

Sometime in 2008 or 2009 Victor was diagnosed with myelodysplastic syndrome (“MDS”), a cancer affecting the bone marrow. He became increasingly ill over the ensuing years, later being diagnosed with bladder cancer and an aggressive fast growing tumor that could not be treated through surgery because of the MDS. According to plaintiff, by 2010 through his death in 2013, Victor was incapacitated by his illness, which prevented him from exercising his responsibilities.

The CFO also had medical issues, as the Court noted:

In 2010, Tapling himself became ill with melanoma skin cancer. He ultimately died from the disease in 2016 after it metastasized. Despite his illness, he remained in his position with Jos. Cacciatore & Co., and continued to act as the “de facto” CFO of the companies. He did not outwardly exhibit any behavior or symptoms that would lead anyone to question his abilities until shortly before his death. Unbeknownst to the companies, however, beginning in 2010 Tapling failed to file the income tax returns for plaintiff and some of the tax returns for some of the other companies. He did in fact prepare plaintiff's returns, and issued the Schedule K-1s, but failed to file the 1120S forms and other returns for 2010 through 2013.

The problems were uncovered following the CFO’s passing.  As the opinion continues:

After Tapling's death, unopened IRS notices were found in his desk. The companies hired an outside firm to review the income tax filing compliance for all of the companies. It found that Tapling had prepared plaintiff's tax returns but failed to file them. In March 2017 that firm filed the delinquent returns for plaintiff.

The corporation clearly faced significant late filing penalties under IRC §6699.  The corporation argued that the penalties should be abated for reasonable cause, as the corporation was disabled due to the incapacity of its CEO and CFO.

The opinion notes that reasonable cause is not defined in IRC §6699 and the IRS has not issued any regulations in that area.  But the court found the regulations under §6651(a)(1) which deal with failure to file other returns to be appropriate to consult.  The opinion notes:

Under that standard a taxpayer demonstrates “reasonable cause” if it can show that it “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time period. 26 C.F.R. § 301.665-1(c)(1); ATL & Sons Holdings, Inc. v. Commissioner of Internal Rev,, 2019 WL 1220942 *6 (T.C. 2019)(holding the same standard applies to penalties imposed under § 6699).

The opinion begins its analysis by noting that a taxpayer bears a heavy burden when arguing for reasonable cause for late filing:

In Boyle,[1] the seminal case discussing reasonable cause, an executor of an estate hired an attorney to prepare and file the federal estate tax return. The attorney filed a return three months late, resulting in a penalty. The estate argued that the penalty should be waived for reasonable cause, arguing that the executor had in good faith relied on the attorney to timely file their returns. The Court rejected this argument, holding that the taxpayer could not demonstrate reasonable cause because Congress placed the burden of prompt filing on the taxpayer, not on an agent or employee of the taxpayer. The Court articulated a bright line rule that reliance could not “function as a substitute for compliance with an unambiguous statute.” Id. at 252. “The 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 late filing under [§ 6699].” id.

Defendant argues that Boyle is directly on point, and that plaintiff's failure to timely file was due solely to its reliance on its agent Tapling, who was supposed to file their returns but failed to do so. Tapling, according to defendant, was simply an agent of plaintiff, and under Boyle, reliance on an agent does not constitute reasonable cause excusing a late filer from penalties.

The corporation argued that the appropriate question was whether the corporation had the ability to perform the action in question, not just its reliance on Tapling.  The opinion continues:

There can be no dispute that an individual taxpayer’s illness and severe health problems can constitute reasonable cause to file late. See e.g., Meyer v. Comm., T.C. Memo 2003-12 (2003). Whether a corporation can be incapable of timely filing based on incapacity of a corporate officer is another matter. Plaintiff relies on In Re American Biomaterials Corp., 954 F.2d 919 (3d Cir. 1992), in which the corporation’s CEO and chairman of the board and its CFO and Treasurer were embezzling funds. The court affirmed a lower court’s decision that these officers’ actions “incapacitated the corporation” and rendered it unable to comply with the IRC. The court noted that these officers were the “only two corporate officers with responsibility for [the corporation’s] tax filing. Id. at 922.

But the Court notes that while such cases exist where the conduct of an officer may make the corporation unable to complete its filing, such cases are rare—and this isn’t one of them.

The opinion concludes:

Despite the number of cases cited in plaintiff’s briefs, only American Biomaterials concluded that the corporation was incapable of timely filing, and that was based on its officers’ criminal activity. All the other cases equated the officers’ activity to that of the attorney in Boyle. In the instant case, plaintiff relied on Tapling. And regardless of whether Tapling was its agent or its employee, plaintiff cannot simply rely on his illness to demonstrate the corporation’s inability to file. The corporation had a president and board members independent from Tapling and Victor, all of whom had responsibility to ensure that the corporation carried out its statutory duties. Nor has plaintiff presented any evidence of any ordinary business controls to ensure that it met its responsibility. Indeed, it admits that it ceded all responsibility to Tapling without any oversight. This does not demonstrate ordinary and prudent business practice. Consequently, the court grants defendant’s motion for summary judgment and denies plaintiff’s motion for summary judgment.

The Court also refused to take into account the taxpayer’s argument that the IRS had abated penalties for related companies also controlled by Victor noting in a footnote:

Plaintiff points out that the government abated late filing penalties for some of the other Cacciatore companies “some of which” were based on the same reasonable cause arguments made by plaintiff in the instant case. Even if this is true, and the court has no evidence to demonstrate the reasoning of those decisions, they are irrelevant to the instant decision, which must be based solely on the facts presented to the court. Nor does the court have any evidence as to the corporate structures of the other companies or whether those companies can or did demonstrate ordinary and prudent business practices.

[1] U.S. v. Boyle, 469 U.S. 241 (1985)