A recent Memorandum and Order from the United States District Court for the District of Rhode Island, The Estate of Vincenzo Sandonato v. United States of America, C.A. No. 23-304-JJM-AEM, offers valuable insights for a tax practice regarding the "reasonable cause" exception to the failure to file penalty under I.R.C. § 6651(a)(1). The case underscores the importance of documented advice and the factual nature of the reasonable reliance defense.

Background of the Case

The case involves the Estate of Vincenzo Sandonato (the "Estate"), which filed its federal estate tax return after the applicable deadline. As a result of the untimely filing, the IRS assessed a failure to file penalty. The Estate subsequently paid the penalty and brought suit against the United States for a refund, asserting that its late filing was due to "reasonable cause".

The decedent, Vincent Sandonato, died on April 12, 2017, with his property held in the Vincent Sandonato Trust. His sister, Rita L. Mayo, became the executor of his estate and a co-trustee of the Trust. To handle estate tax obligations, the Estate retained attorney Joseph Palumbo, who had managed Mr. Sandonato’s legal affairs for over twenty years. Attorney Palumbo prepared a written memorandum titled "Estate Tax Analysis" and discussed it with Ms. Mayo. This analysis represented his final written statements regarding the Estate’s tax obligations.

Crucially, the Estate missed the deadline to file its federal tax return and did not request an extension while Attorney Palumbo was retained. A few months after the deadline passed, the Estate learned that Attorney Palumbo had stopped practicing due to illness and retained new counsel. New counsel, with the assistance of a CPA firm, identified errors in Attorney Palumbo’s analysis and helped Ms. Mayo prepare the return. The Estate ultimately filed its tax return ten months after the prescribed deadline.

The IRS assessed a $468,976 failure to file penalty and a $135,482 failure to pay penalty. The Estate requested abatement of both penalties based on "reasonable cause" due to reliance on its attorney’s tax advice. The IRS denied the abatement request initially. Upon appeal, the IRS Appeals Office fully abated the failure to pay penalty but only partially abated the failure to file penalty, stating that "[r]easonable cause was not fully met for the failure to file penalty but was full[y] met for the failure to pay penalty". The Estate paid the remaining failure to file penalty and associated interest, totaling $444,068.78, and then sought a refund, which was denied, leading to this suit.

The Taxpayer’s Request for Relief

The Estate’s core assertion is that it had "reasonable cause" for the late filing of its federal estate tax return, entitling it to a refund of the failure to file penalty. The basis for this claim was the Estate’s alleged reasonable belief that it was not required to file an estate tax return or pay estate taxes based on advice received from Attorney Palumbo. This advice, according to the Estate, included repeated verbal assurances and the conclusions drawn from the written Estate Tax Analysis. Specifically, the Estate claimed the Estate Tax Analysis concluded that based on one of the analyzed scenarios, "the Estate did not have a tax liability and there would not be a need to file a federal estate tax return," and that Attorney Palumbo verbally reassured Ms. Mayo that "no federal estate taxes were owed and no federal tax return was required to be filed".

Court’s Analysis of the Law

The Court began its legal analysis by stating the standard for the failure to file penalty: a taxpayer who fails to timely file a tax return is subject to a mandatory penalty unless they meet the "heavy burden" of proving that the failure was "due to reasonable cause and not due to willful neglect." (citing 26 U.S.C. § 6651(a)(1)).

The seminal Supreme Court case addressing the "reasonable cause" requirement in the context of reliance on an agent for filing is United States v. Boyle, 469 U.S. 241 (1985). 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 § 6651(a)(1)." The Court in Boyle reasoned that the duty to file a return when due is a personal, nondelegable duty [10, referencing the principle from Boyle].

However, the Supreme Court in Boyle also noted an exception: courts have found "reasonable cause" when "a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken." The Boyle opinion stated that "in such a situation, reliance on the opinion of a tax adviser may constitute reasonable cause for failure to file a return." (citing Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944)). The rationale provided in Boyle for this exception is that when an advisor counsels on a matter of tax law, such as whether a liability exists, it is reasonable for a taxpayer to rely on that advice because "[m]ost taxpayers are not competent to discern error in the substantive advice of an accountant or attorney." Requiring a taxpayer to challenge their expert advisor or seek a second opinion would "nullify the very purpose of seeking the advice of a presumed expert" and is not demanded by "ordinary business care and prudence."

Therefore, the "essential question" for the Court became whether the Estate "reasonably relied" on an attorney’s substantive tax law advice that it was unnecessary to file a federal tax return, thereby providing "reasonable cause" for the failure to timely file.

Application of the Law to the Facts

The Court examined the evidence presented by both parties to determine if a genuine dispute of material fact existed regarding the Estate’s claim of reasonable cause based on reliance on Attorney Palumbo’s advice.

The Estate asserted that it relied on Attorney Palumbo’s verbal assurances and the Estate Tax Analysis, which it claims concluded filing was unnecessary. Ms. Mayo attested that the analysis indicated no tax liability and no need to file under one scenario and that Attorney Palumbo verbally reaffirmed this when she sought clarification. She stated she relied on his conclusion, valuations, and assessment due to her unfamiliarity with federal tax requirements.

The United States countered, arguing that the written Estate Tax Analysis was not substantive advice stating that filing was unnecessary. The government highlighted Ms. Mayo’s admissions that the written analysis was unclear regarding whether tax would be owed and that she was waiting for further advice, which she never received. The United States also contended that Ms. Mayo’s assertion about Attorney Palumbo’s verbal advice contradicted her prior sworn testimony and lacked genuine support because it didn’t detail the circumstances of the advice.

The Court reviewed Attorney Palumbo’s written Estate Tax Analysis. It noted that the analysis presented two scenarios, one resulting in a $24,000 tax liability and another where "there would be no need to file a federal estate tax return and there would be no federal estate tax" if certain real estate was excluded. The "RECOMMENDATIONS" section stated that if the taxable estate could be kept below $5.49 million, "there would not be any need to even file an estate tax return". The Court observed that, based on the written analysis alone, "it appears that more information may have been needed to determine whether it was unnecessary for the Estate to file an estate tax return - as Ms. Mayo acknowledged in her deposition".

However, the Court then considered Ms. Mayo’s assertion that she had a verbal conversation where Attorney Palumbo clarified and concluded it was unnecessary to file, and that she relied on this verbal conclusion. The Court stated that a "reasonable fact-finder could accept Ms. Mayo’s assertion that Attorney Palumbo advised her that it was unnecessary to file a tax return and that she relied on such an assertion when neglecting to file such a tax return." The government’s argument that her testimony contradicted prior sworn testimony raised a credibility issue, which the Court stated it "should not assess when deciding on a summary judgment motion." (citing Labreche v. Brouillette, 2024 WL 3598849, at *5 (D.R.I. July 31, 2024), which quoted Dominguez-Cruz v. Suttle Caribe, Inc., 202 F.3d 424, 432 (1st Cir. 2000)).

Furthermore, the Court found that a "reasonable jury could find that it was reasonable for Ms. Mayo to rely on Attorney Palumbo’s advice" given her stated lack of experience in estate administration, fiduciary capacity, sophistication in tax matters, unfamiliarity with the complex estate details and asset valuations. She also attested that Mr. Sandonato had indicated Attorney Palumbo was familiar with his assets and prepared to manage tax matters, and that she knew Attorney Palumbo handled many of Mr. Sandonato’s legal affairs and was familiar with the Trust. Based on her inexperience and Palumbo’s purported familiarity and competence, a fact-finder could conclude her reliance was reasonable. The Court referenced the Boyle standard again, noting that given Ms. Mayo’s lack of competence to discern error in substantive advice, a fact-finder could reasonably conclude it was reasonable for her not to "challenge [Attorney Palumbo], to seek a ’second opinion,’ or to try to monitor [him] on the provisions of the [Tax] Code" despite the confusing written analysis and his ultimate conclusion.

Court’s Conclusions

Based on its analysis, the Court concluded that genuine disputes of material facts exist regarding whether:

The Estate actually relied on any substantive tax advice from Attorney Palumbo when it failed to file its tax return.
It was reasonable for the Estate to rely on Attorney Palumbo’s substantive tax advice.

Citing Boyle, the Court reiterated that "[w]hether the elements that constitute ’reasonable cause’ are present in a given situation is a question of fact." These factual disputes are matters for a factfinder (a jury) to determine.

Accordingly, the Court DENIED both the United States’ Motion for Summary Judgment and the Estate’s Cross-Motion for Summary Judgment . The matter is set for trial .

This case serves as a reminder that while reliance on an agent for filing is generally not "reasonable cause," reliance on a tax advisor’s substantive advice that filing is unnecessary can be. However, establishing such reliance and its reasonableness in the face of potentially conflicting evidence (like a confusing written analysis versus alleged verbal advice, or contradictions in testimony) creates factual disputes that preclude summary judgment and require a trial. Tax practitioners providing advice on filing requirements should ensure their conclusions are clear and well-documented, and taxpayers should be aware that reliance claims may face intense scrutiny and require factual proof.

Prepared with assistance from NotebookLM.