In Knappe, the executor was advised by a tax accountant with whom he had dealt previously that the estate could file for an extension of time to file the estate tax return and pay the tax. The executor authorized the accountant to file the extension. The extension requested was for six-months additional time to file the return and one year discretionary additional time to pay. The IRS granted the extensions as requested -- 6 months and one year respectively. However, for some reason, the accountant believed he had requested a one-year extension for both. The return was then filed after the 6-month extended due date but before the one-year period. The IRS imposed the late filing penalty.
The Ninth Circuit first laid out the Code's background (footnote omitted):
An estate-tax return, Form 706, must be filed within nine months of the decedent's death. 26 U.S.C. § 6075(a); 26 C.F.R. § 20.6075-1. An executor may apply for an automatic six-month extension of time to file Form 706 by filing Form 4768 on or before the due date of the return and checking the appropriate box. 26 C.F.R. § 20.6081-1(b). While the IRS "may grant a reasonable extension of time for filing any return," "no such extension shall be for more than 6 months" except in the case of taxpayers who are abroad. 26 U.S.C. § 6081(a).
Extensions of the deadline to pay the estate tax operate differently. Treasury Department regulations specify that the IRS may grant an extension of time to pay estate taxes, at the written request of the executor, "for a reasonable period of time, not to exceed 12 months." 26 C.F.R. § 20.6161-1(a)(1).
An executor who fails to file a timely estate-tax return is subject to a penalty. See 26 U.S.C. § 6651(a)(1). The late-filing penalty is mandatory when a taxpayer fails "to file any return . . . on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect." Id. The penalty amount is five percent of the amount of tax that appears on the return for each month or fraction of a month that the return is late, up to a maximum of 25 percent. Id.
To establish reasonable cause, a taxpayer must prove that he "exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." 26 C.F.R. § 301.6651-1(c)(1). Knappe's central argument on appeal is that by relying on his expert accountant's advice about the effect of the extension on the deadline for filing the return, he exercised "ordinary business care and prudence" and so had reasonable cause for filing the return three months late.Focusing on reasonable cause:
Cases addressing reasonable cause for late filing of tax returns fall into two general categories. In the first category are cases involving taxpayers who delegate the task of filing a return to an expert agent, only to have the agent file the return late or not at all. The leading case in this category is Boyle, 469 U.S. 241. There, Boyle, the executor of his mother's estate, retained an attorney who advised him that an estate-tax return was due but did not mention when it was due. Id. Boyle contacted the attorney repeatedly to inquire into the progress of the estate proceedings and the preparation of the return, and was repeatedly assured that the return would be filed "in plenty of time." Id. at 242-43 (quotation marks omitted). Eventually, the attorney admitted to Boyle that the return was late because a clerical oversight had caused him to overlook the deadline. Id. at 243. The return was filed three months late. The IRS assessed the statutory penalty, and Boyle sued to recover it. Id. at 244.
The Supreme Court held that Boyle's reliance on his attorney to file the tax return timely was not reasonable cause for the delay. "Congress has placed the burden of prompt filing on the executor," the Court explained, "not on some agent or employee of the executor." Id. at 249. The Court described the taxpayer's "fixed and clear" duty as "an obligation to ascertain the statutory deadline and then to meet that deadline, except in a very narrow range of situations." Id. at 249-50. Delegating the duty of filing to an agent was not within the "very narrow range of situations" in which failing to meet a statutory filing deadline would be excused, because "Congress has charged the executor with an unambiguous, precisely defined duty to file the return within nine months." Id. at 250. That 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. The Court continued:
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. . . . It requires no special training or effort to ascertain a deadline and make sure that it is met. 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 a late filing under § 6651(a)(1).
Id. at 251-52; see also Conklin Bros. of Santa Rosa, Inc. v. United States, 986 F.2d 315, 316-18 (9th Cir. 1993) (holding that reasonable cause did not excuse a corporation's late filing and payment of taxes when the company office manager failed to make timely filings and payments and falsified records to disguise her errors from company management).
In the second category are cases in which a taxpayer relies on an agent's erroneous advice that no return is due. Courts have consistently held that such reliance does constitute reasonable cause for delay. Even the Boyle court appeared expressly to endorse such a rule:
When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a "second opinion," or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. "Ordinary business care and prudence" do not demand such actions.
496 U.S. at 250-51 (citations omitted). Cases in this category stand for the principle that the question of whether a return is due is a matter of substantive tax law, and that a taxpayer acts with ordinary business care and prudence when he relies on an expert's answer to that question. See, e.g., United States v. Kroll, 547 F.2d 393, 396 (7th Cir. 1977) (holding that "when there is no question that a return must be filed, the taxpayer has a personal, nondelegable duty to file the tax return when due" but noting that "[w]hether or not the taxpayer is liable for taxes is a question of tax law which often only an expert can answer. The taxpayer not only can, but must, rely on the advice of either an accountant or a lawyer. This reliance is clearly an exercise of ordinary business care and prudence.").
This case does not fall squarely into either category. Knappe neither delegated the task of filing the return to a neglectful agent nor received mistaken advice that no taxes were due. Rather, he personally filed the return after the actual deadline, but within the time that Burns erroneously had assured him was available.
In Boyle, the Supreme Court expressly declined to reach the question posed by this case:
Courts have differed over whether a taxpayer demonstrates "reasonable cause" when, in reliance on the advice of his accountant or attorney, the taxpayer files a return after the actual due date but within the time the adviser erroneously told him was available. We need not and do not address ourselves to this issue.
469 U.S. at 251 n.9 (citations omitted). Our sister circuits have reached contradictory conclusions. Compare, e.g., Estate of Kerber v. United States, 717 F.2d 454, 455-56 (8th Cir. 1983) (per curiam) (refusing to find reasonable cause where an executrix's attorney "correctly advised her that it would be necessary to file an estate tax return" but "erroneously believed that the return was due one year," rather than nine months, "after the decedent's death"), with Estate of Bradley v. Comm'r, 33 T.C.M. (CCH) 70, 72-73 (1974) (holding that it was "consistent with ordinary business care and prudence for [the executor] to consult a member of an accounting firm which regularly prepared tax returns for advice on the due date of the estate tax return and to rely on the advice he received"), aff'd, 511 F.2d 527 (6th Cir. 1975).
This case is more like the first category than the second because of the Supreme Court's distinction between substantive and nonsubstantive tax advice, Boyle, 469 U.S. at 251-52, which we recently recognized in Baccei v. United States, 632 F.3d 1140, 1148-49 (9th Cir. 2011). Reading those cases closely, we conclude that the question of when the estate-tax return was due once an extension had been obtained was a nonsubstantive one. For that reason, Knappe did not exercise ordinary business care and prudence when he relied unquestioningly on Burns's advice about the extended deadline, and he unreasonably abdicated his duty to ascertain the filing deadline and comply with it.The Ninth Circuit then goes into a longer analysis of how it reached its conclusion. I recommend that analysis to readers.
I suggest that Knappe is reconcilable with Estate of Liftin, even though both involved filing dates. Knappe involved a simple extended filing date. Estate of Liftin involved the more substantive tax issue of whether, given that citizenship had not been granted, the filing date was even required. That is a subtlety or nuance of the Code and administration for which the taxpayer -- there the executor -- is entitled to rely and has reasonable cause if he does.