Estate Had Reasonable Cause for Failure to Timely File Estate Tax Return Based on Attorney's Advice (4/6/13)

In Estate of Morton Liftin v. United States, 110 Fed. Cl. 119 (2013), here, the Court of Federal Claims, Judge Miller, held that the estate's failure to timely file the estate tax return because it was waiting for the surviving spouse to obtain citizenship, thus qualifying  bequests to her for the marital deduction, constituted reasonable cause sufficient to prevent the application of the late filing penalty.  Readers who have only a passing familiarity with the Supreme Court's holding in United States v. Boyle, 469 U.S. 241 (1985) may think the holding inconsistent.  It is not, as the Judge Miller explained.  I quote the relevant portion of the opinion (some case, page citations and quotation marks omitted for readability):

To avoid a penalty for a late-filed return, the taxpayer bears the "heavy burden" of proving its failure to file timely was due to reasonable cause and not willful neglect. Boyle, 469 U.S. at 245 (citing I.R.C. § 6651(a)(1)). In order to prove "reasonable cause," a taxpayer must show that it "exercised 'ordinary business care and prudence' but nevertheless was 'unable to file the return within the prescribed time.'" "Willful neglect" requires a "conscious, intentional failure or reckless indifference." 

In Boyle, the Supreme Court observed that "[c]ourts 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." The Court's decision in Boyle did not resolve those differences. The Court did state, however, that: 

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. 

By contrast, 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. In short, tax returns imply deadlines. 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. Among the first duties of the representative of a decedent's estate is to identify and assemble the assets of the decedent and to ascertain tax obligations. Although it is common practice for an executor to engage a professional to prepare and file an estate tax return, a person experienced in business matters can perform that task personally. It is not unknown for an executor to prepare tax returns, take inventories, and carry out other significant steps in the probate of an estate. It is even not uncommon for an executor to conduct probate proceedings without counsel.

Id. at 251-52 (citation omitted). In short, the Supreme Court distinguished advice from an attorney involving an interpretation of substantive tax law, which can constitute reasonable cause, from an attorney's assistance in meeting the requirements of unambiguous statutes, which cannot constitute reasonable cause. 

The Tax Court has since held that reasonable reliance on the erroneous advice of an attorney regarding the due date of a return can constitute reasonable cause. Estate of La Meres v. Comm'r, 98 T.C. 294, 320 (1992). The Tax Court attempted to categorize cases in which reliance on advice of counsel as to the appropriate time for filing can constitute reasonable cause for a late filing. It noted that, in cases where the expert did not actually give the advice on which the taxpayer claimed to rely, the taxpayer could not establish reasonable cause. Additionally, the taxpayer could not establish reasonable cause where the taxpayer's reliance on the advice was unreasonable—for example, when the advice did not come from an expert or where the taxpayer did not fully disclose all relevant information. Thus, the Tax Court concluded that a taxpayer may demonstrate that its late filing was due to reasonable cause when (a) the taxpayer made full disclosure to an expert, (b) the expert gave advice upon which the taxpayer claims to have relied, (c) the taxpayer relied in good faith on the expert's advice, and (d) the taxpayer did not otherwise know that the return was due. 

I should note that this holding is probably dicta because the estate deferred even further -- for nine months -- after citizenship was achieved in filing the return.  Hence, based on that continued deferral for which it had no reasonable cause, the estate was subject to the  maximum failure to file penalty.