Ohio District Court rejects estate's reasonable cause argument for its late-filed estate tax return
Last week the United States District Court for the Southern District of Ohio issued an opinion finding an estate liable for additions to tax due to the estate's failure to timely file its estate tax return and its failure to timely pay the tax. Specht v. United States, No. 1:13-cv-708, 2015 U.S. Dist. LEXIS 800 (Jan. 6, 2015).
In Specht, the estate's executor hired an attorney to represent the estate and to prepare and file its estate tax return (Form 706). The attorney informed the executor that the estate's return had to be filed within nine months following the decedent's death, which in this case was September 30, 2009. The return was not filed by this due date, and when the executor asked the attorney why she had missed the deadline, the attorney told the executor that she had an extension to file the return. However, this was not true, and no extension had been filed.
Prior to and subsequent to the return due date, the executor received various telephone calls and written correspondence which indicated that the attorney had been neglecting her duties in the probate court and with the Ohio Department of Taxation, and that she was incompetent. When the executor learned that the attorney had failed to perform yet another task with regard to the sale of certain stock holdings, the executor terminated the attorney and retained new counsel. The estate finally filed its estate tax return and paid the tax and associated interest on January 26, 2011, almost a year-and-a-half after the due date. The executor discovered that the attorney had been privately battling brain cancer throughout the entire process; she was later declared legally incompetent and is now subject to a guardianship over her person and estate. The estate filed a malpractice suit against the attorney, which the parties settled, and the attorney voluntarily relinquished her law license.
The estate paid the additions to tax and filed a refund suit in the district court.
I.R.C. sec. 6511(a)(1) and (a)(2) impose separate additions to tax for a failure to timely file a tax return and a failure to timely pay the tax due on that return (these rules apply equally to estate tax returns). Each of these additions to tax are subject to an exception in the event that the taxpayer shows that the failure to file or pay "is due to reasonable cause and not due to willful neglect." The U.S. Supreme Court has held that, under this exception, the taxpayer bears the heavy burden of proving both (1) that the failure was due to reasonable cause; and (2) that the failure did not result from willful neglect. Boyle v. U.S., 469 U.S. 241 (1985).
To make such a showing, the estate was required to demonstrate that it exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. The failure to timely file a tax return is not excused by the delegation of such a duty to an agent.
The District Court rejected the estate's argument that the executor lacked the sophistication to file the estate return on her own, holding instead that she relied on an agent to file the return and that the agent simply failed to follow through. The court noted that there was no evidence to support a finding that she did not have the ability to control whether the deadline was met. The court granted the United States' motion for summary judgment, upholding the failure to file and failure to pay additions to tax.
However, the court concluded its opinion by expressing where its sympathies lie:
While this Court finds it difficult to hold that Plaintiffs are ultimately responsible for Ms. Backsman's malpractice, that is what binding precedent requires. Notably, in light of Ms. Backman's malpractice, the State of Ohio refunded the late filing and payment penalties for Ohio estate taxes without the Estate filing a refund suit. (Doc. 16, Ex. 2 at ¶ 14). It is truly unfortunate that the United States did not follow the State of Ohio's lead.