Wednesday, July 25, 2007

Back Taxes: "Reasonable cause" for IRC 6651(a) - reliance on an attorney

Estate of Gertrude Zlotowski, Deceased, Gunther Grewe, Ancillary Administrator, C.T.A. v. Commissioner.Dkt. No. 22150-04 , TC Memo. 2007-203, July 24, 2007.

An estate was liable for penalties under section 6018 imposes on the executor the obligation to make the necessary return of tax. The term "executor" is defined in section 2203, and the parties agree that (1) Messrs. Roisen and Helman were executors within the meaning of those sections, and (2) they, and only they, were responsible for filing the estate tax return when it became due.

Section 6651(a)(1) provides for an addition to tax in the event a taxpayer fails to file a timely return (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. The amount of the addition is equal to 5 percent of the amount required to be shown as tax on the delinquent return for each month or fraction thereof during which the return remains delinquent, up to a maximum addition of 25 percent for returns more than 4 months delinquent.II.

The parties do not dispute the computation of the

The term "willful neglect" denotes "a conscious, intentional failure or reckless indifference." United States v. Boyle, 469 U.S. 241, 245 (1985). Reasonable cause is established where, despite the exercise of ordinary business care and prudence, a taxpayer is unable to file timely. Id. at 246 & n.4; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; see also McMahan v. Commissioner, 114 F.3d 366, 369 (2d Cir. 1997) (considering elements constituting reasonable cause for late filings under
Nevertheless, describing the executor's duty to file the return as an "unambiguous, precisely defined duty", the Court cautioned that the executor's expectation that the attorney, as his agent, would attend to the matter "does not relieve the principal of his duty to comply with the statute." Id. The Court described as among those very narrow circumstances in which an executor may be excused from discharging his duty to ascertain and meet the filing deadline the circumstance in which an executor has relied on the erroneous advice of counsel concerning a question of law; e.g., "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." Id.
B. Analysis
We start our analysis with two unassailable facts: Messrs. Roisen and Helman were obligated to file the estate tax return no later than December 10, 2000, and they failed in that obligation. Petitioner may escape an addition to tax on account of that failure if he can show that they had reasonable cause for the failure because they reasonably relied on the advice of Mr. Ledley that they had no such obligation. Petitioner, however, has failed to make that showing. Indeed, petitioner has failed to show that, on December 10, 2000, Messrs. Roisen and Helman were aware that the last day for filing the estate tax return was passing without the return being filed, much less that they let it pass without filing the return in reliance on Mr. Ledley's advice.
Mr. Helman is deceased, and petitioner has provided no evidence of Mr. Helman's state of mind. Mr. Roisen testified about his administration of the estate, and, from that testimony, we draw the conclusion that he was almost completely disengaged from estate administration, relying on Mr. Ledley to do virtually all that was required of him and Mr. Helman. Specifically, we make the following findings, based on Mr. Roisen's testimony: He agreed to serve as an executor to accommodate his old business acquaintance, decedent's husband. He relied on decedent's attorney for the selection of Mr. Ledley as executors' counsel. He knew nothing about the estate and relied fully on Mr. Ledley, who, from his perspective, was in charge of the estate. Apart from signing the Form 706, he did not participate in filing it, which job, he believed, was in Mr. Ledley's hands. He never discussed with Mr. Ledley penalties for a late-filed return. He only discussed with Mr. Ledley whether the return was going to be filed on time after it already was late.
Mr. Roisen's almost complete disengagement from return preparation is captured by his final exchange with one of respondent's counsel:
Q: So, essentially your testimony is that they [i.e., Mr. Ledley] took care of everything relative to the filing of the return?
A: Absolutely. That is a hundred percent correct.
Q: And you had no participation in the filing of the return?
A: No, except that they required my signature, because being the executor of the will, I had to sign it, and which I did. I had full confidence in them.
Mr. Roisen signed the estate tax return, on August 28, 2001, after it was more than 8 months overdue.
While we have before us Mr. Ledley's testimony that, in late September or early October of 2000, he advised Messrs. Roisen and Helman to suspend their administration of the estate and he also advised them not to file an estate tax return, we have no testimony from Mr. Roisen that either he or Mr. Helman ever received (or, if received, understood) that advice. At trial, Mr. Roisen was called as a witness by petitioner. He was examined by one of petitioner's counsel with respect to advice received from Mr. Ledley. He readily agreed with counsel that he had received advice from Mr. Ledley and had followed that advice. Counsel's questions, however, were with respect to advice generally; she did not ask Mr. Roisen whether he received and followed any advice with respect to not making a timely return of tax (i.e., filing the estate tax return on or before December 10, 2000). We infer from that failure of inquiry that Mr. Roisen's answer to that question would not have been favorable to petitioner's case. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946) ("the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable"), affd. 162 F.2d 513 (10th Cir. 1947). We are not dissuaded by Mr. Ledley's testimony from our conclusion, expressed above, that petitioner has not shown that Messrs. Roisen and Helman's failure to file timely the return was due to their reliance on advice received from Mr. Ledley.
Finally, even considering Mr. Ledley's advice, it was not advice that, as a matter of law, Messrs. Roisen and Helman had no obligation to file an estate tax return by December 10, 2000. It was simply advice that there was some risk (unspecified) with continuing their administration of the estate (including filing the estate tax return). Indeed, Mr. Ledley returned to preparation of the estate tax return in late January or early February 2001 since, he testified, it was taking a long time for the heirs under the German will to take over the New York proceeding.
C. Conclusion
Petitioner has failed to show that, on account of reasonable cause and not due to willful neglect, petitioner is excepted from liability for the
section 6651(a)(1) for failure to file timely the Form 706.
Decision will be entered under Rule 155.
1 The delinquency having been established, respondent has met the burden of production placed on him by 2 Until Messrs. Roisen and Helman were relieved of their duties as executors, there is no question but that it was their obligation to file the Form 706. See sec. 20.6018-2, Estate Tax Regs. Although they may not have had complete information about the German assets, they could have satisfied that obligation by filing a timely tax return based on the best information available and later filing an amended return. See Estate of Vriniotis v. Commissioner, 79 T.C. 298, 311 (1982).

No comments: