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Surprise, Surprise, An Estate Has Reasonable Cause For Filing A Tax Return Late

By Joel N. Crouch on January 13, 2020

In prior blog posts, we have discussed the uphill battle an estate faces when it requests abatement of a late filing penalty when the Form 706, United States Estate Tax Return, is not timely filed. Although there are cases where an estate has prevailed on a reasonable cause/reliance defense, they are few and far between.  In the typical case, the court cites United States v. Boyle in holding that a taxpayer can rely on a tax professional for tax advice, but not regarding the “ministerial act” of filing a tax return on time.

In a recent case, Estate of Agnes R. Skeba v. United States, a federal district court determined not only did the IRS wrongly interpret IRC Section 6651(a)(1) in calculating and assessing a late filing penalty, but also that the estate had reasonable cause for filing the return late.  In Skeba, the decedent had an estate of almost $15 million but the estate had a liquidity problem because it was primarily made up of farm land and equipment.  The executor used the available funds to pay inheritance taxes in New Jersey and Pennsylvania and to make a partial payment to the IRS of $725,000.  The estate was diligently pursuing a loan to pay the balance due the IRS, but the loan closure had been delayed.  The loan eventually closed a little more than  nine (9) months after the decedent’s date of death and the IRS was immediately paid the balance of the estimated estate tax. 

Due to litigation related to Will contests, the estate requested a six (6) month extension of time to file the estate tax return, which the IRS granted.  However, the estate did not file the return by the extension date, in part due to the illness of the both the executor and the attorney for the estate, which delayed the state court Will contest litigation.   When the estate tax return was filed almost nine (9) months after the extension date, the estate tax liability was $941,000 less than the estimated payments.  The estate asked the IRS to return the $941,000 overpayment, but the IRS imposed a $450,000 late filing penalty and returned the balance of $491,000.  The estate filed a claim for refund which was denied by the IRS and the estate filed an action in federal district court.

After finding that the taxpayers’ interpretation of Section 6651(a)(1) and how it should be applied was correct, the court discussed whether the taxpayer had reasonable cause for late filing.  The court’s discussion referenced Boyle, which is usually the kiss of death for a taxpayer.  However, the court determined the estate had reasonable case for filing late, citing (1) the Will contest the estate was facing which was delayed by the executor’s health condition, (2) health issues of one of the estate’s attorneys, (3) the prestige and professionalism of the estate’s law firm, (4) difficulty of obtaining the necessary valuations and appraisals, and (5) the estate’s overpayment of tax prior to the extended deadline for payment.

The facts in Skeba are unique but it is a very good case for taxpayers and I hope it is upheld if the government decides to appeal. It also proves the adage:  that prevailing on IRS penalties is an art not a science.

For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.