Too Much Assuming Leads To Over Quarter Million Late File Penalty

This post was originally published on Forbes Oct 22, 2015

Lesley West, Peter West and John West were the executors of the estate of their mother (June West).  The estate got hit with pretty nasty late file/late pay penalties - $317,821.05.  The executors were in district court seeking a refund, because they thought they had a reasonable cause for being late.  Things did not go well for them.

When To File

If you ever are wondering whether, where and when to file a particular tax form, here is what you should do.  Go to the instructions, which generally you can find on-line and scan the first couple of pages.  You will likely find paragraphs with labels like "When To File".  For the United States Estate (and Generation-Skipping Transfer) Tax Return Form 706, "When To File" is on page 3 of the instructions and it tells you that the form is due within nine months of the date of the decedent's death and that you can use Form 4768 to apply for a six-month extension.

If you are responsible for an estate that has to file (see Which Estate Must File on page 2), you may well need professional assistance, which the estate more than likely will be able to afford.  Nonetheless, that due date thing is something which is not hard to find and it is very precise, not at all vague.

Another Approach

June West died December 27, 2009.  (If only she had held on for a few more days, all these problems would have been avoided). Peter West sent an e-mail on January 3, 2010 to John Rodgers, June West's attorney seeking guidance as to "what legal followups are  needed in the short term".  Rodgers responded that they would:

“need to pay [June West's] final bills, and...possibly file a Federal Estate tax return, [June West's] final 1040, and a trust income tax return.”. Rodgers went on to explain that “[t]his all takes as short as a few months or (if an estate tax return is required) as long as [two] years.” The following day, Peter West, again via email, responded that he was “sure there will be tax due” on the estate and that he “assume[d]” that John Renner, the accountant hired to do June West's 2009 taxes, “would also take care of preparing estate taxes.”

Heads up here.  Estate tax returns are not something that the preparers of income tax returns just kind of throw in with the final income tax return.  Now that word "assumed" is an interesting one. At Joseph B Cohan and Associates we had a saying about the word "assume" , which like many of the JBC sayings might violate the contributor guidelines.  It relates to the first three letters.

Another Assumption

Peter got back to John Rodgers in November 2010, which you and I know was a bit past the due date, which was in September.

In November, Peter West met with his siblings around Thanksgiving and thereafter emailed Rodgers inquiring as to what plaintiffs “need[ed] to do next in order to start work on the estate taxes.” Rodgers interpreted this question as Peter West's hiring him to prepare the estate taxes, and Rodgers began work preparing the estate tax return in December 2010.Rodgers was not concerned that the deadlines had already passed and he never mentioned this fact to plaintiffs, as he mistakenly assumed that Renner, the accountant, had obtained the appropriate extensions, as Peter West had earlier advised Rodgers that Renner would “take care of preparing estate taxes.” 

This is the part that is a little difficult to understand.  The final income tax return of the decedent (Form 1040), the estate's fiduciary income tax return (Form 1041) and the estate tax return (Form 706) interact with one another in a variety of ways. Ideally the people doing these things need to coordinate.  And if I were hired to prepare a return that I "assumed" had been extended, I would be inclined to ask for a copy of the extension, but maybe that's just me.

Rodgers prepared the return and informed the Wests that the federal estate tax due was $1,258,019. Lesley West filed the return on March 28, 2011 (Which I think would have been spot on timely if there had been an extension, since the 27th was a Sunday.  Although frankly, I tend to avoid cutting it that fine on things like this.)  Regardless the estate was hit with $275,032.72 in late file and $42,783.33 in late pay penalties.

Reasonable Cause?

The refund claim was based on the theory that the e-mail that stated that it could take as long as two years "constituted legal advice as to the required deadlines for filing ad paying estate tax on which plaintiff's could reasonably rely".  The Court found that it was not.

Simply put, Rodgers' January 4, 2010 email to Peter West was not legal advice as to the date of a filing or payment deadline. The language on which plaintiffs seize is Rodgers' comment that “[t]his all takes as short as a few months or (if an estate tax return is required) as long as [two] years.” This is insufficient as a matter of law to constitute legal advice as to tax filing or payment deadlines for several reasons. First, nothing in the record indicates that plaintiffs ever asked for a deadline, even before the January 4 email was sent. Indeed, Peter West's January 3 email that prompted Rodgers' January 4 response email simply asked what needed to be done in the “short term.” Thus, Rodgers was clearly not responding to a request for specific information about a deadline. Moreover, the email does not contain the language characteristic of advice as to deadlines, e.g., “pay by,” “due on,” or “file within.” Finally, there is no objective basis to determine from what date Rodgers would even calculate a two-year deadline.

Lessons 

I think that the result in this case is rather harsh.  Given how compliant the taxpayers were once they got their act together, I think the government should have been satisfied with the late pay penalty.  The problem would have been easily avoided if they had been more proactive in communicating with their professionals and if the professionals had been communicating with one another.   You can't tell from the decision why the proactivity was not happening. There may have been an understandable desire to minimize fees.  If that is the case it was kind of a penny wise, pound foolish result.

I think that you could use this case as an object lesson in why you might want to consider involving a professional as at least a co-executor, if you have a significant estate.  At any rate, you should try to arrange things so that your advisers and heirs/executors will work as a team.