Private Client Services Update – But My Tax Expert Told Me****
By Robert H. Powell III, Estate, Trust & Wealth Transfer
We all know April 15th and the tax filing and payment deadline is almost upon us. Since the Supreme Court’s Boyle decision in 1985 (United States v. Boyle, 469 U.S. 241 (1985)), most tax practitioners have operated on the belief that the Court’s ruling was an outright holding that the taxpayer’s reliance on a tax professional’s advice was not reasonable cause for failure to pay or file on time and that either would result in imposition of late payment and/or late filing penalty and interest. The 3rd Circuit Court of Appeals (“3rd. Cir.”) has now shone a little light at the end of the tunnel in the Thouron (Thouron v. U.S., 752 F.3d 311 (2014)) decision and the door is cracked slightly for the taxpayer to obtain possible relief from imposition of those penalties and interest.
Thouron died in 2007 leaving a substantial estate. The Executor retained an experienced tax attorney to provide tax advice for the estate. The Estate’s tax return and payment were due November 6, 2007. On that date, the Estate filed an application for an extension of time to pay and made a payment of $6.5 million, much less than the slightly over $20 million ultimately determined to be owed. The Estate argued that the lesser amount was paid based on the tax attorney’s advice that the Estate might elect to defer certain liabilities under IRC §6166. The Estate later determined that it did not qualify for the §6166 deferral. The extension for filing was granted and the return filed in a timely manner. The Estate’s request for an extension of time to pay was denied and the IRS notified the Estate that it was imposing a failure-to-pay penalty of $999,072. Following losses at the administrative level, the Estate paid all taxes, penalties, and interest and filed a request with the IRS for a refund of the penalty plus accrued interest that it had paid. Not receiving a response from the IRS, the Estate filed suit in the District Court alleging that the failure to pay resulted from reasonable cause and not willful neglect and therefore not subject to the imposed penalty and interest. Based on Boyle, the government requested the District Court to grant a motion for summary judgment arguing that there was “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” (Fed.R.Civ.P. 56(a)). The request for summary judgment was granted and the Estate appealed to the 3rd. Cir.
The 3rd Cir. reasoned that there are “three distinct categories of late-filing or, by extension, late payment cases” as follows: (1) where the taxpayer relies on the agent for the ministerial task of filing or paying as in Boyle; (2) where the taxpayer, in reliance on the advice of the professional, files after the due date but within the time the professional told the taxpayer was available; and (3) the taxpayer relies on the professional’s advice as to a matter of law. Boyle, it reasoned, involved only the first category and the Supreme Court thus did not reach the other two categories. The Court went on to say that if the taxpayer could show that it not only relied on the advice of a tax expert but also that it either could not pay by the deadline or that payment would result in undue hardship, then the taxpayer could avoid late-payment penalties and interest, which in this case amounted to almost $1 million. The 3rd Cir. reversed the District Court’s granting of summary judgment in favor of the IRS and remanded the case for further review to see if the taxpayer could show not only reliance on the tax professional but also the required “undue hardship from paying” or “inability to pay” by the statutory deadline.
Assuming the deadline for filing has not run, a taxpayer who has paid late-filing or late-payment penalties and interest because of reliance on the advice of a tax professional should consider filing an amended return if the taxpayer believes it can show that it not only relied on the advice of the tax professional but also that payment would have either resulted in undue hardship or that there was no ability to pay. – Bob Powell
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.