The District Court for the Southern District of Ohio has upheld the Internal Revenue Service’s imposition of penalties totaling more than $1 million on an estate that failed to file its estate tax return on a timely basis and timely pay the estate tax it owed even though the estate attorney was battling cancer and lost her license to practice law.
In granting the IRS motion for summary judgment, the court said Tuesday that the legal question in the case, Specht v. U.S., was simple: “Whether Plaintiffs’ failure to timely file the United States Estate (and Generation Skipping Transfer) Tax Return and to timely pay the estate taxes was due to reasonable cause and not willful neglect. However, the factual circumstances are both complex and sad.”
Janice Specht, a co-fiduciary of the estate, hired Mary Goeke Backsman, an attorney with over 50 years of experience in estate planning. However, Specht was unaware that Backsman was privately battling brain cancer. Moreover, according to the court, Backsman deceived Specht, whether intentionally or unintentionally, about the status of an extension on the filing of the estate’s tax returns. That deception eventually led to malpractice claims and the voluntary relinquishment of Backsman’s law license.
Specht argued that reasonable cause exists for failure to timely file and pay estate taxes, because their failure was due to their reliance on the attorney who was entrusted to handle the estate. The IRS responded that courts have recognized a non-delegable nature of the duty to make timely filings of tax returns and have held that reliance on counsel is insufficient reasonable cause not to file a return or pay taxes.
“Serving as the executor of a probate estate is clearly not an easy task, which is why Mrs. Specht trusted an attorney to guide her through the process,” the court stated. “While this Court finds it difficult to hold that Plaintiffs are ultimately responsible for Ms. Blacksman’s malpractice, that is what binding precedent requires. Notably in light of Ms. Blacksman’s malpractice, the State of Ohio refunded the late filing and payment penalties for Ohio estate taxes without the Estate filing a refund suit. It is truly unfortunate that the United States did not follow the State of Ohio’s lead.”
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