A federal appeals court has upheld a penalty assessed against the estate of a deceased man because the executor filed the return late, even though estimated taxes had been paid.
The full assessed penalty is mandatory unless advice given by counsel establishes reasonable cause for not filing the return.
While an estimated tax payment more than covered the taxes due, there were two uncertainties material to calculating the proper amount of tax due under Section 6651(a)(1) of the Tax Code. The principal one was whether and when the widow of Morton Liftin would become a United States citizen so that the marital deduction could apply. The second uncertainty involved litigation with the widow relating to her rights under a prenuptial agreement and the decedent’s will.
Although the executor, the decedent’s son John Liftin, is an attorney, he retained his former law partner for assistance in administering the estate. The estate received an automatic six-month extension of time to file and pay, and the IRS granted the extension on Jan. 16, 2004. The new deadline to file the return and pay the estate tax was June 2, 2004. Neither of the two uncertainties had been resolved by that date.
In a split decision in the case, Estate of Liftin v. U.S., the U.S. Court of Appeals for the Federal Circuit affirmed the Court of Federal Claims determination that it was reasonable for the executor to rely on counsel’s advice as to waiting for the widow to obtain citizenship. However, it was unreasonable to further delay filing well beyond the time she obtained citizenship until the other “ancillary matters” were resolved. Therefore, the court upheld the late filing penalty.
Judge Pauline Newman, dissenting, noted that the $877,300 estimated tax had been paid two years earlier before any late-filing penalty could accrue. “Nonetheless, the IRS levied the same 25 percent late-fling penalty as if no payment of estimated tax had been made. My colleagues on this panel agree with this outcome.”
“With all respect to my colleagues, they are incorrect,” Judge Newman stated. “The role of the estimated tax payment is to avert the imposition of a penalty. No statute or regulation provides that the nonpayment penalty accrues for the period after full payment of the estimated tax. The statute explicitly bars such assessment. It is incongruous to levy a penalty for late payment of a tax that had been timely and fully paid two years earlier, before the penalty period accrued.”
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