• Estate of Nancy P. Young v. United States (D. Mass., No. 1:11-cv-11829-RWZ, 12/17/12)
  • February 13, 2013
  • Law Firm: Proskauer Rose LLP - New York Office
  • In Estate of Nancy P. Young v. United States, the District Court upheld a late-filing penalty against an estate whose accountants advised it to file its estate tax return late, believing there would be no penalty since the full amount of the estate tax had been paid.

    The decedent died in 2008. The estate submitted timely requests for extensions of time to file and to pay; both of which were granted. The estate paid the estate tax due prior to the extended payment deadline.

    The estate was preparing the estate tax return during 2009, in the midst of the recession. The estate believed that the appraised values of its real estate holdings were substantially higher than fair market value and sought reevaluations.

    As the extended estate tax return filing deadline approached, the estate had two options: (1) file the estate tax return with the appraised values, and then file a supplemental return later when the real estate holdings were sold; or (2) wait until the real estate holdings were sold, and then file one estate tax return after the filing deadline.

    The estate's accountants believed that since the estate already had paid more than its eventual estate tax liability, there would be no penalty for filing late. Therefore, they advised the estate to file one estate tax return after the filing deadline, as one return (rather than two) would simplify the audit process.

    The estate followed the accountants' advice and filed one estate tax return after the filing deadline. The IRS assessed the estate with late filing penalties and interest.

    The estate argued that it had reasonable cause for filing late because it relied on expert tax advice.

    The District Court found that there was not reasonable cause in this case. Here, the estate was fully aware that it legally was required to file the estate tax return by the applicable deadline. The advice that the estate relied on was that (a) there would be no penalty for late filing, and (b) the late filing would be better for the audit process. The District Court cited precedence which held that reliance is not reasonable cause when the taxpayer is advised that the return is due but that the taxpayer need not comply because no penalty would be imposed. In addition, the reliance is not a reasonable cause when the taxpayer decides that the desire to make the audit process easier is more important that his duty to comply with a known filing deadline.

    The estate had an obligation to file a timely return with the best information that it had, and it cannot claim reasonable cause based on advice that it was necessary to wait for complete information before filing the return.