If an estate is taxable, then Form 706- United States Estate (and Generation-Skipping Transfer) Tax Return (the “return”) must filed nine months after a decedent’s date of death (15 months if an extension is granted). What happens if an attorney advises the executor that the attorney will take care of the return, but then the return is filed late? Does reliance on that attorney relieve the executor from tax penalties?
Ms. Escher died in 2008 with an estate of approximately $12.5 million. Prior to her death, Ms. Escher engaged her attorney, Ms. Backsman (“Backsman”), who had 50 years experience, to draft her documents naming Ms. Escher’s cousin, Janice Specht (“Specht”) as her as executor. After Ms. Escher’s death, Specht hired Backsman to handle the estate, including filing the estate tax return. Specht did not know that Backsman was suffering from brain cancer.
Specht also authorized Backsman to sell certain UPS stock to pay the estate taxes. She periodically called Backsman to inquire about the status of the federal estate tax return, but she never asked for a copy of a letter or proof that the tax liability had been paid.
Unfortunately, Backsman missed quite a few deadlines, as evidenced by court notices to Specht. When Specht inquired, Backsman said she had handled these matters. In 2010, Specht received a notice from the Ohio Department of Taxation that the state estate tax return was delinquent. Specht also contacted her brokerage company and found that Backsman had never sold the UPS stock to pay the estate federal and state taxes. Finally, she fired Backsman and hired another attorney.
As the federal estate tax return had never been filed, the new attorney filed the federal estate tax return and paid the tax liability, together with interest and assessed penalties.
In October 2013, Specht and her attorney brought an action in district court to claim a refund for the penalties because Specht had relied on Backsman to file the federal estate tax return and pay the taxes. The lower court concluded that Specht’s reliance on Backsman was NOT a reasonable cause for the missed deadline. The court also found that Specht’s failure to supervise Backsman, DESPITE all the warnings of Backsman’s deficient performance, constituted willful neglect. Backsman ultimately surrendered her law license and settled the malpractice claim.
Section 6651 of the Internal Revenue Code (the “Code”) provides that, when a required return is not filed, penalties shall be imposed unless the failure to file is “due to reasonable cause and not due to willful neglect.” Specht argued that she relied on Backsman to file the proper return and pay the tax. Specht also argued that because of Specht’s age (73), education (only graduated high school) and lack of experience (no experience acting as an executor), her reliance on a 50 year experienced attorney constituted reasonable cause to avoid the penalties.
The court noted that, as soon as Specht determined what was not done, she successfully hired an attorney, filed the estate tax return and handled the sale of the UPS stock. Thus, Specht COULD accomplish her executor duties. It was Specht’s unreasonable complete reliance on her attorney rather than any circumstances beyond Specht’s control that caused the delay in filing the return.
ADVICE: If you act as an executor (a personal representative in Florida) or trustee, then you can hire an attorney to advise you as to tax matters. You can not, however, delegate your responsibility for ensuring that all tax returns are appropriately filed. You may have a malpractice action against your attorney but the final responsibility lies with you.
WORD OF THE WEEK: “A fortiori” is a Latin term which means a weaker proposition from a stronger proposition. For example if you state that a person is dead (the stronger proposition) , a fortiori the person is not breathing (the weaker proposition).
GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎