Janice Specht, et al v. USA

Filing

OPINION filed : The district court's grant of summary judgment to the government is AFFIRMED. Decision not for publication. Damon J. Keith, David W. McKeague, and Helene N. White (AUTHORING), Circuit Judges.

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NOT RECOMMENDED FOR PUBLICATION
File Name: 16a0545n.06
No. 15-3095
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
JANICE C. SPECHT and JON HOFFHEIMER, CoFiduciaries of the Estate of Virginia L. Escher,
Plaintiffs-Appellants,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.

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FILED
Sep 22, 2016
DEBORAH S. HUNT, Clerk

ON APPEAL FROM THE
UNITED STATES DISTRICT
COURT FOR THE SOUTHERN
DISTRICT OF OHIO

BEFORE: KEITH, McKEAGUE, and WHITE, Circuit Judges.
HELENE N. WHITE, Circuit Judge. The Internal Revenue Service assessed penalties
and interest on the penalties totaling $1,189,261.38 against the estate of Virginia L. Escher
(“Estate”) for its failure to timely file its tax return and pay its tax liability pursuant to 26 U.S.C.
§ 6651(a)(1) and (a)(2). The Estate paid the penalties and interest under protest and brought this
action to recover the amount paid. Finding that the Estate showed neither reasonable cause nor
an absence of willful neglect to excuse the late filing and payment, the district court granted the
government’s motion for summary judgment. We AFFIRM.
I. Background
The factual background of this case is largely undisputed. Virginia Escher died on
December 30, 2008, leaving an estate valued at approximately $12,506,462. Eight months
before her death, Escher, accompanied by her cousin, co-plaintiff-appellant Janice Specht, met
with attorney Mary Backsman to execute Escher’s will.

Backsman had over fifty years’

experience in estate planning. During this meeting, Specht agreed to be the executor of Escher’s

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estate and witnessed her will. Specht was seventy-three years old at the time of the meeting, had
no formal education after graduating from high school, had never served as an executor, and had
never been in an attorney’s office prior to witnessing Escher’s will.
After Escher’s death, Specht retained Backsman to represent the Estate. Unbeknownst to
Specht, Backsman was suffering from brain cancer, and her competency was deteriorating. In
January 2009, Backsman informed Specht that the Estate owed approximately $6,000,000 in
federal estate taxes, and that the Estate would need to liquidate its shares in United Parcel
Service, Inc. (“UPS”), in order to pay the liability. Backsman informed Specht that the estate
taxes were due nine months following Escher’s death, on September 30, 2009. Backsman also
suggested that her law firm could pay the liability on the Estate’s behalf and seek reimbursement
later.
On February 9, 2009, Specht signed two forms:

the Application for Authority to

Administer Estate and the Fiduciary’s Acceptance. The latter document laid out Specht’s duties
as executor and included an attestation that Specht would “[f]ile all tax documents as required by
law.” R. 13-13, PID 160. Specht testified that although she probably did not understand what
this form meant and did not know the meaning of “fiduciary,” she did not ask Backsman to
explain any part of the form to her before signing it. Specht also testified that she never thought
to ensure that the tasks listed on the Fiduciary’s Acceptance were completed. Specht was aware,
however, based on her experience filing her personal income taxes, that there might be a
consequence if the estate taxes were filed late.
The parties agree that Specht relied heavily on Backsman. One fiduciary responsibility
that Specht successfully completed was procuring tax releases from each of Escher’s twentythree separate banks. Other than this, it appears Specht’s actions in executing the Estate were

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limited to calling Backsman and inquiring about the status of the matter. Whenever Specht
asked about the filing of the tax return and payment, Backsman assured her that an extension had
been obtained. However, Specht did not ask for proof that an extension had been obtained, and
Backsman’s assurances turned out to be false—she had never even requested an extension.
Before the IRS filing deadline, Specht received four notices from the probate court
informing her that the Estate had missed probate deadlines. Specht responded to the notices by
calling Backsman and asking why she had missed the deadline. Specht then unquestioningly
accepted Backsman’s repeated response that she had obtained an extension and was handling the
matter. No immediate consequences resulted from the missed probate deadlines. The September
30 IRS filing deadline came and passed without the Estate filing its tax return and paying the
federal estate tax.
In the nine months following the IRS deadline, Specht received two more notices from
the probate court informing her that Backsman failed to file a first accounting of the Estate’s
assets.

Again, there were no immediate consequences from these notices as Backsman

eventually filed the accounting. In July 2010, Specht received a call from friends of Escher who
had also hired Backsman as an attorney for a family member’s estate. They warned Specht that
Backsman was incompetent, and told Specht they were seeking to have Backsman removed as
co-executor of their family member’s estate. After these calls, Specht scheduled a meeting with
Backsman and again accepted Backsman’s representation that the execution of the Estate was
going smoothly. At this meeting, Backsman also had Specht sign a “blank paper” that Backsman
stated would empower her to sell the Estate’s UPS stock. R. 14, PID 191. Backsman later told
Specht that she had sent a letter to UPS to initiate the sale of the stock.

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On August 13, 2010, Specht received a notice from the Ohio Department of Taxation
informing her that the Estate’s Ohio state tax return was delinquent.

Specht contacted

Backsman, who, as usual, assured Specht all was fine. A month later, Specht received two
additional notices from the Ohio Department of Taxation. Specht also received two additional
calls from the other family imploring her to fire Backsman and recommending attorney Vincent
Salinas as a suitable replacement. Specht contacted Salinas after each phone call, and Salinas
agreed that she should fire Backsman.
On October 27, 2010, Specht called UPS and learned that the company never received a
letter from Backsman regarding the sale of the Estate’s UPS stock. This revelation caused
Specht to finally fire Backsman, and she subsequently hired Salinas to represent the Estate. It
was only then, a little over a year after the IRS filing deadline, that Specht learned that the return
had not been filed and the taxes had not been paid. At that point, she was not surprised by the
revelation. Within a month of hiring Salinas, the Estate successfully liquidated the UPS stock
for a total of $8,251,715. On January 26, 2011, the Estate filed its federal tax return and paid its
tax liability and interest.
The IRS assessed penalties against the Estate for failing to meet the September 30, 2009,
deadline, which the Estate has since paid. The Ohio Department of Taxation, however, fully
refunded the Estate’s state penalties due to the hardship caused by Backsman’s representation.
The Estate settled a malpractice action against Backsman in 2012, and Backsman has since
surrendered her law license.
In October, 2013, Specht and co-fiduciary Jon Hoffheimer brought this action on behalf
of the Estate to recover $1,189,261.38 in penalties and interest on the penalties assessed against
the Estate by the IRS.

The district court granted the government’s motion for summary

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judgment, concluding that Specht’s reliance on Backsman to file the tax return and pay the tax
liability was not a reasonable cause for the missed deadline. The district court also found that
Specht’s failure to supervise Backsman, despite the many warning signs of Backsman’s deficient
performance, constituted willful neglect of her duty to file the tax return and tax payment.
II. Analysis
Sections 6651(a)(1) and (2) of the Tax Code provide for the assessment of penalties for
failure to file a tax return and failure to pay a tax liability, respectively. 26 U.S.C. § 6651(a)(1),
(a)(2). These penalties are mandatory unless the failure is “due to reasonable cause and not due
to willful neglect.” Id. “To escape the penalty, the taxpayer bears the heavy burden of proving
both (1) that the failure did not result from ‘willful neglect,’ and (2) that the failure was ‘due to
reasonable cause.’”

United States v. Boyle, 469 U.S. 241, 245 (1985) (citing 26 U.S.C.

§ 6651(a)(1)). The Estate appeals the district court’s grant of summary judgment, arguing that in
light of Specht’s age, education, and inexperience, her reliance on Backsman to file the tax return
and pay the tax liability was a reasonable cause of the Estate’s failure to meet the deadline. The
Estate also argues that Specht’s continued reliance on Backsman throughout the process did not
constitute willful neglect of her duty to file the tax return and pay the tax liability.
A. Standard of Review
We review a district court’s grant of summary judgment de novo. Ondo v. City of
Cleveland, 795 F.3d 597, 603 (6th Cir. 2015). “Summary judgment is appropriate if there is no
genuine issue of material fact and the movant is entitled to judgment as a matter of law.” Id. All
evidence should be viewed in the light most favorable to the nonmoving party, and all justifiable
inferences should be drawn in favor of the nonmovant. Id. The question is whether the facts,
when construed most favorably to the Estate, show that the Estate’s failure to file its tax return

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and pay its tax liability by the September 30, 2009, deadline was due to reasonable cause and not
willful neglect.
B. Reasonable Cause
Although the Tax Code does not define “reasonable cause,” “the relevant Treasury
Regulation calls on the taxpayer to demonstrate that [s]he exercised ‘ordinary business care and
prudence’ but nevertheless was ‘unable to file the return within the prescribed time.’” Boyle,
469 U.S. at 245 (citing 26 CFR § 301.6651–1(c)(1)) (emphasis added). In Boyle, the leading
case interpreting the Tax Code’s “reasonable cause” exception1, the Supreme Court declared that
“[t]he time has come for a rule with as ‘bright’ a line as can be drawn . . . Congress has placed
the burden of prompt filing on the executor, not on some agent or employee of the executor. . . .
Congress intended to place upon the taxpayer an obligation to ascertain the statutory deadline
and then to meet that deadline, except in a very narrow range of situations.” Id. at 249–50. The
Court explained that “tax returns imply deadlines. Reliance by a lay person on a lawyer is of
course common; but that reliance cannot function as a substitute for compliance with an
unambiguous statute.” Id. at 251. The Court therefore concluded that “Congress has charged the
executor with an unambiguous, precisely defined duty to file the return within nine months . . .
That the attorney, as the executor’s agent, was expected to attend to the matter does not relieve
the principal of his duty to comply with the statute.” Id. at 250.
The Estate attempts to distinguish Boyle on the basis that Specht was unqualified to be an
executor, and her reliance on Backsman was thus more reasonable than the reliance in Boyle and
our cases following Boyle.

To be sure, the Boyle Court left open the possibility that an

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Though Boyle involved only § 6651(a)(1), this Court has found that the Supreme
Court’s construction of “reasonable cause” in Boyle also applies to § 6651(a)(2). Valen Mfg. Co.
v. United States, 90 F.3d 1190, 1193 n.1 (6th Cir. 1996).
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executor’s qualifications might impact the reasonableness analysis, id. at 248 n.6, and Justice
Brennan’s concurrence includes taxpayers suffering from “senility, mental retardation or other
causes” as examples of the “exceptional cases” that might render an individual unable to comply
with the statutory deadlines. Id. at 255 (Brennan, J., concurring). But even Justice Brennan
observed that the “overwhelming majority” of individuals are capable of complying with the
deadlines. Id.
The Estate correctly notes that Specht was a less sophisticated executor than Robert
Boyle, the executor in Boyle. Unlike Specht, Boyle was a businessman who had previously
served as an executor, albeit twenty years before the events of that case. However, it was
undisputed that Boyle “was not experienced in the field of federal estate taxation” and “relied on
[his attorney] for instruction and guidance.” Id. at 242. Although Boyle’s attorney repeatedly
assured him that the tax return would be filed on time, the attorney missed the deadline by three
months due to a clerical error. Id. at 243. Similarly, Specht called Backsman numerous times
and accepted her representations that the return would be filed and the liability paid on time. The
Estate attempts to distinguish Boyle based on Backsman’s tragic medical situation. But, the
relevant question is whether the executor, not the attorney, was reasonable in missing the
deadline. Here and in Boyle, the executors blindly relied on their attorney’s representations that
the filing would be completed on time, and in both situations the deadline was missed.
Considering Specht’s lack of oversight, the deadline would have been missed even if Backsman
had been healthy but committed a clerical error of the kind that occurred in Boyle. Thus, Boyle is
controlling.
Further, this court has reinforced the strict, bright-line rule of Boyle. In Valen Mfg. Co. v.
United States, 90 F.3d 1190 (6th Cir. 1996), we considered whether an employee’s active

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concealment of her failure to file the company’s tax return and pay its liabilities constituted
reasonable cause for missing the statutory deadline. Id. at 1190–91. Applying Boyle, we
concluded that, although the company “exercised ordinary business care and prudence,” id. at
1194, it also had to demonstrate that it was “rendered unable to meet its responsibilities despite
the exercise of such care and prudence.” Id. at 1193 (emphasis in original). Finding that the
employee’s dishonesty was not a reasonable cause for missing the deadline, Valen clarified that
the failure to pay “must result from circumstances beyond the taxpayer’s control (e.g. postal
delays, illness), not simply the ‘taxpayer’s reliance on an agent employed by the taxpayer.’” Id.
(citing Boyle, 469 U.S. at 248 n.6) (emphasis in original). We explained that such a policy is
“eminently reasonable,” as “[f]orgiveness of penalty assessments levied against taxpayers who
could exert greater controls and exercise greater levels of personal responsibility would only
encourage late filings and payments to the IRS.” Id. at 1194.
We noted that the company in Valen could not establish reasonable cause in part because
it successfully completed its payments soon after discovering its employee’s malfeasance. Id. at
1193. Here, although Specht may be a less sophisticated taxpayer than the company in Valen or
the executor in Boyle, she nonetheless proved her ability to execute the estate. Soon after
discovering that Backsman lied about initiating the sale of UPS stock, Specht successfully
terminated her, hired Salinas as new counsel for the Estate, and, together with Salinas, filed the
tax return and paid the outstanding liability. Thus, like the company in Valen, it was Specht’s
complete reliance on an unreliable agent, rather than circumstances beyond her control, that
caused the late filing.
Finally, our recent unpublished decision in Vaughn v. United States, 635 F. App’x 216
(6th Cir. 2015), confirms Boyle’s bright-line rule. There, Mo Vaughn, a former Major League

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Baseball player, hired a wealth-management firm and a tax accountant to manage his finances,
prepare and file his tax returns, and make payments. Vaughn, 635 F. App’x at 218. Rather than
pay Vaughn’s taxes, Vaughn’s financial manager embezzled millions of dollars from him. Id.
Though we expressed sympathy for Vaughn, we affirmed the district court’s grant of summary
judgment to the government, concluding that “Vaughn’s statutory duty is non-delegable and is
not excused because of the felonious actions of his financial agents.” Id. at 217. “Taxpayers are
. . . expected to know that they must file a return and pay their taxes. . . . [Vaughn] is facing
penalties because he relied on [his agents] to complete and file his tax returns.” Id. at 220.
Finally, we reiterated our interpretation of reasonable cause to mean “something that is beyond
the taxpayer’s possible control and oversight, not something that occurs under his authorization
and subject to his control.” Id. at 221.
The Estate points to only one case supporting its position, Brown v. United States, 630 F.
Supp. 57 (M.D. Tenn. 1985), a thirty-one-year-old district-court case decided prior to Valen and
Vaughn that the Estate concedes has never been cited as precedent. Brown involved a seventyeight year old executor with a high school education and minimal experience in tax matters. Id.
at 58. The executor hired an attorney to prepare and file the return, but the attorney was
hospitalized two weeks prior to the filing deadline. Id. at 60. The district court found that the
executor’s age, health, and lack of experience constituted reasonable cause for his failure to
timely file the tax return. Id. The Estate’s reliance on this case is misplaced. The facts of
Brown are distinguishable. Specifically, the court in Brown found that the executor was not
reasonably capable of hiring a new attorney. Id. The court also found it important that the
executor’s health had been deteriorating for years, and that he had been “under the care of
several doctors” while he was executor. Id. at 58. This advanced age and sickness, coupled with

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the executor’s inability to replace his attorney, support that the executor fell within the
exceptional circumstances outlined in Boyle. In contrast, Specht demonstrated her ability to
replace Backsman by hiring Salinas and ultimately filing the tax return and paying the liability.
There is also no evidence suggesting that Specht suffers from any health problems.
We acknowledge that Specht was the victim of staggeringly inadequate legal counsel and
there is no evidence of purposeful delay. However, although the circumstances are unfortunate,
Boyle, Valen, and Vaughn make it clear that the duties to file a tax return and pay taxes are nondelegable and mere good-faith reliance does not constitute reasonable cause. Specht signed
forms undertaking fiduciary obligations as the executor of the estate, and, despite knowing that
her responsibilities were important, asked no questions about what her job entailed. Further,
Specht knew the initial filing deadline was September 30, 2009, and understood that there would
be consequences for a failure to timely file.

She received multiple warnings regarding

Backsman’s deficient performance but took no steps to replace her until more than a year after
the IRS deadline passed, instead relying solely on Backsman’s assurances that an extension had
been obtained. Although Backsman’s representation was certainly an obstacle, Specht was not
unable to file the return or pay the liability on behalf of the Estate. Specht could have more
seriously considered the numerous warning signs of Backsman’s incompetence and replaced her
at any time; she has not shown reasonable cause to excuse the Estate’s late filing and payment.
Because we affirm the grant of summary judgment on the basis that the Estate has not
met its heavy burden of showing reasonable cause for its failure to file its tax return and pay its
tax liability by the applicable deadline, we need not reach the question whether Specht willfully
neglected her duty to do so.

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IV. Conclusion
For these reasons, we AFFIRM the district court’s grant of summary judgment to the
government.

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