The Estate of Esther M. Hake et al v. The United States of America
Filing
44
MEMORANDUM OPINION (Order to follow as separate docket entry) re 23 MOTION for Summary Judgment Plaintiffs' Motion for Summary Judgment / 33 Dft's cross-motion for summary judgment. Signed by Magistrate Judge Martin C. Carlson on February 10, 2017. (kjn)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
THE ESTATE OF ESTHER M. HAKE, :
RICKY L. HAKE and
:
RANDY L. HAKE, Executors,
:
:
Plaintiffs
:
:
v.
:
:
UNITED STATES OF AMERICA,
:
:
Defendant
:
Civil No. 1:15-CV-1382
(Magistrate Judge Carlson)
MEMORANDUM OPINION
I.
INTRODUCTION
In this action, two executors to their late mother’s estate have sued the
United States seeking abatement and reimbursement of a penalty that was assessed
after the executors were late in filing the estate’s tax returns. The executors did not
simply neglect to comply with a deadline that was known to them.
To the
contrary, the executors filed the return on the date that their tax attorney advised
them that it was due, after the estate had been granted extensions of both its filing
and payment deadlines. Indeed, the executors took care to pay the taxes that they
believe were owed well before payment was due and in an amount that later
proved to be more than $100,000 in excess of what was actually owed.
Nevertheless, the executors unquestionably filed the estate’s return approximately
six months’ late, having been incorrectly advised by tax professionals that the
return deadline had also been extended for one year, something that was admittedly
inaccurate, and in fact was generally unavailable under governing tax laws and
regulations. For this error the executors were assessed a late penalty in the amount
of $197,868.26, and interest of $17,202.44 imposed pursuant to section 6651(a)(1)
of the Internal Revenue Code.1
There appears to be no real dispute between the executors and the United
States that the return was filed on July 2, 2013, and that it was filed on this date
because the executors had been advised by tax professionals they had retained that
they had been granted a one-year extension to file the return and to pay the taxes
owed on the estate. There is also no dispute between the parties that this advice
was incorrect, and that tax law permits only a six-month extension of time to file
an estate tax return for domestic executors, whereas it permits up to a one-year
extension to pay the taxes owed.
The executors’ counsel has candidly
acknowledged that the advice he gave his clients was wrong.
The executors pursued an administrative appeal for abatement of the penalty
on August 13, 2013. When that appeal was rejected, the executors paid the entire
Notably, the penalty was offset by the $108,526.97 overpayment that the
executors made in February 2013, and thus the Internal Revenue Service
demanded a penalty of $106,543.73.
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1
balance owed for penalty and interest. The executors then took steps to secure a
refund of the penalty and interest, and exhausted their administrative remedies with
the Internal Revenue Service, all of which were unsuccessful.2 This litigation
followed when the executors filed a complaint on July 15, 2015.
The parties have now filed cross-motions for summary judgment, (Docs. 23,
33), which have been fully briefed and are ripe for disposition. Upon consideration
of the parties’ briefs, the unique and undisputed facts of this case, as well as the
developing law in this field, the Court finds that the executors’ reliance upon the
advice of their counsel in these particular circumstances regarding the applicable
deadlines for filing the estate’s return was reasonable, and, therefore, the
imposition of the penalties and interest was not warranted.
In reaching this
As part of their efforts to obtain a refund, the executors, through new counsel,
filed a letter requesting abatement of the penalty on January 13, 2014. In this
letter, the executors argued that they had reasonable cause for the late filing
because it was the result of legal advice from counsel. On March 27, 2014, the
IRS denied this request. On May 14, 2014, the executors filed a protest with the
Appeals Division, again requesting abatement and refund of the penalty due to
reasonable cause. On December 18, 2014, the IRS initially denied the request, but
permitted the executors to provide additional information by January 19, 2015, if
desired. The executors filed additional information on January 15, 2015, including
citation to Estate of Thouron v. United States, 752 F.3d 311 (3d Cir. 2014), for the
proposition that erroneous expert advice of a legal professional constitutes
reasonable cause for the failure to file. The executors supplemented this filing on
June 18, 2014, and included an affidavit from tax counsel who attested that he had
advised the executors to seek an extension of the time to pay taxes under I.R.C. §
6161 in order to extend the deadline for filing the return and the payment due date,
so that both would be due on July 2, 2013. On March 9, 2015, the IRS denied the
appeal. (Doc. 25 ¶ 20, Doc. 30 ¶20.)
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2
conclusion, the Court acknowledges the United States’ arguments regarding the
application of emerging case law from other courts in this field, but finds that
application of authority from the United States Court of Appeals for the Third
Circuit to the particular facts of this case compels this outcome.
II.
BACKGROUND
Esther M. Hake died on October 2, 2011. Two of her sons, Ricky and
Randy Hake, were qualified as the executors of her estate pursuant to the grant of
Letters Testamentary by the York County Register of Wills on October 31, 2011.
At the time of Mrs. Hake’s death, she was legally incapacitated and her five
surviving children were locked in an intra-family dispute over her care and the
value of her assets. (Dep. of Ricky Hake (“Ricky Dep.”) at 10-13 and 20-25; Dep.
of Douglas P. France (“France Dep.”) at 10-19, 28.) The dispute among Mrs.
Hake’s children impaired the ability of Ricky and Randy Hake to administer the
estate efficiently, made difficult the process of obtaining appraisals of the family
grocery business, and delayed the preparation of the required tax returns. (Ricky
Dep. at 10, 14, 52; France Dep. at 14-19.) These factors, in turn, led the Hakes to
secure, and rely upon, the advice of legal and tax professionals.
There is no dispute that the Hake brothers had no experience with probate
law, inheritance taxation, federal estate taxation, or related matters. (Ricky Dep. at
25-33, 39.) Accordingly, to assist them in their legal duties, the executors engaged
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Douglas P. France of the firm France Paskey as tax professionals and estate
attorneys to advise the executors on all tax matters and related estate
administration, including the calculation, preparation, payment, and filing of
federal taxes and tax returns. (Ricky Dep. at 5, 13; Dep. of Randy Hake (“Randy
Dep.”) at 18; France Dep. at 11, 21-22.) Owing to his longstanding representation
of the family and its business affairs, the executors relied on the legal counsel of
France and his associate, Jennifer Galloway. (Ricky Dep. at 5, 13-14; Randy Dep.
at 20-21; France Dep. at 70-71.)
Federal tax law provides that an estate-tax return, Form 706, must be filed
within nine months of the decedent’s death. 26 U.S.C. 6075(a); 26 C.F.R. §
20.6075-1. Accordingly, the estate’s federal tax return and tax payment were due
on July 2, 2012. (Dep. of Ricky Hake at 5, 7, 40; France Dep. at 20-21.) Although
the executors intended to file the taxes and return by this deadline, it became
apparent that this would be impossible because of the ongoing family disputes
surrounding valuation of the estate’s assets. (Ricky Dep. at 7-8, 51-52; France
Dep. at 24-25, 31-34; Dep. of Jennifer Galloway (“Galloway Dep.”) at 17-18.) In
order to give them time to resolve these ancillary issues, France advised the
executors to seek extensions of time in which to file the return and pay the taxes
owed. (Ricky Dep. at 17, 43; Randy Dep. at 11, 13; France Dep. at 36-37, 87-88.)
Pursuant to the executors’ direction, France filed a Form 4768 on June 12, 2012,
5
seeking extensions of time to file the return and pay the taxes. (Galloway Dep. at
9; France Dep., Ex. 1.) France advised the executors to seek the longest extension
possible, in part because he did not know what the limits on such an extension
were, as he had never before filed for such an extension. (Ricky Dep. at 19; France
Dep. at 37, 83.) Galloway prepared and filed the Form 4768 and, upon approval,
informed France that the deadline to pay the taxes and return had been extended
for one year. (France Dep. at 36-38, 41, 60; Galloway Dep. at 9, 12-16, 20, 25, 41;
Ricky Dep. at 46-47, 67.) France, in turn, informed the executors that they had
been granted a one-year extension of the deadlines. (Ricky Dep. at 55, 68; Randy
Dep. at 4, 7, 12; France Dep. at 42, 67, 71.)
France and Galloway’s advice was wrong, as Treasury Regulation 26 C.F.R.
20.6081-1 generally limits any extension to file the Form 706 return to six months
for executors in the United States.3 Indeed, the Form 4768 that Galloway prepared
and filed on June 21, 2012, specifically provided for a six-month automatic filing
extension and a one-year discretionary payment extension, with the cover letter
that accompanied the Form 4768 expressly requesting “an automatic 6 month
extension of time to file a Form 706.” (Doc 35 ¶ 18, 20) Pursuant to this request,
the estate’s deadline for filing its return was extended until January 2, 2013. (Id. ¶
21.) However, the deadline for payment of taxes had been extended to July 2013.
The regulations permit an extension of up to one year for executors who are
abroad. Id.
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3
In fact, the estate made a prepayment of the taxes in the amount of $900,000
on February 12, 2013, some five months prior to this extended tax payment
deadline. This payment, which turned out to be more than $100,000 in excess of
the actual tax liability, was accompanied by a letter in which the executors
represented that “[w]e have an extension for filing the Return of July 3, 2013.
Should you have any questions regarding this return, please contact me
immediately.” (Compl., Ex. B.) The IRS did not contact France or the executors
about his inaccurate assertion of the estate’s deadline to file its tax return. (France
Dep. at 51-53.)
The estate then filed its return on July 2, 2013, the date the executors were
told it was due. (Ricky Dep. at 22-23, 65; France Dep. at 70-72, 82, 117 and Ex.
3.) The IRS notified the estate on August 12, 2013, that a penalty in the amount of
$197,868.26, and interest in the amount of $17,202.44, had been assessed under
section 6651 of the Internal Revenue Code for failure to file a timely return.
However, because the estate had overpaid its taxes by $108,526.97, an offset
penalty of $106,543.73 was demanded. (Compl., Ex. D.)
On August 13, 2013, France took the first steps to seek abatement of the
penalty, explaining by letter that he had understood the extension of the deadline
for paying the taxes applied equally to the deadline for filing the return. When
these efforts and subsequent appeals proved unsuccessful, the executors and France
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retained the services of new counsel for the estate, which engaged in a protracted
administrative review process with the IRS, which was ultimately unavailing. See
footnote 2, supra. Having exhausted its administrative remedies, the estate filed
this action on July 15, 2015, seeking recoupment of the penalty and interest paid.
On September 16, 2016, the estate filed a motion for summary judgment,
and on October 6, 2016, the United States filed its cross-motion for summary
judgment. The motions are fully briefed. On October 24, 2016, the case was
reassigned to the undersigned pursuant to the parties’ consent. (Doc. 40)
III.
STANDARD OF REVIEW
Summary judgment is appropriate “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). In evaluating a motion for summary
judgment, a court must determine “whether the pleadings, depositions, answers to
interrogatories, admissions on file, and affidavits show that there is no genuine
issue of material fact and whether the moving party is, therefore, entitled to
judgment as a matter of law.” Macfarlan v. Ivy Hill SNF, LLC., 675 F.3d 266, 271
(3d Cir. 2012) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). A
disputed issue is only “genuine” if there is a sufficient evidentiary basis upon
which a reasonable factfinder could find for the non-moving party. Kaucher v.
Cnty. of Bucks, 455 F.3d 418, 423 (3d Cir. 2006) (citing Anderson v. Liberty
8
Lobby, Inc., 477 U.S. 242, 248 (1986)). A factual dispute is “material” only if it
could affect the outcome of the suit under the governing law. Doe v. Luzerne
Cnty., 660 F.3d 169, 175 (3d Cir. 2011) (citing Gray v. York Papers, Inc., 957 F.2d
1070, 1078 (3d Cir. 1992)). The Court is not tasked with resolving disputed issues
of fact, but only with determining whether there exist any factual issues that must
be tried. Anderson, 477 U.S. at 247-49.
In considering a motion for summary judgment, a court must view the
evidence in the light most favorable to the non-moving party. Macfarlan, 675 F.3d
at 271; Bouriez v. Carnegie Mellon Univ., 585 F.3d 765, 770 (3d Cir. 2009).
Where there exist factual issues that cannot be resolved without a credibility
determination, the court must credit the non-moving party’s evidence over that
presented by the moving party. Anderson, 477 U.S. at 255. However, if there is
no factual issue presented, and if only one reasonable conclusion could arise from
the record with respect to the potential outcome under the governing law, the court
must award summary judgment in favor of the moving party. Id. at 250.
The standard of review does not change where the parties have filed crossmotions for summary judgment. Appelmans v. City of Phila., 826 F.2d 214, 216
(3d Cir. 1987). This is because cross-motions for summary judgment
are no more than a claim by each side that it alone is
entitled to summary judgment, and the making of such
inherently contradictory claims does not constitute an
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agreement that if one is rejected the other is necessarily
justified or that the losing party waives judicial
consideration and determination whether genuine issues
of material fact exist.
Transportes Forreos de Venezuela II CA v. NKK Corp., 239 F.3d 555, 560 (3d Cir.
2001. If review of cross-motions for summary judgment reveals that there are no
genuine issues of material fact to be tried, then judgment may be entered in favor
of the party entitled to judgment in light of the law and undisputed facts. Iberia
Foods Corp. v. Romeo Jr., 150 F.3d 298, 302 (3d Cir. 1998).
IV.
DISCUSSION
This case turns on to a single question which comes before us on a specific,
unusual, and narrowly defined set of facts:
When an executor relies upon
inaccurate advice from legal and tax counsel regarding the extended deadline for
filing an estate tax return, in a factual context where determination of filing and
payment deadlines are governed by a series of mandatory and discretionary rules
which may vary depending upon the residence status of the taxpayer, does that
reliance upon professional advice constitute reasonable cause to avoid the
assessment of late filing penalties and interest? On the unique facts of this case,
we find that it does.
Pursuant to statute and applicable regulations, an estate tax return generally
must be filed with the IRS within nine months after a decedent’s death. 26 U.S.C.
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§ 6075; 26 C.F.R. § 20.6075-1. The regulations permit an executor to apply for an
automatic six-month extension of time to file the estate tax return by filing a Form
4768 on or before the date the return is due to be filed. 26 C.F.R. § 20.6081-1(b).
Executors may also apply for discretionary extension of time to pay estate taxes
“for a reasonable period of time, not to exceed 12 months.” 26 C.F.R. § 20.61611(a)(1). Notably, although the IRS “may grant a reasonable extension of time for
filing any return,” “no such extension shall be for more than 6 months” except in
cases of taxpayers who are out of the country. 26 U.S.C. § 6081(a).
Thus, with respect to payment and filing deadlines, the legal terrain requires
a subtle multi-faceted analysis. First, one must determine the initial filing and
payment deadlines. Next one must negotiate a series of deadline extension rules.
Some of these extensions are automatic; others are discretionary. Further, one
must be alert to the fact that the application of these differing rules can lead to
different deadlines for payment and filing. Finally, one must remain mindful of the
fact that the filing rules themselves change depending upon the residency status of
the executors.
When a taxpayer fails to file a tax return by the due date, including any
extension of time for filing, a late penalty applies “unless it is shown that such
failure is due to reasonable cause and not due to willful neglect.” 26 U.S.C. §
6651(a)(1). The Supreme Court has instructed that in order to gain the benefit of
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this exception, an executor bears “the heavy burden of proving . . . that the failure
[to timely file the tax return] was ‘due to reasonable cause.’” United States v.
Boyle, 469 U.S. 241, 245 (1985). Reasonable cause will excuse a failure to file
timely only “[i]f the taxpayer exercised ordinary business care and prudence and
was nevertheless unable to file the return within the prescribed time.” 26 C.F.R. §
301.6651-1(c)(1).
The Supreme Court’s decision in Boyle provides further guidance in this
area, which the United States Court of Appeals for the Third Circuit has carefully
explained in a decision that was handed down at the time these executors were
trying in vain to set aside the penalties and interest assessed in this case. Estate of
Thouron v. United States, 752 F.3d 311, 314 (3d Cir. 2014). In Thouron, the Third
Circuit read Boyle to have identified three distinct categories of late-filing cases.
In the first category consists of cases that involve taxpayers who delegate the task
of filing a return to an agent, only to have the agent file the return late or not at all.
Id. (citing Boyle, 469 U.S. at 249-50). In Boyle, the Supreme Court held that in
such cases, reliance upon one’s attorney to file a timely tax return was not
reasonable cause to excuse the late filing. Id. The second category of late-filed
cases identified in Boyle, as that decision is construed by the court of appeals in
Thouron, is where a taxpayer, in reliance on the advice of an accountant or
attorney, files a return after the actual due date, but within the time that the
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taxpayer’s lawyer or accountant advised the taxpayer was available. Id. Finally, in
the third category are those cases where “an accountant or attorney advises a
taxpayer on a matter of tax law[.]” Id. (quoting Boyle, 469 U.S. at 251) (emphasis
in Boyle).
Boyle itself fit squarely into the first category. In that case, Robert Boyle
was the executor of his mother’s estate, and retained a lawyer on behalf of the
estate to assist with tax matters. Boyle relied on the lawyer’s instruction and
guidance, and although he repeatedly checked with the lawyer about the status of
the estate’s return, the lawyer “overlooked the matter because of a clerical
oversight in omitting the filing date from [his] master calendar.”
Id. at 315
(quoting Boyle, 469 U.S. at 243). As a result, the estate’s return was filed three
months’ late. The Supreme Court held that in such circumstances, the executor
could not hide behind the oversight of his attorney because executors have a clear
obligation to make sure that estate tax returns are filed timely “that cannot be
discharged by delegating responsibility to an attorney or accountant.” Id. (citing
Boyle, 469 U.S. at 249-50). The Court further found that the executor’s reliance on
his tax lawyer was not for substantive tax advice, but “for the administrative act of
filing the return.” Id. (citing Boyle, 469 U.S. at 252).
In Thouron the United States Court of Appeals for the Third Circuit
construed Boyle narrowly, and has instructed us that Boyle addresses only cases of
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“clerical oversight,” where a taxpayer has simply relied on a third party to file a
return by the prescribed deadline. In Thouron, the court of appeals found that it
was presented with distinguishable facts to those at issue in Boyle. Thouron
involved the administration of a substantial estate following the death of Sir John
Thouron at the age of 99. The executor appointed to administer the estate retained
an experienced tax lawyer to advise him. The estate’s tax return and payment were
due on November 6, 2007, and on that date the estate requested an extension of
time to file the return, and paid $6.5 million, which represented a fraction of what
would eventually be owed. The estate declined to pay the entire balance of its tax
liability, or to request an extension of its payment deadline, because its tax lawyer
had advised that the estate may be able to defer certain liabilities under other
sections of the Internal Revenue Code, in order to pay those liabilities in
installments over several years.
As requested, the estate received an automatic extension of the time to file
the return, making that return due on May 6, 2008. Unlike the case before this
Court, the estate in Thouron filed its return timely but on the same day requested
an extension of time to pay, having determined by this point that it would not
qualify for deferring payment to a later tax year. The IRS denied the requested
extension and imposed a penalty for failure to pay the tax owed by the deadline.
The estate’s administrative appeals failed, and it filed a complaint seeking a
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refund, arguing that its failure to pay was reasonable and not willful neglect, since
it was based on substantive advice of counsel. The district court granted summary
judgment in the government’s favor, and the Third Circuit vacated the ruling,
holding that the case was distinguishable from Boyle, and finding that the estate
should be permitted to present evidence to show that it should not have been
assessed the penalties because of its reasonable reliance on the legal advice of
counsel. 752 F.3d at 312-13.
In reaching this determination, the court of appeals took care to note that
Boyle had recognized a split of authority regarding the second category of cases,
where the estate either paid or filed late, but did so by or before the deadline that
its lawyer had instructed. 752 F.3d at 315. Indeed, in observing that the Supreme
Court explicitly declined to resolve this dispute in the circuits, the Third Circuit
noted that it had previously held that “a taxpayer could show reasonable cause
where he or she filed (or paid) before what he or she was erroneously advised was
the deadline.” Id. (citing Boyle, 469 U.S. at 251 n.9); see also Boyle, 469 U.S. at
251 n. 9 (“We need not and do not address ourselves to this issue.”) (citing
Sanderling, Inc. v. C.I.R., 571 F.2d 174 (3d Cir. 1978)).
The Third Circuit also underscored that in the third category of cases where
a taxpayer has relied on erroneous advice of tax counsel regarding a question of
law, Boyle found that “[c]ourts have frequently held that ‘reasonable cause’ is
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established when a taxpayer shows that he reasonably relied on the advice of an
accountant or attorney that it was unnecessary to file a return, even when such
advice turned out to have been mistaken.” Id. (quoting Boyle, 469 U.S. at 250).
Here too, the Supreme Court noted two Third Circuit decisions that stood for this
position. Boyle, 469 U.S. at 250 (citing Hatfried, Inc. v. Commissioner, 162 F.2d
628, 633-35 (3d Cir. 1947), and Girard Investment Co. v. Commissioner, 122 F.2d
843, 848 (3d Cir. 1941)).4
Boyle plainly holds that where the executor has wholly delegated a clerical
or ministerial duty to some third party, the taxpayer may not hide behind the third
party’s failure to perform the administrative task of filing a return. But we read the
Thouron to instruct that this is the extent of Boyle’s holding. Indeed, the Third
Circuit expressly noted that Boyle “did not rule on when taxpayers rely on the
advice of an expert, whether that advice relates to a substantive question of tax law
or identifying the correct deadline.” Id. at 316. Therefore, we are constrained to
agree with the executors that the holding in Boyle—as construed in Thouron—does
not compel a ruling in the government’s favor in this case.
4
Indeed, it seems somewhat incongruous that an executor may in some cases
reasonably rely upon the erroneous advice of counsel if he is told he need not file a
return at all, but would not be excused for relying upon the advice of counsel that a
return needed to be filed, and that the deadline for that return had been extended,
where the lawyer made a mistake about the date the return was due. In short, the
case law would seem to excuse the greater sin of not filing at all while potentially
condemning the lesser offense of paying early but filing late.
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The United States insists that it is irrelevant whether the plaintiffs wholly
delegated their duty to administer the estate to their lawyer, since Boyle should be
read more broadly for the proposition that the statutory requirement for timely
filing a return is solely the duty of the taxpayer, and is non-delegable. Such an
argument, however, invites us to ignore the Third Circuit’s instruction that the
holding of Boyle does not reach the very circumstances of this case, where the
executors did not delegate their filing duty to their lawyer, but where they did rely
upon their lawyer to advise them when their taxes needed to be paid and their
return filed, in addition to assisting them with the legal requirements for
administering the estate – something with which they had no familiarity.
To demonstrate that their failure to file a timely return was “due to
reasonable cause and not to willful neglect,” 26 U.S.C. § 6651(a)(1), the Third
Circuit explained that the executors would need to show that they “exercised
ordinary business care and prudence and [were] thus nevertheless unable to file the
return within the prescribed time[.]” Thouron, 752 F.3d at 314 n.1 (citing Treas.
Reg. § 301.6651-1(c)(1)). The Tax Court has held that reasonable cause may be
found to exist when a taxpayer files a return after the due date, but does so in
reliance upon an expert’s erroneous advice.
See Estate of La Meres v.
Commissioner, 98 T.C. 294, 318 (1992) (“[T]he Tax Court has consistently held
that erroneous legal advice with respect to the date on which a return must be filed
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can constitute reasonable cause for failure to file timely a return if such reliance
was reasonable under the circumstances.”).
This case aptly illustrates how such reliance upon expert advice can be
objectively reasonable. As we have noted, there was nothing immediately intuitive
about the determination of these deadlines. Instead, in order to ascertain when
taxes needed to be paid and returns needed to be filed, the executors would have
had first to identify the initial filing and payment deadlines and then navigated a
series of extension rules, some of which are automatic and others of which are
discretionary. The executors would then have had to recognize that the interplay
of these automatic and discretionary extension rules would lead to material
differences in payment and filing deadlines. The executors would also have to
have been mindful of the fact that the application of some extension rules varies,
depending upon their residency status. Given the complexity of these rules it is
hardly surprising that even experienced counsel may sometimes become confused.
Furthermore, although the United States insists that the Court should read
Boyle to foreclose the plaintiffs from demonstrating reasonable cause under the
undisputed facts of this case, we disagree. As discussed, in Boyle the Supreme
Court expressly declined to address the question of whether a taxpayer
demonstrates “reasonable cause” when, in reliance upon the advice of counsel, the
taxpayer files a return “after the actual due date but within the time the adviser
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erroneously told him was available.” 469 U.S. at 251 n.9. The Supreme Court
flatly declined to address such a circumstance, while recognizing that numerous
courts, including the United States Court of Appeals for the Third Circuit, had
found that in such cases a taxpayer demonstrated reasonable cause for the untimely
filing. Id. (citing cases, including Sanderling, Inc. v. Commissioner, 571 F.2d
174, 178-79 (3d Cir. 1978)). Given the Third Circuit’s limited interpretation of
Boyle’s holding in Thouron, and the fact that the Supreme Court itself noted that its
holding did not reach the very circumstances presented in this case, the Court
disagrees that Boyle compels a ruling in the government’s favor.
In reaching this result, we recognize that some other courts have interpreted
Boyle in the manner urged by the United States, and on facts that are substantially
similar to those presented in this case. See, e.g., Knappe v. United States, 713 F.3d
1164 (9th Cir. 2013); West v. Koskinen, 141 F. Supp. 3d 498 (E.D. Va. 2015).
Were we writing upon a blank slate these cases might have persuasive power, but
we do not write upon a blank slate. Quite the contrary, “[u]nder the ‘allocation of
authority established by the three-tier system of federal courts,’ Casey v. Planned
Parenthood, 14 F.3d 848, 856 (3d Cir.1994) (internal quotations omitted), this
Court is obliged to follow Third Circuit precedent unless that precedent has been
overruled by the court of appeals sitting in banc or by an opinion of the Supreme
Court that overrules the precedent.” Loftus v. Se. Pennsylvania Transp. Auth., 843
19
F. Supp. 981, 984 (E.D. Pa. 1994).
Therefore, we are bound to follow the
interpretive guidance that our court of appeals provided in Thouron, which
carefully isolated the holding of Boyle and construed it to apply to first-category
cases only, where executors have delegated entirely their obligations to prepare
and file returns and make payment of taxes owed. The Supreme Court has not yet
held that in the second category of cases – where the executor relied upon the
advice of tax counsel when filing a return after the actual deadline but within the
period instructed by counsel – an executor may not demonstrate that such reliance
was reasonable. Furthermore, in Sanderling, the Third Circuit concluded that
similar reliance may be reasonable. 571 F.2d 174, at 178-79.5
Moreover, the undisputed facts of this case indicate that the executors were
endeavoring to exercise care in the administration of the estate, and relied upon the
advice of counsel to aid them in that effort. These facts reflect that the executors
We acknowledge that the continued authority of Sanderling and its relevance
may be subject to some debate following Boyle. See West v. Koskinen, 141 F.
Supp. 3d 498, 503 n.12 (E.D. Va. 2015) (opining that Sanderling “is of doubtful
authority” in the wake of the Boyle decision). We are not free to engage in that
debate, however, because it appears that Sanderling remains good law in this
circuit, and we are therefore bound to follow it. Furthermore, we decline to parse
the holding of Sanderling in any manner which would effectively overrule that
decision, since the Supreme Court specifically recognized Sanderling as an
example of the kind of cases that involved reliance upon the advice of counsel
regarding the deadline for filing a return that were not before the Supreme Court in
Boyle, and the fact that the Third Circuit in Thouron recognized this as an area that
Boyle left unsettled. In short, since the Supreme Court, this nation’s highest court,
specifically declined to overrule Sanderling in Boyle, as an inferior court within the
Third Circuit we are bound to faithfully apply Sanderling to the facts of this case.
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5
applied for an extension of the payment and filing deadlines, in accordance with
the advice of counsel. This advice and the executors’ reliance on it was eminently
reasonable and prudent under the circumstances, where inexperienced executors
were buffeted by and contending with intra-family disputes over asset valuations
and other matters that hampered their ability to fulfill their legal obligations.
Moreover, nothing in the record remotely suggests that the executors were cavalier
in their attention to the tax rules, or were seeking to do anything other than ensure
that the estate paid its taxes faithfully. Indeed, the executors paid the estate taxes
before they were due, and overpaid those taxes by $108,526.97. In their letter
accompanying the overpayment, the executors noted their understanding – which
they obtained from counsel – that their return was not due to be filed for another
several months, something that at the time was incorrect but was unknown to them.
On July 2, 2013, the executors filed the estate’s return on the deadline that counsel
had instructed.
The record thus strongly supports the executors’ assertion that they
reasonably relied upon the advice of their legal counsel, and that they took the
steps they reasonably believed were required of them to pay the estate’s taxes and
file its return in accordance with the law. On these undisputed facts, we find that
the executors exercised ordinary business care and prudence in relying upon their
counsel’s erroneous assertion that the deadline for filing the return and paying the
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taxes owed had been extended for 12 months, and the Court is not persuaded that
Boyle or other binding authority compel a contrary finding.
In reaching this conclusion, however, we wish to emphasize the very narrow
scope of our ruling. We do not purport to stake out new or novel legal theories in
this decision. Rather, we attempt to simply and faithfully apply the law of this
circuit to the facts of this case.
Moreover, our decision regarding the
reasonableness of the executors’ reliance upon legal advice is strictly limited to,
and bound up in the facts of this case. Those facts reveal that the executors relied
upon counsel, who were required to make a multi-faceted analysis of a series of
rules regarding mandatory and discretionary deadlines.
These rules differed
between payment and filing deadlines, and individual rules differed depending
upon a number of variables, including the residence status of the executors.
Further, while the executors received erroneous advice, they paid the taxes early,
and in an amount that was more than $100,000 in excess of what was owed.
Bound by Thouron, Sanderling and their progeny, we find that on these unique and
uniquely compelling facts, the executors’ reliance on professional advice was
reasonable, and that they are entitled to summary judgment in this case.6
6
We recognize an emerging disparity between the Third Circuit’s interpretation of
Boyle, and the construction given that decision by other courts. We understand
that the United States may have an institutional interest in clarifying this disparity
and creating a uniform standard applicable to these cases. To the extent that the
United States believes that this case provides an appropriate factual vehicle for
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V.
CONCLUSION
Accordingly, for the reasons discussed above, the plaintiffs’ motion for
summary judgment will be granted, and the defendant’s motion will be denied. A
separate order, consistent with this memorandum, will be filed separately.
/s/ Martin C. Carlson
United States Magistrate Judge
Dated: February 10, 2017
asking the appellate court to re-examine Thouron and Sanderling, it is of course
entirely free to do so.
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