In Thouron v. United States, No. 13-1603 (3d Cir. May 13, 2014) the Court of Appeals for the Third Circuit held that reliance on tax advice may establish a reasonable cause defense to failure to pay penalties. (Slip. Op. at 9.)
This case arises out of estate taxes originally due in 2007. In his will, the decedent appointed a friend as executor of the estate and the friend hired a tax attorney to advise the estate on tax matters. Relying on the advice of the attorney, the estate timely filed an extension for time to file the estate return and remitted a partial payment, but did not file for an extension to pay the remainder of the tax due. The estate claimed its attorney advised it that the extension to pay was not due until the return was filed and that the tax due would be deferred under I.R.C. section 6166 because the bulk of the estate’s assets were illiquid. The estate further claimed that the attorney advised it that no penalty would be imposed. The IRS assessed the mandatory penalties of I.R.C. section 6651 and the estate filed a refund claim in district court asserting reasonable cause and reliance on its tax expert as a penalty defense.
The district court for the District of Pennsylvania held that reliance on the tax adviser was not reasonable cause for the late payment of the estate taxes and granted summary judgment in the government’s favor. To support its conclusion, the lower court relied heavily on United States v. Boyle, 469 U.S. 241 (1985), a Supreme Court decision holding an estate could not rely on its attorney for the ministerial task of timely filing a return. The district court read Boyle to preclude any finding of reasonable cause based on reliance on an expert or other agent in failure-to-file and failure-to-pay cases.
The Third Circuit reversed and remanded. The court first established that the holding of Boyle, though a late-filing case, was applicable to failure-to-pay cases because of the similarity in the language in the statutes. The Third Circuit held, however, that the district court misapplied Boyle to the facts at issue. Distinguishing Boyle because it involved reliance on an adviser for merely the ministerial task of filing, the court noted the distinction drawn in Boyle between relying on an expert’s clerical action and relying on the expert’s advice: “taxpayers may rely on the advice of an expert but may not, for purposes of completing their statutory duty, rely on an agent to perform the task of filing and paying.” (Slip. Op. at 9).
Ultimately, the Third Circuit held there was a material question as to whether the estate relied on the advice of counsel in not paying the tax due and remanded the case for that factual determination. The court noted that the estate must also show either an inability to pay or undue hardship from paying at the deadline. The court offered no insight as to how the estate can make such showing.
