District Court denies summary judgment and finds that a trial is necessary to determine whether the estate should be subject to a negligence penalty for its failure to disclose that the decedent made gifts during his life – Estate of Haggar v. Comm'r, 107 AFTR 2d 2011-974 (DC SD 2/23/2011)

In Haggar, the issue was whether an estate's admitted failure to disclose that the decedent made gifts during life should be subject to a negligence penalty. The Court rejected both the taxpayer's and the government's request for summary judgment and will determine the issue at trial.

Decedent made a gift to Daughter and told her that she didn't have to do anything with regard to the gift and that he would take care of the tax return. Decedent also made a gift to his Wife's children. Wife was aware of the gifts and signed a gift tax return consenting to gift split. The accountant did not give Decedent or Wife a copy of the gift tax return.

Decedent died and Daughter and Wife were appointed as Executors. They hired an attorney and accountant to prepare the Decedent's estate tax return. Wife turned over Decedent's tax records, which did not include any gift tax returns. Wife and Daughter were somewhat educated and experienced in the business world, but not familiar with tax law. When asked by the attorney whether Decedent had ever made any gifts, Wife and Daughter answered no. Accordingly, the estate tax return reported that no federal gift tax returns had ever been filed.

The IRS examined the estate tax return and determined the estate failed to disclose prior gifts and assessed a negligence penalty. The estate paid the additional federal estate tax and interest, but contended that the penalty was erroneously or illegally assessed because there was reasonable cause for the underpayment and that they acted in good faith.

Under IRC Section 6662, an accuracy penalty is imposed if any part of an underpayment of tax is due to either negligence or to disregard of rules or regulations but without intent to defraud. The penalty is 20% of the portion of the underpayment attributable to the negligence. The penalty doesn't apply to the portion of the underpayment for which the taxpayer shows reasonable cause and he acted in good faith.

The Court found that there was disputed evidence that Wife and Daughter acted in good faith when they incorrectly answered the questions about whether Decedent had previously filed gift tax returns. This evidence included the fact that (1) Daughter was not aware that a gift tax return was filed and (2) Wife did not understand that the gift was relevant for purposes of the estate tax return. The weight of the evidence depends heavily on the credibility of the individual making the statements and those determinations are best made after seeing and hearing the individual in person. Therefore, neither side was entitled to summary judgment.