On May 13, 2014, the Third Circuit Court of Appeals ruled that a fiduciary of an estate may assert a reasonable cause defense to a late payment penalty if the taxpayer relied on the advice of a tax expert which caused the failure to pay by the deadline.33 According to the Third Circuit, the taxpayer must also show either an inability to pay or undue hardship from paying at the deadline.
The case involved the Estate of Sir John Thouron (“Estate”) who died in 2007 leaving behind a substantial estate. The executor retained Cecil Smith, an experienced tax attorney, to provide tax advice for the Estate. On November 6, 2007, the Estate’s tax return and payment were due to the Service. On that date the Estate asked for an extension of time to file its return and made a payment of $6.5 million as an estimated tax payment. Smith advised the Estate that the full amount of the Estate tax should not be paid because of the possibility of electing to defer the payment of tax under Section 6166. The Estate eventually filed its return within the six-month extension period, but did not elect to defer taxes under Section 6166 because it had determined it did not qualify for the election. The Estate requested an extension of time to pay the tax. The Service denied, as untimely, the Estate’s request for an extension of time to pay, and imposed on the Estate a failure to pay penalty, which the Estate unsuccessfully appealed administratively. The Estate paid the tax and penalty of $999,072, and sought a refund; the Service refused to refund the penalty amount. Thereafter, the Estate brought a refund action alleging that its failure to pay resulted from reasonable cause and not willful neglect.
The district court granted summary judgment to the Service, holding that the Estate could not show reasonable cause based on expert advice under these facts, citing United States v. Boyle, 469 US 241 (1985).
On Appeal, the Third Circuit agreed that Boyle applied to failure-to-pay cases, but concluded that the district court “applied Boyle more bluntly than would we.”34 Accordingly to the Circuit Court, the district court misread Boyle to preclude any finding of reasonable cause based on reliance on an expert or other agent. Boyle was a late-filing case, where the taxpayer relied on an agent for the ministerial task of filing or paying tax owed. That is not what occurred in this case, where the taxpayer relied on the advice of an expert. The Third Circuit held that a “taxpayer’s reliance on the advice of a tax expert may be reasonable cause for failure to pay by the deadline if the taxpayer can also show either an inability to pay or undue hardship from paying at the deadline.”35 The Third Circuit remanded the case to the district court, for further fact finding, to apply the law in light of the Third Circuit’s holding.