TIMOTHY S. BLACK, District Judge.
This civil action is before the Court on Defendant's motion for summary judgment (Doc. 13) and the parties' responsive memoranda (Docs. 14, 17).
Plaintiffs Janice Specht and Jon Hoffheimer bring this litigation as co-fiduciaries of the estate of Virginia Escher, seeking to recover the sum of $1,198,261.38 in penalties and interest, which the Internal Revenue Service ("IRS") imposed upon the Escher estate as a result of its failure to timely file its estate tax return and to pay the estate tax owing in a timely fashion.
The legal question is simple: Whether Plaintiffs' failure to timely file the United States Estate (and Generation-Skipping Transfer) Tax Return and to timely pay the estate taxes was due to reasonable cause and not willful neglect. However, the factual circumstances are both complex and sad.
Virginia Escher passed away on December 30, 2008 at the age of 92. Her estate was worth approximately $12,506,462. Plaintiff Janice Specht, Ms. Escher's cousin, was asked to be the executor of the estate. Mrs. Specht, then 73, was a high-school-educated homemaker who had never served as an executor, held no stock, and had never been in an attorney's office. Mrs. Specht selected Ms. Escher's attorney, Mary Backsman, to assist her.
Ms. Backsman had over 50 years of experience in estate planning, but unbeknownst to Mrs. Specht, was privately battling brain cancer. Ms. Backsman deceived Mrs. Specht (whether intentionally or unintentionally), as to the status of an extension regarding the filing of the estate's tax returns. That deception eventually led to malpractice claims and the voluntary relinquishment of Ms. Backsman's law license.
Plaintiffs argue that reasonable cause exists for failure to timely file and pay estate taxes, because their failure was due to their reliance on the attorney who was entrusted to handle the estate. Defendant maintains that courts have recognized a non-delegable nature of the duty to make timely filings of tax returns and have held that reliance on counsel is not sufficient to constitute reasonable cause for the failure to file a return or pay a tax.
43. The UPS stock produced a net increase of $2,512,907.00 plus $608,230.00 from the date of death to the dates of sale. (Doc. 13-7 at 59; Doc. 13-18 at ¶ 5).
A motion for summary judgment should be granted if the evidence submitted to the Court demonstrates that there is no genuine issue as to any material fact, and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party has the burden of showing the absence of genuine disputes over facts which, under the substantive law governing the issue, might affect the outcome of the action. Celotex, 477 U.S. at 323. All facts and inferences must be construed in a light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
A party opposing a motion for summary judgment "may not rest upon the mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 248 (1986).
The Tax Code provides for mandatory additions-to-tax (commonly referred to as penalties) for the: (1) failure to timely file a return, 26 U.S.C. § 6651(a)(1), and (2) failure to timely pay a tax, 26 U.S.C. § 6651(a)(2). With respect to Section 6651, the Supreme Court has stated that "Congress' purpose in the prescribed civil penalty was to ensure timely filing of tax returns to the end that tax liability will be ascertained and paid promptly." United States v. Boyle, 469 U.S. 241, 245 (1985). However, these penalties are not owed if the taxpayer can establish that the failure is "due to reasonable cause and not due to willful neglect." 26 U.S.C. § 6651(a)(1) (failure to file); (a)(2) (failure to pay). Under this exception, "the taxpayer bears the heavy burden of proving both": (1) that the failure was due to reasonable cause; and (2) that the failure did not result from willful neglect. Boyle, 469 U.S. at 245.
The Estate does not contest that it failed to timely file or pay the estate tax. The only issue is whether these failures were due to "reasonable cause and not due to willful neglect."
Reasonable cause is not defined in the Internal Revenue Code. However, Treasury Regulations require the estate to demonstrate that it "exercised `ordinary business care and prudence' but nevertheless was `unable to file the return within the prescribed time.'" Boyle, 469 U.S. at 246 (quoting 26 C.F.R. § 301.6651(c)(1)). In Boyle, the Supreme Court held that "[t]he failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not `reasonable cause' for a late filing under Section 6651(a)(1)." 469 U.S. at 248. In Boyle, the Supreme Court recognized a distinction between a taxpayer who "has relied on the erroneous advice of counsel concerning a question of law," and a taxpayer who has retained an attorney to attend to "an unambiguous, precisely defined duty to file" a return by a certain time. Id. at 250. Although a taxpayer may reasonably rely on advice received from an attorney "on a matter of tax law . . . one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due." Id. at 251.
For example, in Valen Mfg. Co. v. United States, 90 F.3d 1190 (6th Cir. 1996), a corporation sought to avoid both failure-to-file and failure-to-pay penalties imposed when its hired bookkeeper not only failed to file the appropriate tax returns and make the required tax deposits, but actively concealed the delinquencies from her employer. Id. at 1191. The Sixth Circuit affirmed the district court's granting of summary judgment quoting Boyle: "the relevant Treasury Regulation calls on the taxpayer to demonstrate that [it] exercised `ordinary business care and prudence' but nevertheless was unable to file the return within the prescribed time." Id. at 1192 (citing 26 C.F.R. § 301-6651-1(c)(1)). The court rejected the taxpayer's argument that it had exercised ordinary business care and prudence by hiring several "outside" companies that would review its employees' work. "`Ordinary care and prudence' requires more than mere delegation." In re Carlson, 126 F.3d 915, 922 (7th Cir. 1997).
Plaintiff cites Brown v. United States, 630 F.Supp. 57 (M.D. Tenn. 1985), a case decided the same year as Boyle and before the controlling precedent of Valen and its progeny. Aside from the fact that Brown is an outlier,
Here, Mrs. Specht argues that she lacked the sophistication to single-handedly complete and file the estate's federal tax return. However, there is no evidence to suggest that she lacks the sophistication to understand the importance of the estate tax deadline or to ensure that deadline was met. Mrs. Specht relied on an agent to file tax returns and the agent failed to do so. However, as the Sixth Circuit states, "[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." Valen, 90 F.3d at 1194. The bright line rule articulated by the Supreme Court in Boyle and by the Sixth Circuit in Valen Manufacturing makes clear that the reasonable cause analysis looks at the party with ultimate responsibility for satisfying the tax liabilities, not the actions or medical conditions of their agent. While Plaintiff argues that the failure to meet the tax deadline resulted from circumstances largely beyond her control, there is no evidence to support a finding that she was an executor without the ability to control whether the deadline was met.
Accordingly, even though Plaintiff hired counsel to handle the estate, reliance on counsel cannot constitute reasonable cause for the late filing and payment of taxes. Even if Backsman's medical condition led her to malpractice in the course of representing the Estate, this did not render Mrs. Specht "disabled."
In addition to the reasonable cause requirement, to escape penalties under Section 6651, the Estate must also meet the heavy burden of proving that the late filing and payment did not result from willful neglect. Boyle, 469 U.S. at 245. Willful neglect is "a conscious, intentional failure or reckless indifference." Id. However, mere carelessness is enough for a taxpayer to be denied a refund based on the exceptions in Section 6651. Id. at 245 n.4 ("[a] taxpayer seeking a refund must therefore prove that his failure to file on time was the result neither of carelessness, reckless indifference, nor intentional failure.").
For example, in Vaughn v. United States, No. 1:12cv3135, 2014 U.S. Dist. LEXIS 105766 (N.D. Ohio June 27, 2014), a former Major League Baseball player filed a lawsuit alleging that tax penalties levied against him violated Section 6651. Specifically, his financial advisor failed to timely file his taxes and embezzled millions of dollars from him. However, the court found that despite the fact that Plaintiff tried to be proactive in seeking professionals to manage his finances and taxes, the ability to pay his taxes was not beyond his control and therefore he could not prove that the late filing did not result from willful neglect.
Mrs. Specht was aware that the Estate's federal tax return needed to be filed and paid nine months after Ms. Escher's death on September 30, 2009; that the tax liability was approximately $6,000,000; and that the Estate would need to sell its UPS stock to cover the tax liability. Mrs. Specht further understood that the September 30, 2009 deadline was important, and that missing the deadline would result in consequences. In the months prior to the estate tax deadline, Mrs. Specht received at least four notices from the probate court informing her that the estate was missing probate deadlines. After the deadline, Mrs. Specht received at least two additional noticed from the probate court warning that Backsman had failed to file a first accounting of the Estate's assets; numerous calls from the Rotterman family informing Specht that Backsman was incompetent; two letters from the Ohio Department of Taxation informing Specht that the state tax return was delinquent; and a warning from another attorney — whom she eventually hired to replace Backsman — informing her that she needed to hire another attorney.
Serving as the executor of a probate estate is clearly not an easy task, which is why Mrs. Specht trusted an attorney to guide her through the process. While this Court finds it difficult to hold that Plaintiffs are ultimately responsible for Ms. Backsman's malpractice, that is what binding precedent requires. Notably, in light of Ms. Backman's malpractice, the State of Ohio refunded the late filing and payment penalties for Ohio estate taxes without the Estate filing a refund suit. (Doc. 16, Ex. 2 at ¶ 14). It is truly unfortunate that the United States did not follow the State of Ohio's lead.
Accordingly, for these reasons, Defendant's motion for summary judgment (Doc. 13) is
