Two Estate Tax Rulings Uphold IRS Regulatory Interpretations

In two recent estate tax cases, executors were denied timeliness-related claims, and although in both cases the executors said administrative failures by the IRS caused or contributed to the error, the courts said those lapses did not rise to the level of misconduct that would justify special treatment.

In the first case, the First Circuit Court of Appeals affirmed a district court ruling that the IRS does not have authority to grant a second extension for estate tax filings unless the filer qualifies for one of three good-cause exceptions. In doing so, the First Circuit declared that Treas. Reg. § 20.6081-1(b) satisfies the Chevron reasonableness requirement (Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984)) and merits deference.

The case concerned the estate of Margaret W. Dickow. As executor of her estate, her husband, D. Charles Dickow, sought a refund of estate taxes based on two arguments: (1) that the IRS’ position that IRC § 6511(b)(2)(A) bars a second extension of an estate tax filing deadline was in error and (2) that the IRS was equitably estopped from refusing the refund claim because it did not explicitly inform Dickow that it had been denied. Not informing him amounted to misrepresenting that the requested second extension had been granted, he argued.

After filing a timely first extension and paying $945,000 of estimated tax, Dickow submitted the second extension request. He altered a standardized Form 4768 by hand to request an additional six-month extension to Oct. 15, 2004. The IRS rejected this second request but did not send notification that it had granted or denied it. Dickow mailed the estate’s federal tax return claiming a refund of $337,140 on Sept. 30, 2004. The IRS refunded the requested amount. Three years later, Dickow submitted an amended return claiming an additional $237,813 refund. The IRS denied Dickow’s claim for the additional refund, and he filed suit in federal district court in Massachusetts.

The district court determined that section 6081(a) is ambiguous as to whether the IRS could grant more than one six-month extension. However, the court gave deference to Treas. Reg. § 20.6081-1(b), limiting the extended time period to six months, as a reasonable interpretation of an ambiguous statute. Because Dickow’s claim was filed more than three years after the extension due date and his request did not satisfy one of the limited good-cause exceptions in Treas. Reg. § 20.6081-1(c), the court held that his refund request was untimely.

The district court also rejected Dickow’s equitable estoppel argument, holding that “the doctrine of equitable estoppel cannot be used to extend the time to file a tax refund claim.” Even if equitable estoppel had been applicable, the court found, the IRS’ failure to expressly reject the extension request was not a material misrepresentation that the second extension had beengranted and did not rise to the level of affirmative misconduct, which must be proved for the doctrine to be invoked.

Affirming the lower court decision, the First Circuit noted that “we may not disturb the IRS rule unless it is arbitrary or capricious in substance, or manifestly contrary to the statute. … We think the regulations are clear when read as a whole that no second extension was available.”

In Telesmanich v. Commissioner, the Tax Court held that the IRS did not abuse its discretion in denying an estate’s request for abatement of interest assessed per section 6601(a). Due to international probate issues, the executor of Nicholas Telesmanich’s, estate, his nephew Kresimir Telesmanich, could not access funds from the estate until eight years after the decedent died. The executor called the IRS, and an unidentified employee told him to file Form 1041 and pay amounts due when he gained access to the funds. The employee did not mention whether interest would be assessed.

Section 6404(e)(1) allows the IRS to abate the assessment of interest to the extent that any unreasonable error or delay in payment of tax is attributable to an officer or employee of the IRS being erroneous or dilatory in performing a ministerial or managerial act. The court held that the IRS did not abuse its discretion in denying the request for abatement of interest. The court said that an IRS employee’s giving incorrect tax law advice is not a ministerial act under section 6404. Furthermore, Telesmanich did not show that the IRS employee’s error caused him to delay paying the taxes, since he did not have access to the funds to pay them. Finally, it denied Telesmanich’s equitable estoppel argument because it found that the IRS employee’s giving inaccurate information did not constitute affirmative misconduct.

• Dickow v. U.S., docket no. 10-2151 (1st Cir. 8/19/11), aff’g 740 F.Supp. 2d 231 (D. Mass. 2010)
• Estate of Telesmanich v. Commissioner, TC Memo 2011-181

By Dayna E. Roane, CPA, M.Tax., Perry & Roane PC, Boulder, Colo.

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