A district court held that an estate was entitled to abatement of a penalty for filing an estate tax return late. The court found the estate had reasonable cause for the late filing and that the IRS's denial of the abatement request was arbitrary and capricious.
Facts: The decedent, Agnes Skeba, died on June 10, 2013. The estate was valued at approximately $13.1 million, consisting mostly of illiquid real estate. On March 6, 2014, four days before the federal estate tax return was due, the plaintiff, Joseph Skeba, through counsel, filed with the IRS Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, with a partial payment of the estate tax of $725,000. A letter accompanied the payment, explaining that all of the liquid assets of the estate had been used to pay state and federal estate tax liabilities. In addition, the letter explained that a mortgage application to refinance the real estate was pending to satisfy the balance of the federal estate tax liability.
On March 18, 2014, eight days after the original due date, the estate made a second payment to the IRS of $2,745,000, making the total estate taxes paid $3,470,000. Then, on June 25, 2014, the IRS approved the application for an extension to file the estate tax return until Sept. 10, 2014. On July 8, 2014, the IRS approved the estate's application for an extension until Sept. 10, 2014, to pay the estate tax, even though the tax already had been paid.
On June 30, 2015, more than nine months after the extended due date, the estate filed its estate tax return, reporting a net estate tax due of $2,528,838. The previous estimated payment of $3,470,000 was credited against the estate tax, for an overpayment of $941,162. The IRS assessed a 25% failure-to-file penalty of $450,960. The estate requested an abatement of the penalty.
The estate, through an attorney, enclosed a letter with the abatement request giving reasons why the filing of the estate tax return had been delayed: a pending will contest in state court, health concerns of the plaintiff in the will contest, and valuation issues.
In response, the IRS stated that the reasons provided did not establish reasonable cause or show due diligence. After appealing the determination and receiving no response, the estate filed suit in district court, and both sides moved for summary judgment.
Issues: Sec. 6651(a)(1) provides for the assessment of a penalty with respect to a return filed after its due date (including any extension), calculated as a percentage of the amount required to be shown as tax, unless it is shown that the failure to timely file is due to reasonable cause. Sec. 6651(a)(2) provides for the assessment of a penalty for failure to pay the amount required to be shown as tax on or before its due date, also including any extension. Sec. 6651(b) coordinates the two penalties by providing that, for purposes of the failure-to-file penalty in Sec. 6651(a)(1), the amount required to be shown as tax is reduced by any tax paid on or before "the date prescribed for payment of the tax" and by any credit that may be claimed against the tax on the return.
The estate argued that Secs. 6651(a)(1) and (2) should be read together, concluding that no penalty was due since the tax liability was overpaid before its extended due date. In addition, it argued that the late filing was due to reasonable cause. Further, the estate's attorney testified that an IRS representative had indicated in a phone conversation that penalties would not be assessed so long as the tax had been paid in full.
The IRS argued that the phrase "date prescribed for payment of the tax" is defined by Sec. 6151(c) as the "last day fixed for such payment (determined without regard to any extension of time for paying the tax)." Thus, the IRS argued, the payment after the original due date did not reduce the tax required to be shown on the return for purposes of the late-filing penalty.
Holding: The district court granted the estate's motion for summary judgment. The court held that the more specific provisions of Sec. 6651 take precedence over the more generic language of Sec. 6151 (noting that Sec. 6151(a) is headed "General rule" and includes the proviso "[e]xcept as otherwise provided in this subchapter"), under the long-standing principles of narrow construction in interpreting tax statutes found in Gould v. Gould, 245 U.S. 151 (1917).
In addition, the court found that the IRS's denial of the request for abatement was arbitrary and capricious. The court stated that the IRS should have reviewed the entire file and conducted an evidentiary hearing or undertaken some investigation before deciding the issue.
- Estate of Skeba, No. 17-cv-10231, D.N.J. (10/3/19)
— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.