Late Filing Penalty Did Not Apply Where Estate Tax Was Paid Before Extended Due Date

(Parker Tax Publishing February 2020)

A district court held that an estate that was granted an extension to file its tax return, and that paid the total estate tax due but failed to file its return before the extended deadline, was not liable for a penalty under Code Sec. 6651(a)(1) for the late filing of the return. The court reasoned that, under Code Sec. 6651, the penalty is calculated as a percentage of the tax due on the due date with extensions, and because the estate fully paid the tax due before that date, no late filing penalty applied. Estate of Skeba v. U.S., 2020 PTC 4 (D.N.J. 2020).

Background

Agnes Skeba died on June 10, 2013. Under Code Sec. 6075(a), the due date for the estate's tax return was nine months from that date - March 10, 2014. On or about March 6, the estate's counsel, George White, filed a 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 along with a letter explaining the reasons for the application.

White's letter explained that the estate had few liquid assets, all of which were being paid to the New Jersey and Pennsylvania departments of revenue for inheritance taxes. The estate was in the process of obtaining a mortgage on a farm, but delays in valuations and appraisals resulted in the lender failing to close on the mortgage by the closing deadline of March 7, 2014. The letter stated that the estate expected the mortgage to close within 14 days, and the estate would then remit the balance of the estate taxes owed to the IRS.

As anticipated, the estate refinanced its real estate and made a second estate tax payment to the IRS around March 18, 2014, eight days after the original due date for payment. The two estate tax payments totaled $3,470,000. The IRS approved the estate's application and extended the deadline to September 10, 2014. The IRS letter granting the extension did not acknowledge the estate's payments.

On or around June 30, 2015, the estate filed its federal tax return. The return reported the net estate tax as approximately $2.5 million, resulting in an overpayment of $941,000. In August 2015, the IRS sent the estate a notice showing the overpayment and indicating that a penalty was assessed due to the estate's failure to timely file a return. The IRS calculated the penalty as 25 percent of the $2.5 million amount due on March 10, 2014, minus the estate's first partial payment of $750,000.

White sent the IRS a letter requesting abatement of the penalties. The letter set forth various reasons for the delay in filing the estate's return and included a reference to a conversation White had with IRS representatives in which he was informed that, as long as the taxes were paid in full, then the filing of the return beyond the extended deadline was permissible and would not be subject to penalties. The letter further explained that beyond September 10, 2014, the estate continued to have delays in filing due to pending litigation over Skeba's will and the executor's health problems. In addition, the estate's litigation attorney was diagnosed with cancer, causing further delays.

The IRS replied with a letter stating that White's abatement request did not establish reasonable cause or show due diligence. In response, the estate sent two letters appealing the IRS's determination, but the IRS never replied to either letter. The estate eventually brought an action in a district court to have the late filing penalty set aside.

Under Code Sec. 6651(a)(1), a penalty is imposed on a taxpayer's failure to file a return by the due date, determined with regard to any extensions of time for filing. Likewise, Code Sec. 6651(a)(2) applies a penalty for the failure to pay taxes by the due date, determined with regard to any extensions. Both penalties apply unless the taxpayer shows that the failure is due to reasonable cause and not due to willful neglect. Under Code Sec. 6651(b), the penalty amount is reduced by the amount of any tax paid on or before the due date.

The estate argued that Code Sec. 6651(a)(1) and Code Sec. 6651(b)(1) should be read together. The estate said that under these provisions, the late filing penalty is calculated by incorporating the net amount due on the date prescribed for payment as set forth in Code Sec. 6651(b)(1). According to the estate, because the tax was overpaid on March 18, 2014, and the extension ran until September 10, 2014, there was no net amount due on the September deadline, and therefore no penalty should be imposed.

The government argued that the requirements of Code Sec. 6651(a)(1) and Code Sec. 6651(b) must be construed together with Code Sec. 6151, which states that the tax shown on a return must be paid by the last day fixed for filing the return, determined without regard to any extensions. The government reasoned that the return due date was nine months after the death of Agnes Skeba - March 10, 2014. Because no return was filed by that date and only $750,000 was paid when over $2.5 million was due, the government argued that a penalty could be assessed on the difference under Code Sec. 6651(a)(1). The government reasoned that there was an administrative need to complete and close tax matters, and although there was the timely payment of the estate taxes, the matter lingered and the administrative objective to timely close the file was not met.

Analysis

The district court rejected the government's arguments and held that the late filing penalty did not apply. The court found that both Code Sec. 6651(a)(1) and Code Sec. 6651(a)(2) designate the specific day on which penalties will be assessed for both the late filing and payment of the estate tax return. The court noted that both paragraphs specify that the date prescribed is to be determined with regard to any extension of time for filing. In the court's view, the language of Code Sec. 6651 should be given precedence over a more generic statute like Code Sec. 6151. The court said that the government put forth a valid point that there is an administrative need to complete and close tax matters. However, the court concluded that while there may be a need for some other penalty for failure to timely file a return, such a penalty would have to be enacted by Congress.

The court then addressed the issue of whether the estate demonstrated reasonable cause and not willful neglect and found that the estate had reasonable cause for the delay. The court noted that it already determined that the penalty at issue was not properly imposed, but it reviewed this issue for completeness. First, the court noted that the estate's litigation attorney was diagnosed with cancer. Second, the court noted that farms are often situated in residential, retail, and manufacturing zones, making appraisals more difficult and time consuming to prepare. In the court's view, these two factors constituted reasonable cause for delay.

For a discussion of delinquency penalties, see Parker Tax ¶262,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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