Email was not ‘advice’ on tax deadline

Confusion over who was responsible for filing an estate tax return on a $5 million estate left three siblings paying interest and penalties and contemplating a malpractice action against the lawyer who had represented their mother prior to her death.

After the siblings, who served as executors for their mother’s estate, were late in paying an estate tax of $1.2 million, the IRS asked for $335,636.76 in penalties and interest. The estate paid up, but asked the IRS to abate the penalty.

When the government denied their claim, the executors sued the IRS in Alexandria federal court, saying they had reasonably relied on the erroneous advice of counsel. Citing a description by their mother’s lawyer of the general time frame for completing the estate tax return process, the executors said they had “reasonable cause” to excuse the late filing and payment.

After considering the exchange of emails and conversations among the executors and their mother’s lawyer, Alexandria U.S. District Judge T.S. Ellis III said “no expert advice as to the filing or payment deadline was actually provided.”

With no “reasonable cause” for the late filing, the court granted summary judgment for the government in his Oct. 19 decision in West v. Koskinen, Comm’r (VLW 015-3-520).

Dangerous assumptions

June West died on Dec. 27, 2009, survived by her daughter Lesley West and sons Peter and John West. Lesley was the only sibling who lived in Virginia. Shortly after the mother’s death, Lesley contacted John F. Rodgers, June West’s attorney, to solicit his assistance in settling June West’s estate.

Peter West emailed Rodgers on Jan. 3, 2010, seeking guidance as to “what legal follow-ups are needed in the short term.” Rodgers replied to the email the next day, advising that the siblings would need to pay June West’s final bills and “possibly file a Federal Estate tax return,” their mother’s final 1040 and a trust income tax return.

Rodgers went on to explain that this “all takes as short as a few months or (if an estate tax return is required) as long as two years.” Peter West emailed back the next day, saying he was “sure there will be tax due” on the estate and that he “assume[d]” that  the accountant hired to do June West’s 2009 taxes “would also take care of preparing estate taxes.”

In early February 2010, the siblings met with Rodgers in person to discuss issues relating to the estate, but there was no discussion about estate tax filing or payment deadlines, Ellis noted.

Fast forward to November 2010, when the filing and payment deadline for the estate tax already had passed and the siblings were meeting around Thanksgiving time. After they were again together, Peter West emailed Rodgers to ask what they needed to do next in order to start work on the estate taxes.

“Rodgers interpreted this question as Peter West’s hiring him to prepare the estate taxes, and Rodgers began work preparing the estate tax return in December 2010,” Ellis said.

According to Ellis’ review of the parties’ depositions, after Rodgers and the siblings met in February 2009, the siblings thought Rodgers would be handling the estate tax return and Rodgers believed the accountant would be handling the return. Ellis declined to assign fault for this misunderstanding.

In March 2011, Rodgers told Lesley West the estate owed $1,258,019 in taxes, which she paid on March 28, 2011.

West first learned the return had to be filed the week before it was due, she said during her deposition. “Oh my gosh, it was such a shock to me,” she said in response to a question about how Rodgers calculated the date.

Seeking a refund of the penalties, the estate argued the return was filed within the automatic extension period and “several people thought others were preparing the return and none was timely prepared.”

‘Reasonable cause’

In court, Ellis sympathized with the plaintiffs, but said the law was clear. To show “reasonable cause” for late payment, a taxpayer has to show that, although she exercised ordinary business care and prudence, the taxpayer was unable to file by the deadline, unable to pay the tax by the deadline, or faced undue hardship from timely payment.

The estate failed that test, according to the court.

“Simply put, Rodgers’ January 4, 2010 email to Peter West was not legal advice as to the date of a filing or payment deadline,” Ellis wrote. The lawyer’s general estimate of up to two years to process the matter was “insufficient as a matter of law to constitute legal advice as to tax filing or payment deadlines,” he said.

“No reasonable person exercising ordinary business care and prudence would rely on the email for that purpose,” Ellis concluded.

In a footnote, Ellis indicated he was less than enthusiastic about the case’s conclusion, “as the taxman is hardly a popular or sympathetic figure.”

“Not all estate planning attorneys prepare estate tax returns,” said Roanoke lawyer Lee Osborne. Osborne is a member of the Virginia Bar Association Wills, Trusts and Estates Section Council; he was not involved in the West case.

“It doesn’t matter who does” the tax return, he said, as long as someone is tracking the deadline. It’s important “not to leave it in doubt.”

There is an open question as to whether there’s “reasonable cause” based on a lawyer’s advice, or whether tracking the tax deadline is a non-delegable duty, according to Ellis’ opinion.

But the court did not have to reach that question, as it ultimately concluded the lawyer did not give advice on the deadline, according to Osborne.

Lesley West’s July 16 deposition references a malpractice action against Rodgers pending in Alexandria Circuit Court that was “on hold” during the suit against the IRS.

McLean lawyer George R. Pitts, who represented the Wests, declined comment on the case. Ayana Free, who represented the IRS, could not be reached for comment.