• Ninth Circuit upholds late payment penalties and interest assessed against estate that filed incomplete Form 4768 — The U.S. Court of Appeals for the Ninth Circuit upheld penalties and interest assessed against an estate that filed an incomplete Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes” and then paid its estate tax after the due date. Baccei v. United States, 107 A.F.T.R.2d 2011-898 (9th Cir. 2011).

    Ronald Baccei served as executor of the estate of Eda O. Pucci and as trustee of her revocable trust. He retained a certified public accountant to prepare and file the federal estate tax return. The accountant filed a Form 4768, intending to extend the deadline to pay but didn't complete Part III of the form. Instead, the accountant attached a statement titled “Request for extension of time to file and pay U.S. Estate Tax” in which he explained that due to ongoing litigation, Ronald hadn't yet been appointed executor and the bank wouldn't release funds to Ronald prior to his formal appointment.

    The accountant filed the estate tax return based on the six-month extension and made a payment at that time. The Internal Revenue Service assessed late payment penalties of over $58,000 and interest of over $69,000.

    The estate initiated a claim for a refund, but the district court held that the IRS correctly assessed late penalties and interest. The estate appealed, arguing: (1) the estate had filed a payment extension request that substantially complied with the regulations; (2) the late payment of estate taxes owed was due to reasonable cause; and (3) the IRS should be equitably estopped from assessing the late penalties and interest.

    The Ninth Circuit agreed with the district court and held against the estate on all points. First, it explained that the doctrine of substantial compliance only applies to regulatory requirements that are procedural and/or unclear or relatively ancillary or unimportant. Here, the regulations requiring completion of Part III of the form were essential because the information provided on Part III allows the IRS to determine whether an extension should be granted and for what period of time. Therefore, the Ninth Circuit held that the doctrine wasn't applicable. In addition, it held that equitable estoppel, which only applies if the party to be estopped engaged in affirmative misconduct, didn't apply because while the IRS didn't notify the estate that it had denied the estate's application for an extension of time to pay estate tax, its inaction wasn't an affirmative misrepresentation or concealment of a material fact that would justify estoppel.

    Lastly, the Ninth Circuit held that the estate's failure to pay estate tax wasn't due to reasonable cause. Under Internal Revenue Code Section 6651(a)(2), a late payment penalty will be assessed unless the failure to pay is due to reasonable cause and not willful neglect. Under the Treasury regulations, reasonable cause may be established if the taxpayer can show that he exercised ordinary business care and prudence. The court held that Ronald couldn't use reliance on the estate's accountant as a proper excuse. Ronald was responsible for identifying the payment deadline and making sure that a payment was made or a proper extension was obtained; these weren't duties he could delegate to the accountant. As a result, he had failed to exercise ordinary business care and prudence and hadn't demonstrated reasonable cause.

  • Ninth Circuit reverses district court on deductibility of palimony claim against estate — In Estate of Shapiro v. Commissioner, No. 08-17491 (9th Cir. 2011), the Ninth Circuit held that the IRS wasn't entitled to summary judgment on the issue of whether Cora Chenchark's claim against the estate of Bernard Shapiro was deductible under IRC Section 2053(a).

    Cora lived with Bernard for over 22 years in Nevada, but the two were never married. Cora provided homemaking services (cooking, cleaning and managing household employees) but contributed no financial assets to the household. In 1999, Cora learned that Bernard was involved with another woman and filed a breach of contract claim against him, arguing that she and Bernard had agreed to pool their resources and share equally in each other's assets. Bernard died in 2000 while the claim was still pending. Bernard's estate continued to defend the claim and ultimately prevailed in September 2001 when the jury found that the two hadn't entered into any express or implied contract. Cora appealed but eventually settled with the estate for approximately $1 million.

    The estate claimed a deduction of $8 million for Cora's claim against the estate under IRC Section 2053(a)(3), which allows a deduction for such “claims against the estate … as are allowable by the laws of the jurisdiction … under which the estate is being administered.” The IRS disallowed the claim. The estate filed for a refund of $2 million based on an expert's opinion that the value of Cora's claim as of Bernard's date of death was $5 million. The district court upheld the IRS' motion for summary judgment, holding that Cora's homemaking services didn't provide sufficient consideration to support a contractual agreement under Nevada law and that, without a contract, the claim wasn't deductible under IRC Section 2053.

    The Ninth Circuit disagreed. It explained that under IRC Section 2053, the deduction for claims based on promises or agreements is limited “to the extent that they were contracted bona fide and for adequate and full consideration in money or money's worth.” It held that the district court had misinterpreted Nevada case law and that in fact Nevada hadn't addressed whether homemaking services were sufficient consideration for a contract. It noted that homemaking services such as those Cora provided can be quantified and valued and that these services aren't, under Nevada law, necessarily of zero value.

    The Ninth Circuit also held that the estate wasn't estopped from arguing that Cora's homemaking services provided consideration for a deductible claim against the estate. The district court had ruled that the estate was barred from taking inconsistent positions in its refund claim and the Nevada contract case. However, the Ninth Circuit held that the estate's positions weren't inconsistent and that the estate was able to deduct the value of the claim without waiving the right to contest the validity of the claim in Nevada court.

  • IRS releases draft form for allocation of basis for property received from decedent dying in 2010 — Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 allows estates of individuals dying in 2010 to elect out of the estate tax and to apply modified carryover basis rules. (See “The 2010 Tax Act Election,” by Michael J. Jones, p. 18.) Under the modified carryover basis rules of IRC Section 1022, the basis of property received from a decedent is the lesser of the decedent's adjusted basis or the fair market value of the property on the date of the decedent's death. However, there are exceptions that allow the executor to allocate up to $1.3 million, increased by unused losses and loss carryovers, to increase the basis of estate assets and up to $3 million to increase the basis of estate assets passing to the decedent's surviving spouse. The 2010 Form 8939, “Allocation of Increase in Basis for Property Acquired From a Decedent,” isn't yet final, but the IRS has posted a draft version on its website. The IRS is still in the process of drafting the instructions to the form, which will detail when, how and where to file it (for now, the website notes that the Form 8939 shouldn't be filed with the decedent's final income tax return, and the election to have to have the modified carryover basis rules apply shouldn't be made on the decedent's final income tax return). On its website, the IRS states that the final Form 8939 will be available at least 90 days before the filing deadline.