Tax Law Update: September 2021Tax Law Update: September 2021
David A. Handler and Alison E. Lothes highlight the most important tax law developments of the past month.
Dispute over whether transaction was gift or contract. In Pratte v. Bardwell (D. Ariz. No. CV-19-00239-PHX-GMS, Aug. 4, 2021), the plaintiff, Ronald Pratte, sued his former friend and employee, Jeffrey Bardwell, alleging breach of contract, promissory estoppel and unjust enrichment. The dispute arose from a transaction at a Las Vegas airport. Five years after they had met and become friends, Ronald met Jeffrey and four others at the Las Vegas airport and gave them each a $2 million check and told them that he would be transferring real estate to them as well and indicating they should start a home construction business. However, Ronald alleges that in exchange for the check, Jeffrey agreed to work for him until Ronald’s death. Jeffrey disagreed and claimed that the transaction was a gift, and no such promise was made.
Ronald paid gift taxes relating to the transaction. The court held that there were clearly issues of material fact to be resolved on the claim of breach of contract and promissory estoppel because both parties presented different characterizations of the same event. Further, the court explained that the claim of unjust enrichment was dependent on the determination of the contract matter, so no decision could be made. Lastly, the court held that Ronald couldn’t make a claim for taxes paid on behalf of Jeffrey because the gift tax liability is his alone, as the donor. Further, he shouldn’t have paid any gift taxes at all if there was a contract established, as he claimed.
Because of the disputed character of the transaction, the court denied both parties’ motions for summary judgment.
• Estate seeks refund for penalties assessed on late filed return—In Leighton v. United States (unpublished, Court of Federal Claims (Aug. 9, 2021)), the executor of a decedent’s estate sought a refund for penalties imposed by the Internal Revenue Service for late filing penalties and interest. The decedent’s son was the executor of the estate, and he worked with an attorney, a family office and an accounting firm. The attorney advised the executor that an estate tax return need only be filed if the value of the estate exceeded the filing threshold of $5.49 million. The family office had the accounting firm complete a questionnaire, and after some review, the whole team concluded the value of the estate was between $1 million and $2 million, and there was no need to file a return. The team worked together throughout the administration of the estate and had a good working relationship.
Two years after the decedent’s death, the decedent’s son mentioned to the attorney the existence of certain irrevocable trusts. The attorney inquired of the accountant and learned that there had been a gift tax return filed in 2012. When taking into account the value of the lifetime gifts, the value of the estate now exceeded the filing threshold, and a federal estate tax return should have been filed (and tax was due). The estate filed the return and paid the tax, penalties and interest.
The estate then filed a refund claim for the penalty. The IRS denied the refund claim, and the estate appealed. The estate claimed its failure to file was due to reasonable cause and not willful neglect. The United States moved to dismiss the claims alleging that the lawyer’s advice was unreasonable, the executor remained responsible for filing the return on time and the unavailability of the 2012 gift tax return was unreasonable.
Treasury Regulations Section 301.6651-1(c)(1) provides that: “If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return [or pay the tax] within the prescribed time, then the delay is due to a reasonable cause.”
The court stated:
Generally, a taxpayer may establish reasonable cause for failing to file a timely return to avoid penalty by establishing reasonable reliance on the advice of an accountant or attorney, even if it is later established that such advice was erroneous or mistaken. Thomas v. Comm’r, 82 T.C.M. (CCH) 449 (T.C. 2001), 2001 WL 919858 (citing 26 U.S.C. § 6651(a)(1)).
***
As a general rule, a taxpayer is not obliged to share details with a tax preparer that a reasonably prudent taxpayer would not know; neither is the taxpayer obligated to share details that he himself would neither know nor reasonably should know are relevant. Pankratz v. Comm’r of Internal Revenue, 121 T.C.M. (CCH) 1178 (T.C. 2021) (citing 26 C.F.R.
§1.6664-4(c)(1)(i)).
The court held that the taxpayer’s claim for refund couldn’t be dismissed because further evidence was required, as the complaint alleged sufficient facts on which it could succeed. The question of how and why the gift tax return wasn’t discovered needed to be investigated.
