Tax Court And Delivery Services

 We sent a petition to the Tax Court on Friday. It needs to arrive by Monday.

Technically, the petition does not have to arrive Monday, as long as it is in the care of an “approved” delivery service. I do not like to count on that extra day(s), however, so I treat the final day of the 90-day letter as an absolute deadline. In truth, I do not like waiting this late into the 90 days, but there was, you know, tax season and all.

COMMENT: Yes, the individual filing deadline was moved to May 17, but we made a concerted effort to prepare as many individual returns as possible by April 15. The majority of us here at Galactic Command do not like or appreciate a Dunning-Kruger Congress requiring us to again reschedule our personal lives.  

You may remember the old days when people used to go to the post office on April 15^th and mail their returns, especially if there was money due. Clearly there is no way that the return could make it to the IRS on the 15^th if one mailed it on the 15^th. The reason this worked (and still works, although it is much less of an issue with electronic filing) is Code Section 7502.

            § 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

This Section means that putting the return in the mail timely equals the IRS receiving it timely.

Mail service in our corner of the fruited plain has been … substandard recently. We have an accountant who no longer uses mail delivery for repetitive time-sensitive filings, such as sales and payroll taxes. She has too many experiences of mail taking a week to go crosstown that she has given up on regular mail for certain returns.

It is easier nowadays to avoid the post office, of course, with Fed Ex and UPS and other delivery services available.

We sent our petition via Fed Ex.

I am looking at a case that deals with “approved” delivery services.

What makes this an issue is that a delivery service is not approved until the IRS says it is. Granted, a lot of services have been approved, but every now and then one blows up. Use CTG Galactic Delivery, for example, have a hiccup – or just cut it too close – and you may not like the result.

A law firm sent a Tax Court petition the day before it was due. The admin person shipped it with Fed Ex using “First Overnight” delivery.

OK.

Something weird happened, and the package got relabeled. Why? Who knows. The result however is the petition got to the Tax Court late.

In general, one would consider Fed Ex to be a safe bet and Fed Ex to be squarely within the list of approved delivery services. The problem is that the IRS does not look at Fed Ex overall as “approved.” It instead looks at the delivery options of Fed Ex as individually approved or not. When the law firm sent their petition, the following services were approved:

·      Fed Ex Priority Overnight

·      Fed Ex Standard Overnight

·      Fed Ex 2 Day

·      Fed Ex International Priority

·      Fed Ex International First

You know what service is not on the list?

Fed Ex First Overnight, the one the law firm used.

Now, Fed Ex Overnight eventually got added to the list, but not in time to save the law firm and this specific filing.

Are their options left if one blows the Tax Court filing?

Yes, but the options are less appealing. One could litigate in District Court, for example, but that would require one to pay the assessed tax in full and then sue for refund.

There is also audit reconsideration, but I shudder to take that option with IRS COVID 2020/2021. The IRS has the option of accepting or rejecting a reconsideration request. I can barely get the IRS to do what it HAS to do, so the idea of giving it the option to blow me off is unappealing.

For the home gamers, our case this time was Organic Cannabis Foundation LLC et al v Commissioner.

What Does It Mean To File A Return?

 

The IRS generally has three years to examine a return and assess additional taxes after it has been filed.

This can put pressure on whether what was filed is a “return.”

I am looking at a case involving this issue.

Mr Quezada (Q) ran a stonemasonry business. He had a number of people working for him over the years. Like many a contractor, he treated these individuals as subcontractors and not employees.

OK.

He filed Form 1099s.

OK.

Most of these 1099s did not include social security numbers.

Oh oh.

This is a problem. If a payor requests a social security number and an individual refuses to provide it, the tax Code requires the payor to withhold “backup withholding.” The same applies if an individual provides a bogus social security number.

Say that you are supposed to pay someone $1,000 for stone masonry work, but they refuse to provide a social security number.

COMMENT: Let’s be honest: we know what is going on here.

You are required to withhold 24% and send it to the IRS. You should pay the person $860 and send $240 to the IRS.

QUESTION: what are the odds that anyone will ever claim the $240?

FURTHER QUESTION: And how could one, since there is no social security number associated with the $240?

Mr Q was supposed to file the following forms with the IRS:

·      Form 1099

·      Form 1096 (the summary of the 1099s)

·      Form 945 (to remit the $240 in our example)

He filed the first two. He did not file the third as he did not withhold.

Mr Q filed for bankruptcy in 2016. The creditors had a chance to file their claims.

In the spirit of bayoneting the dead, the IRS wanted backup withholding taxes from 2005 onward.

It filed its claim – for over $1.2 million.

QUESTION: how could 2005 (or 2006? or 2007?) still be an open tax year?

The IRS gave its argument:

1.    The liability for backup withholding is reported on Form 945.

2.    Mr Q never filed Form 945.

3.    The statute of limitations never started because Mr Q never filed the return.

The IRS was alluding to the Lane-Wells case.

In Lane-Wells the taxpayer filed one type of corporate tax return rather than another, mostly because it thought that it was the first type and not the other. The distinction meant money to the IRS.

The Supreme Court agreed with the IRS.

The IRS likes to consider Lane-Wells as its trump card in case one does not file a return, unintentionally leaves out a schedule or files the wrong form altogether. The courts have fortunately pushed back on this position.

Mr Q had a problem. He had not filed Form 945. Then again, from his perspective there was no Form 945 to file. He was between a rock and a hard spot.

The Appeals Court hearing Mr Q’s case realized the same thing.

The Court reasoned that the issue was not whether Mr Q filed the “magic” form. Rather, it was whether Mr Q filed a return that:

·      Showed the liability for tax, and

·      Allowed calculation of the amount of tax

Here is the Court:

The IRS could determine that Q[uezada] was liable for backup-withholding taxes by looking at the face of his Forms 1099; if a particular form lacked a TIN, then Q[uezada] was liable for backup withholding taxes applied to the entire amount …”

There is the first test.

For each subcontractor who failed to supply a TIN, the IRS could determine the amount that Q[uezada] should have backup withheld by multiplying the statutory flat rate for backup withholding by the amount Q[uezada] paid the subcontractor.”

There is the second test.

The Court decided that Q had filed returns sufficient to give the IRS a heads-up as to the liability and its amount. The IRS could but did not follow up. Why not? Who knows, but the IRS was time-barred by the statute of limitations.

Our case this time was Quezada v IRS, No 19-51000 (5^th Cir. 2020).

Incompetent Employees And IRS Penalties

 

“Taxes are what we pay for civilized society.” Compania General De Tabacos de Filipinas v. Collector, 275 U.S. 87, 100 (1927) (Taft, C.J.). For good reason, there are few lawful justifications for failing to pay one's taxes. Plaintiff All Stacked Up Masonry, Inc. (“All Stacked Up”), a corporation, believes it has such an excuse. It brings this suit to challenge penalties and interest assessed by the Internal Revenue Service (“IRS”) following its failure to file the appropriate payroll tax documents and its failure to timely pay payroll tax liabilities for multiple tax periods.

The above is how the Court decision starts.

Here are the facts from 30,000 feet.

·      The company provides masonry services.

·      The company got into payroll tax issues from 2013 through 2015.

·      The company paid over $95 thousand in penalties and interest.

·      It now wanted that money back. To do so it had to present reasonable cause for how it got into this mess in the first place.

Proving reasonable cause is not easy, as the IRS keeps shrinking the universe of reasonable cause.  An example is an accountant missing a timely extension. There is a case out there called Boyle, and the case divides an accountant’s services into two broad camps:

·      Advice on technical issues, and

·      Stuff a monkey could do.

Let’s say that CTG Galactic Command is planning a corporate reorganization and we blow a step, causing significant tax due. Reliance on us as your advisors will probably constitute reasonable cause, as the transaction under consideration was complex and required specialized expertise. Let’s say however that we fail to extend the corporate return – or we file it two days after its extended due date. Boyle stands for the position that anyone can google when the return was due, meaning that relying on us as your tax advisors to comply with your filing deadline is not reasonable.

As a practitioner, I have very little patience with Boyle. We prepare well over a thousand individual tax returns, not to mention business, nonprofit, payroll, sales tax, paper airplanes and everything in between. Visit this office during the last few days before April 15th, for example, and you can feel the tension like the hum from an electrical transformer. What returns are finished? What returns are only missing an item or two and can hopefully be finished? What returns cannot possibly be finished? Do we have enough information to make an educated guess at tax due? Who is calling the client?  Who is tracking and recording all this to be sure that nothing is overlooked? Why do we do this to ourselves?

Yeah, mistakes happen in practice. Boyle just doesn’t care. Boyle holds practitioners to a standard that the IRS itself cannot rise to. I have several files in my office just waiting, because the IRS DOES NOT KNOW WHAT TO DO. I brought in the Taxpayer Advocate recently because IRS Kansas City botched a client. We filed an amended return in response to a Notice of Deficiency the client did not inform us about. The amended must have appeared as “too much work” to some IRS employee, and we were informed that Kansas City inexplicably closed the file. This act occurred well before but was fortuitously masked by subsequent COVID issues. The after-effects were breathtaking, with lien notices, our requests for releases, telephone calls with IRS attorneys, Collection’s laughable insistence on a payment plan, and – ultimately – a delay on the client’s refinancing. IRS incompetence cumulatively cost me the better part of a day’s work. Considering what I do for a living, that is time and money I cannot get back

I should be able to bill the IRS for wasting my time over stuff a monkey could do.

The Advocate did a good job, by the way.

Let’s get back to All Stacked Up, the company whose payroll issues we were discussing.

The owner fell on ice and suffered significant injuries. This led to the owner relying on an employee for tax compliance. That reliance was misplaced.

·      The first two quarterly payroll returns for 2013 were filed late.

·      The fourth quarter, 2013 return would have been due January 31, 2014. It was not filed until July 13, 2015.

·      None of the 2014 quarterly returns were filed until the summer of 2015.

·      To complete this sound track, the payroll tax deposits were no timelier than the filing of the returns themselves.

Frankly, the company should just have let its CPA firm take care of the matter. Had the firm botched the work this badly, at least the company would have a possible malpractice lawsuit.

The company pleaded reasonable cause. The owner was injured and tried to delegate the tax duties to someone during his absence. Granted, it did not go well, but that does mean that the owner did not try to behave as a prudent business person.

I get the argument. All Stacked Up is not Apple or Microsoft, with acres and acres of lawyers and accountants. They did the best they could with the (clearly limited) resources they had.

The company appealed the penalties. IRS Appeals was willing to compromise – but only a bit. Appeals would abate 16.66% of the penalties and related interest. This presented a tough call: accept the abatement or go for it all.

The company went for it all.

Here is the Court:

Applying Boyle to this case, it is clear as a matter of law that retention of an employee or software to prepare and remit tax filings, make required deposits, and tender payments cannot, in itself, constitute “reasonable cause” for All Stacked Up’s failure to satisfy those tax obligations. The employee’s failures are All Stacked Up’s failures, no matter how prudent the delegation of those duties may have been.”

And there is full Boyle: we don’t care about your problems and you doing your best with the resources available. Your standard is perfection, and do not ask whether we hold ourselves to the same standard.

I wonder if that employee is still there.

I mean the one at IRS Kansas City.

Our case this time was All Stacked Up v U.S., 2020 PTC 340 (Fed Cl 2020).

A Puff Piece

 

Although we do not condone her inconsistency, we find it is merely puffery in an attempt to obtain new employment and of no significance here.”

There is a word one rarely sees in tax cases: puffery.

Puffery is an exaggeration. It approaches a lie but stops short, and presumably no “reasonable” person would believe what is being said or take it literally. The distinction matters if one’s puffery can be used against them as a statement of fact.

Let’s look at the Robinson case.

Mr Robinson had a lawn care business. Beverly Robinson had a job at Georgia Pacific, but in 2007 she started working at the lawn care business. She did the billing. She was also listed on the business checking account, but she never wrote checks.

She must have been the face of the business through, as for 2007 through 2009 most of the Forms 1099 to the business were sent in her name.

In 2010 the marriage went south. Mr Robinson moved out, and Beverly’s dad chipped-in to pay the mortgage on her house. Needless to say, she was not working at the company with all that going on.

In 2011 they filed a joint tax return for 2010. The return showed tax due of approximately $43 grand. She must have separated hard from the business, as no Forms 1099 were issued to her; all the Forms 1099 were issued to him.

COMMENT: I do not understand filing a joint tax return with someone you are likely to divorce. In Beverly’s defense, though, she did not realize that she had an option. They hired a tax preparer (likely because of the business), but the preparer never explained that the option to file separately existed.

In 2011 she was telling the IRS that they could not pay the 2010 tax debt. She also asked about innocent spouse status.

In 2012 they file a joint 2011 tax return. She was working again at another Georgia Pacific facility and had tax withholdings. The IRS took her withholdings and applied them to the 2010 tax year.

COMMENT: That is how it works.

In 2013 Beverly needed to find a new job. She uploaded her resume on a jobseeker website. She listed her Georgia Pacific gig. She also listed Robinson Lawn Care and embellished her duties, especially glossing over the fact that she no longer worked there.

In 2013 Mr Robinson somehow forced his way back into her house. She called the police and was told that they could not evict him since the two were still married.

In October, 2013 she filed a petition for dissolution of marriage.

About time. The year before Mr Robinson had fathered a child with another woman. In 2013 he started paying her child support.

The divorce became final in 2014. Mr Robinson agreed to assume the 2010 tax due.

Riiiight.

In 2015 she files for innocent spouse because of that 2010 tax debt and the IRS continuing to take her refunds.

The IRS turned down her request.

One of the requirements is that the tax liability for which the spouse is seeking relief belong to the “nonrequesting” spouse. In this case, the nonrequesting spouse was Mr Robinson.

He testified that he had moved out of the house in 2013. Oh, he also remembered Beverly working in the business in 2010.

Not good.

The IRS looked at certain Florida registrations that showed her name through 2014.

They also pointed out that she was a signatory on the business checking account.

Then they looked at her resume on that jobseeker website.

The Court was having none of it.

As for Mr Robinson:

Throughout the trial Mr. Robinson’s testimony was relatively inconsistent, and we give it little value.”

As for the registrations:

Although petitioner is listed as the registered owner of Robinson Lawn Care from December 1998 to December 2014, we find the reason for her filing the fictitious name--that her former husband worked during the day--is a sufficient explanation for why she is listed instead of Mr. Robinson. Moreover, she did not sign any State filings in 2010 or thereafter.

As for the checking account:

Similarly we find that petitioner’s name on the business account is not persuasive support for respondent’s position as Mr. Robinson had control of that account and she never wrote checks on it.

The Court pointed out that none of the 2010 Forms 1099 were made out to her, in clear contrast to prior tax years.

We saw above the Court’s comment on her puffery.

It was clear who the Court believed – and did not believe.

The Court decided that she was entitled to innocent spouse relief.

She cut it close, though.

Our case this time was Beverly Robinson v Commissioner of Internal Revenue T.C. Memo 2020-134.

A Failed E-Filed Return Hit With Penalties

 

I have noticed something about electronic filing of tax returns, especially state returns: there is a noticeable creep to demanding more and more information. I can understand if we are discussing tax-significant information, but too often the matter is irrelevant. We received a bounce from Wisconsin, for example, simply because there was a descriptor deep in the state return without an accompanying number.

How did this happen? Perhaps there was a number last year but not one this year. Could an accountant have scrubbed it out? Yes, in the same way that I could have played in the NFL. Work on a return of several hundred pages, add a few states in there for amusement, tighten the screws by closing in on a 15^th deadline and you might miss a description on a line having no effect on the accuracy of the return.

Why is this an issue?

Because if a state – say Wisconsin - bounces a return, then it is the same as never having filed a return. The penalties for not filing a return are more severe than – for example - filing a return but not paying the tax. Does it strike you as a bit absurd for a state to argue that one never filed a return when an accountant prepared (and charged one for) that state return?

The US Tax Court has reviewed the issue of what counts as a federal tax return in a famous case called Beard v Commissioner. The Court looks at four items, each of which has to be met:

·      It must purport to be a return;

·      It must be signed under penalty of perjury;

·      It must contain sufficient information to allow the calculation of the tax; and

·      It must be an honest and reasonable attempt to satisfy the requirements of the tax law.

Let’s look at a case involving the Beard test.

John Spottiswood (let’s call him Mr S) filed a joint 2012 tax return using TurboTax. He made a mistake when entering a dependent’s social security number. He submitted the electronic return through TurboTax on or around April 12. Within a short period, TurboTax sent him an e-mail that the IRS had rejected the return.

Problem: The e-mail was sitting in TurboTax. Mr S needed to log back in to TurboTax to see the e-mail. A professional would know to check, but an ordinary individual might not think of it.

Another Problem: Mr S owed almost $400 grand with the return. Since the return was never accepted, the bank transfer never happened. He did not pay the tax until almost 2 years later.

The IRS tagged him over $40 grand for late payment of tax.

I have no issue with this. Think of the $40 grand as interest.

The IRS also tagged him over $89 grand for late filing of the return.

I have an issue here. Mr S did try to file; the IRS rejected his return. I see a significant difference between someone trying and failing to file a return and someone who simply blew off the responsibility to file. It strikes me as profoundly unfair to equate the two.

Mr S protested the late filing penalty.

He had two arguments:

(1)  He did file (per the Beard standard).

(2)  Failing that, he had reasonable cause to abate the penalty.

I like the first argument. I would advise Mr S to provide a copy of the return to the Court and request Beard.

COMMENT: I suppose the issue is whether the return would meet the third test – sufficient information to calculate the tax. I would argue that it would, as the IRS could deny the dependency exemption and recalculate the tax accordingly. If Mr S objected to the loss of the exemption, he could investigate and correct the social security number.

FURTHER COMMENT: The IRS argued that it could not calculate the tax because it had rejected the return. I consider this argument sophistry, at best. The IRS could simply reject a return ... some returns … all returns … and make the same argument.

But Mr S could not provide a copy of the return.

Why not? Who knows. I suppose he never kept a copy and later lost the username and password to the software.

The Court cut him no slack. To conclude that the return met the Beard standard, the Court had to … you know … look at his return.

That left his second argument: reasonable cause.

The Court again cut him no slack.

The Court said that he should have logged back into TurboTax and yada yada yada.

Seems severe except for one thing: how could Mr S fail to realize that he never got dinged with an almost-$400 thousand bank transfer? I get that he carried a large bank balance, but reasonable people would pay attention when moving $400 grand.

Mr S could not provide a copy of his return nor could he explain how he could blow-off $400 grand. The Court was not buying his jibe.

There was no Beard for Mr S, nor was there reasonable cause to abate the penalty.

OBSERVATION: It occurs to me that Mr S may have received no advantage from the dependency exemption. This case involves a 2012 tax return, and for 2012 it is very possible that the alternative minimum tax (AMT) applied to this return. The AMT serves to disallow selected tax attributes to higher-income taxpayers – attributes such as a dependency exemption (I am not making this up, folks). The Court did not say one way or the other, but I am left wondering if he was penalized for something that did not affect his ultimate tax.

Our case this time was Spottiswood v US.

Corporation Still Owed Penalties Even After Its Officers Died

I had a conversation this week with another practitioner.

He has an elderly client who is having memory issues. This client in turn is represented by another person – an agent. The agent refuses to sign or provide consent to the filing of the elderly client’s tax return.

My first thought was that there must be odd stuff on the client’s return, but I am assured that is not the case. The agent is – how to say this delicately – not a likeable person.

The practitioner asked me what I would do.

The issue is that a tax return is confidential information. We – as CPAs – are not allowed to release a return, even to the IRS, without permission from the client. The IRS requests that this permission be in writing, which is why you sign a form and return it to your preparer before he/she electronically files your return.

Theory is easy. Life is messy.

Let’s segue by looking at a penalty case.

The taxpayer was protesting $58 thousand in penalties.

Turns out the taxpayer was an S corporation. This type of corporation (normally) does not pay tax. Rather it divides up its income among its shareholders (on Form K-1, to be specific), who in turn include those numbers on their individual tax returns.

For years 2011 through 2013 the company did not file returns with the IRS.

Yep, that is going to hurt.

But it did issue K-1s to its shareholders, so (supposedly) all taxes were timely and correctly paid to the Treasury.

Seems odd. Why would the company issue K-1s but not file the return itself with the IRS?

Turns out that there were a number of related family companies – 19 of them, in fact. The patriarch of the family (Victor) hired a CPA (Tapling) to function as CFO for all his companies.

Victor was diagnosed with and treated for cancer. He died December 30, 2013.

We are talking about penalties for years 2011 through 2013, so I suspect that Victor’s illness is involved.

In 2010 Tapling himself was diagnosed with cancer. He eventually died from complications in 2016.

Tapling prepared and distributed the K-1s for years 2011 through 2013 but did not however send the returns to the IRS. Why? Perhaps he was waiting for the passing of authority within the family. Perhaps he did not consider it within his corporate authority to actually sign the returns. Maybe the transition involved family members who wanted Tapling gone, and he did not want to provide easy reasons for his dismissal.    

The IRS came in hot.

It led with the Boyle decision (of which we have spoken before), arguing that the corporation was more than Victor or Tapling. It had a Board of Directors, for example, and the Board could have – should have – stepped in to be sure that returns were being filed.

The company argued that Boyle involved an agent. This situation involved corporate officers and not agents. Its officers were gravely ill and did not timely discharge their responsibilities, much to the company’s detriment.

I see both sides.

To me, the IRS and the company should compromise. Perhaps the IRS could abate 50% of the penalty, and the company would hold its nose and write a check. Both sides could acknowledge that the other side had valid points. Life is messy.

Not a chance:

Consequently the court grants defendant’s motion for summary judgement and denies plaintiff’s motion for summary judgement.”

The IRS won it all.

Our case this time for the home gamers is Hunter Maintenance & Leasing Corp., Inc.v United States.

Faxing A Return To The IRS

We recently prepared a couple of back California tax returns for a client.

The client had an accounting person who lived in California – at least on-and-off -for part of one year. The client itself is located in Tennessee and had little to do with California other than perhaps shipping product into the state. It is long-standing tax doctrine that having an employee in a state can subject a company to that state’s income tax, so I agreed that the client had to file for one year.

The second year was triggered by a one-off Form 1099 issued by someone in Los Angeles. The dollar amount was inconsequential, and I am still at a loss how California obtained this 1099 and why they burned the energy to trace it back to Tennessee. I am not convinced the client sold anything into California that second year. One could sell into Texas, for example, but have the check issued by corporate in Los Angeles.

The client did not care about the details. Just get California off their back.

California requested that we fax the returns to a unit rather than sending them through the regular system

And therein can exist a tax trap.

Let’s talk about it.

Seaview Trading LLC got itself into Tax Court for transacting in a tax shelter. The tax-gentle term is “listed transaction,” but you and I would just call it a shelter. At issue was a $35 million tax deduction, so we are talking big bucks.

The transaction happened in 2001.  The examination started in 2005. On July 27, 2005 the IRS sent Seaview a letter stating that it had never received its 2001 return.

Oh, oh.

This was a partnership, and for the year we are talking about there existed rather arcane audit rules. We will not need to get into the weeds about these rules, other than to say that failing to file a return was bad news for Seaview.

In 2005 Seaview’s accountant faxed a copy of the 2001 tax return to the IRS agent, stating that the return had been timely filed and that Seaview was providing a copy of what it had filed in 2002. He also included a certified mail receipt for the return.

The IRS maintained its position that it had never received the 2001 return. In 2010 the IRS issued its $35 million disallowance.

Fast forward to the Tax Court.

$35 million will do that.

The Court decided to review the case in two steps:

(1)  Did faxing the return to the agent in 2005 constitute “filing” the return?

(2)  If not, does the certified mail receipt constitute evidence of timely filing?

Personally, I would have reversed the order, as I consider certified mailing to be presumptive evidence of timely filing. That is why accountants recommend certified mail. It is less of an issue these days with electronic filing, but every now and then one may decide – or be required – to paper file. In that situation I would still recommend that one use certified mail.

The Court held that faxing the return to the agent did not constitute the filing of a return.

The tax literature observed and commented that faxing does not equal filing.

But there is a subtlety here: Seaview’s accountant indicated that he was supplying the agent a copy of a timely-filed 2001 return. By calling it a copy, the accountant was saying – at least indirectly – that the agent did not need to submit the return for regular processing. That said, it would be unfair for Seaview to later reverse course and argue that it intended for the agent to submit the return for processing.

The IRS won this round.

Now they go to round two: does the certified mail receipt provide Seaview with presumptive proof of timely mailing?

Seaview presents issues that we do not have with our client. We are not playing with listed transactions or obscure audit rules. California just wants its $800 minimum fee for a couple of years. They do not really care if our client actually owes. They want money.

Our administrative staff tried to fax the returns this past Friday but had problems with the fax number. I called the unit in California to explain the issue and discuss alternatives, but I never got to speak with an actual human being. I will try again (at least briefly; I have other things to do) on Monday. If California blows me off again, we will mail the returns.

I fear however that mailing the returns to general processing will cause issues, as the unit will probably issue some apocalyptic deathnote before gen pop routes the returns back to them. We will mail the returns to the specific unit and cross our fingers that not everyone there is “busy serving other customers.”

How I wish I had one of those jobs.

BTW, you can bet we will certify the mail.

Can You Have Reasonable Cause For Filing Late?

I am looking a reasonable cause case.

For the non-tax-nerds, the IRS can abate penalties for reasonable cause. The concept makes sense: real life is not a tidy classroom exercise. If you have followed me for a while, you know I strongly believe that the IRS has become unreasonable with allowing reasonable cause. I have had this very conversation with multiple IRS representatives, many of whom agree with me.

I am looking at one where the penalty was $450,959.

To put that in perspective, a January 29, 2019 MarketWatch article stated that the median 65-year-old American’s net worth is approximately $224,000.

Surely the IRS would not be assessing a penalty of that size without good reason – right?

Let’s go through the case.

Someone died. That someone was Agnes Skeba, and she passed away on June 10, 2013.

Agnes had an estate of approximately $14 million, the bulk of which was land (including farmland) and farm machinery. What the estate did not have was a lot of cash.

On March 6, 2014 the attorney sent an extension form and payment of $725,000 to the IRS.         

COMMENT: An estate return is due within 9 months of death, if the estate is large enough to require a return. Seems within 9 months to me.

The attorney included the following letter with the payment:

Our office is representing Stanley L. Skeba, Jr. as the Executor of the Estate of Agnes Skeba. Enclosed herewith is a completed “Form 4768 — Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes” along with estimated payment in the amount of $725,000 made payable to “The United States Treasury” for the above referenced Estate Tax.

Additionally, we are requesting a six (6) month extension of time to make full payment of the amount due. Despite the best efforts of this office and the Executor, the Estate had limited liquid assets at the time of the decedent’s death. Accordingly, we have been working to secure a mortgage on a substantial commercial property owned by the Estate in order to make timely payment of the balance of the Estate Tax anticipated to be due.

Currently, we have liquid assets in the amount of $1.475 million and the estimated value of the total estate is $14.7 million. Accordingly, we have submitted payments in the amount of $575,000 to the State of New Jersey, Division of Revenue, for State estate taxes payable and in the amount of $250,000 to the Pennsylvania Department of Revenue for State inheritance taxes payable. We are hereby submitting the balance of available funds to you, in the amount of $725,000, as partial payment of the expected U.S. Estate Taxes for the Estate.

We are in the process of securing a mortgage, which was supposed to close prior to the taxes being due, in the amount of $3.5 million that would have permitted us to make full payment of the taxes timely. Due to circumstances previously unknown and unavoidable by the Executor, the lender has not been able to comply with the closing deadline of March 7, 2014. It is anticipated that the lender will be clear to close within fourteen (14) days and then we will remit the balance of the estimated U.S. Estate Taxes payable.

Additionally, there has been delays in securing all of the necessary valuations and appraisals due to administrative delays caused by contested estate litigation currently pending in Middlesex County, New Jersey.

I would say he did a great job.

But the estate did not pay-in all of its estimated tax ….

A few days later the estate was able to refinance. The estate made a second payment of $2,745,000 on March 18, 2014. This brought total taxes paid the IRS to $3,470,000.

COMMENT: Mrs. Skeba died on June 10^th. Add 9 months and we get to March 10^th. OK, the second payment was a smidgeon late.

Now life intervened. It took a while to get the properties appraised. The executor had health issues severe enough to postpone the court proceedings several times. The estate’s attorney was diagnosed with cancer, delaying the case. Eventually the law firm replaced him as lead attorney altogether, which caused further delay.

As we said: life.

The estate asked for an extension for the federal estate tax return. The filing date was pushed out to September 10, 2014.

The estate was finally filed on or around June 30, 2015.

          COMMENT: Nine-plus months later.

The tax came in at $2,528,838, with estimated taxes of $3,470,000 paid-in. The estate had a refund of $941,162.

Until the IRS slapped a $450,959 penalty.

Huh?

The IRS calculated the penalty as follows: 

$2,528,838 – 725,000 = 1,803,838 times 25% = $450,959

The reason? Late filing said the IRS.

On first pass, it seems to me that the worst the IRS could do is assess penalties for 8 days (from March 10 to March 18). Generally speaking, penalties are calculated on tax due, meaning the IRS has to spot taxes you already paid-in.

In addition, need we mention that the estate was OVERPAID?

The attorney asked for abatement. Here is part of the request:

Beyond September 10, 2014, the Estate continued to have delays in filing due to the pending and anticipated completion of the litigation over the validity of the decedent’s Will, which would impact the Estate’s ability to complete the filing and the executor’s capacity to proceed. Initially, it, was anticipated that the trial of this matter would be heard before Judge Frank M. Ciuffani in the Superior Court of New Jersey in Middlesex County, Chancery Division-Probate Part in July of 2014. Due to health concerns on behalf of the Plaintiff, Joseph M. Skeba, the Judge delayed these proceedings multiple times through the end of 2014, each time giving us a new anticipation of the completion of the trial to permit the estate tax return to be filed. Upon the Plaintiffs improved health, the Judge finally scheduled a trial for July 7, 2015, which was expected to allow our completion in filing the return.

           

Accordingly, this litigation, which was causing us reason to delay in the filing, gave rise to the estate’s inability to file the return.

Finally, in May of 2015 we were notified of the Estate’s litigation attorney, Thomas Walsh of the law firm of Hoagland Longo Moran Dunst & Doukas, LLP, that he was diagnosed with cancer that would possibly cause him to delay this matter from proceeding as scheduled. In early June, we were notified by Mr. Walsh’s office that his prognosis had worsened and he would be prevented from further handling the litigation of this matter, so new counsel within his firm would be assisting in carrying this matter through trial. Due to the change in counsel, it was deemed that the anticipated trial was no longer predictable in scheduling, so the Estate chose to file the return as it stood at such time.

Displaying the compassion and goodwill toward man of deceased General Soleimani, on or around November 5, 2015 the IRS responded to the attorney’s letter and stated that the reasons in the letter did not “establish reasonable cause or show due diligence.”

Shheeeessshh.

The accountant got involved next. He included an additional reason for penalty abatement:

I do not believe the IRS had knowledge of the extension in place at the time the penalty was assessed, nor did they have a record of the additional payment of $2,745,000. The IRS listed the unpaid tax as $1,803,838 and charged the maximum 25% to arrive at the penalty of $450,959.50. The estate not only paid the entire tax the estate owed by the due date to pay but also had an overpayment. Section 6651(b) bars a penalty for late filing when estimated taxes are paid.

           

The IRS did not respond to the accountant.

The accountant tried again.

Here is the Court:

                To date, IRS Appeals has not responded to either letter.

I know the feeling, brother.

You know this is going to Court. It has to.

The estate’s argument was two-fold:

1.  The estate was fully paid-in. In fact, it was more than fully paid-in.
2.  There was reasonable cause: an illiquid estate, health issues with the executor, issues with obtaining appraisals, an estate attorney diagnosed with cancer, on and on.

The IRS came in with hyper-technical wordsmithing.

Based on § 6151, the Government cleverly reasons that the last day for payment was nine months after the death of Agnes Skeba—March 10, 2014; because no return was filed by that date a penalty may be assessed. Applying the rationale to the facts, the Government contends only $750,000 was paid on or before March 10, 2014, when $2,528,838 was due on that date. Referring back to § 6651(a)(1), a 25% penalty on the difference may therefore be assessed because it was not paid by March 10, 2014. As such, the full payment of the estate tax on March 18, 2014 is of no avail because the “last date fixed” was March 10, 2014. Accordingly, the Government argues that the imposition of a penalty in the amount of $450,959.00 is appropriate.

The Court brought out its razor:

The Government puts forth a valid point that there is an administrative need to complete and close tax matters. Here, the Estate had nine months to file the return, the extension added six months, and Defendant unilaterally added another nine months to file the return. Although there was the timely payment of the estate taxes, the matter, in the Government’s view, lingered and the administrative objective to timely close the file was not met. See generally Boyle, 469 U.S. at 251. There may be a need for some other penalty for failure to timely file a return, but Congress must enact same.

Slam on the wordsmithing.

COMMENT: Boyle is the club the IRS trots out every time there is a penalty and a late return. The premise behind Boyle is that even an idiot can Google when a return is due. The IRS repetitively denies penalty abatement requests – with a straight face, mind you – snorting that there is no reasonable cause for failure to rise to the level of a common idiot.

That said: did the estate have reasonable cause?

Finally, another issue in this case is whether Plaintiff demonstrated reasonable cause and not willful neglect in allegedly failing to timely file its estate tax return. Although the Court has already determined that the penalty at issue was not properly imposed pursuant to the Government’s flawed statutory rationale, it will review this issue for completeness.

In the tax world, folks, that is drawing blood.

In this case, Mr. White submitted his August 17, 2015 letter explaining the rationale for not filing. (See supra at pp. 5-6). For example, in Mr. White’s letter, he indicated that certain estate litigation was delayed due to health conditions suffered by the executor. (Id.). Additionally, Mr. White refers to the Hoagland law firm and one of the attorneys assigned to the case as having been diagnosed with cancer. (Id.). The Hoagland firm is a very prestigious and professional firm and based on same, Mr. White’s letter shows a reasonable cause for delay.

In addition, Mr. White’s prior letter of March 6, 2014 notes that there was difficulty in “securing all of the necessary valuations and appraisals. . . caused by the contested litigation.” (Hayes Cert., Ex. C). Drawing from my professional experience, such appraisals often require months to prepare because a farm located in Monroe, New Jersey will often sit in residential, retail, and manufacturing zones. To appraise such a farm requires extensive knowledge of zoning considerations. Thus, this also constitutes a reasonable cause for delay.

I hope this represents some whittling away of the Boyle case. That said, I wonder whether the IRS will appeal – so it can protect that Boyle case.

I would say the Court had little patience with the IRS clogging up the pipes with what ten-out-of-ten people with common sense would see as reasonable cause.

Our case this time for the home gamers was Estate of Agnes R. Skeba vs U.S..