The Estate of Morton Liftin, John Liftin v. United States

In the United States Court of Federal Claims
No. 10-589
(Filed: March 29, 2013)
TO BE PUBLISHED
)
THE ESTATE OF MORTON LIFTIN, ) Estate Tax Refund Claim; Reasonable
JOHN LIFTIN, EXECUTOR, ) Cause for Late Filing; Reasonable
) Reliance on Advice of Counsel;
Plaintiff, ) Substantial Variance; 26 U.S.C. § 6651;
) United States v. Boyle, 469 U.S. 241v. ) (1985); Estate of La Meres v. Comm’r, 98
) T.C. 294 (1992).
THE UNITED STATES, )
)
Defendant. )
)
Jonathan Edward Strouse, Holland & Knight, LLP, Chicago, IL, for plaintiff.
Paul Galindo, Trial Attorney, Mary M. Abate, Assistant Chief, David I. Pincus, Chief,
Court of Federal Claims Section, Kathryn Keneally, Assistant Attorney General, Tax Division,
United States Department of Justice, Washington, D.C., for defendant.
OPINION AND ORDER
GEORGE W. MILLER, Judge
Before the Court for decision in this tax refund case are the parties’ cross-motions for
summary judgment. The parties dispute whether the Internal Revenue Service (“IRS”) correctly
assessed a late-filing penalty. Plaintiff asserts that, since it relied on advice from its attorney that
its return was not yet due, its failure to timely file its estate tax return was due to reasonable
cause and did not result from willful neglect. See Pl.’s Mot. Summ. J. (docket entry 41, May 10,
2012). Defendant asserts that the advice plaintiff received from its attorney did not constitute
reasonable cause for plaintiff’s late filing. See Def.’s Cross-Mot. Summ. J. (docket entry 48,
Aug. 2, 2012). For the reasons that follow, the Court DENIES the Estate’s motion for summary
judgment and GRANTS the Government’s cross-motion.
I. Background
Morton Liftin (the “Decedent”) died on March 2, 2003. Decedent appointed his son,
John Liftin (“the Executor”), as the executor of his estate (the “Estate”). Pl.’s Resps. to Def.’s
Statement of Material Facts (“Pl.’s Resps. DMF”) ¶¶ 1, 3 (docket entry 54, Oct. 2, 2012).
Decedent’s will provided for direct bequests to, among others, Decedent’s surviving spouse,
Anna G. Lavandez Liftin (“Mrs. Liftin”), who was a U.S. resident and citizen of Bolivia at the
time of Decedent’s death. Id. ¶¶ 2, 18. Mrs. Liftin also asserted claims against the Estate arising
out of her rights under a prenuptial agreement with Decedent. Id. ¶ 2. The Estate refers to those
claims as “ancillary matters.”
Pursuant to Internal Revenue Code (“I.R.C.”) § 6075(a), the Estate was required to file a
federal estate tax return (Form 706) by December 2, 2003, nine months after Decedent’s death.
I.R.C. § 6075(a). Section 6081(a) permits the Secretary to grant a reasonable extension of up to
six months for the filing of a return. I.R.C. § 6081(a). The applicable regulations provide that
the total allowable time for filing, including extensions, is fifteen months from decedent’s death.
Estate of Maltaman v. Comm’r, 73 T.C.M. (CCH) 2162, at *4 (1997) (citing 26 C.F.R.
§ 20.6081–1).
The Executor employed his former law partner, John D. Dadakis, to assist with the
Estate’s federal estate tax return and administration of the Estate’s assets, including claims by
Mrs. Liftin against the Estate. Decl. of John Liftin (“Liftin Decl.”) ¶ 3 (docket entry 41-1,
May 10, 2012); Pl.’s Resps. DMF ¶¶ 4–5. Dadakis, who was at that time a partner at the law
firm of Morrison & Foerster LLP, has expertise in private wealth services and estate and gift tax
planning. Liftin Decl. ¶ 3; Pl.’s Resps. DMF ¶ 4.
In discussions both before and after Decedent died, Dadakis advised the Executor
regarding the effect of Mrs. Liftin’s citizenship status on the Estate’s federal estate tax return.
Pl.’s Resps. DMF ¶ 15. In general, the value of property which passes from the decedent to a
surviving spouse may be deducted from the value of the estate that is subject to the federal estate
tax. I.R.C. § 2056(a). This so-called “marital deduction” is not available, however, if the
surviving spouse is not a U.S. citizen. § 2056(d)(1)(A). Nevertheless, if the spouse becomes a
citizen before the estate tax return is filed and has been a resident of the United States at all times
after the decedent’s death and before becoming a citizen, the Estate may take the deduction.
§ 2056(d)(4). Thus, as Dadakis advised, the Estate could not have taken the marital deduction
pursuant to § 2056(a) unless Mrs. Liftin was a U.S. citizen when it filed its return. See Dadakis
Dep. 38:21–39:4 (“If the estate had filed a federal estate tax return [before Mrs. Liftin became
naturalized], we would not have been able to obtain a federal -- a marital deduction. And once
filed, we could not go back and amend that return to -- even if she did become a U.S. citizen
afterwards.”). Dadakis advised the Executor that he had a fiduciary duty to attempt to obtain a
marital deduction. Id. at 40:1–3.1
On November 26, 2003, six days before the Estate’s return and taxes were due, the Estate
requested a six-month extension of time to file its return and pay the taxes due. Cross-Mot. Ex.
C, at 180–82. On January 16, 2004, the IRS granted the Estate’s request for an extension of time
1
As an alternative to Mrs. Liftin becoming a citizen, the Estate could have taken a
marital deduction pursuant to I.R.C. § 2056A if the property passed to Mrs. Liftin through a so-
called “qualified domestic trust” (“QDOT”). Plaintiff states, however, that “because the
decedent’s property passed outright to Mrs. Liftin . . . , only Mrs. Liftin, at her sole discretion,
could transfer or assign the property to a QDOT. . . . Mrs. Liftin never cooperated or voluntarily
agreed to transfer the property to a QDOT and, therefore, a QDOT was not available to
[p]laintiff.” Pl.’s Resps. DMF ¶ 18.
2
to file, setting a new deadline of June 2, 2004.2 Cross-Mot. Ex. D, at 183. On January 20, 2004,
the Estate made a tax payment of $877,300, an amount which the Estate estimated would be
sufficient to satisfy the taxes due even if it were unable to claim the marital deduction. See
Cross-Mot. Ex. E, at 184; Def.’s Objections and Resps. Pl.’s “Undisputed Facts” (“Def.’s Resps.
PMF”) 5 (docket entry 50, Aug. 2, 2012).
Thereafter, the Executor and Dadakis became aware that Mrs. Liftin intended to apply for
U.S. citizenship. Liftin Dep. 11:15–21; Dadakis Dep. 90:22–91:4. The Executor knew,
however, that Mrs. Liftin’s naturalization process might not be completed before the June 2,
2004 deadline. Liftin Dep. 16:15–18. Based on his interpretation of Treasury Regulation
§ 20.2056A-1(b),3 Dadakis advised the Estate, in substance, that its late filing in order to claim
the marital deduction would not trigger a penalty as long as the return was filed within a
reasonable time after Mrs. Liftin became a naturalized U.S. citizen, see, e.g., Liftin Dep. 20:4–9;
Dadakis Decl. ¶¶ 12, 16, and other ancillary matters were completed, Liftin Decl. ¶¶ 4, 6, 7;
Dadakis Decl. ¶ 17.4 The Executor found this advice to be reasonable, particularly because the
Estate had already paid more than the amount of tax the Executor believed would ultimately be
due. Liftin Decl. ¶ 4; Liftin Dep. 20:19–21:7.
By June 2, 2004, Mrs. Liftin was not yet naturalized. See Cross-Mot. Ex. F (Mrs. Liftin’s
Certificate of Naturalization dated Aug. 3, 2005). Following Dadakis’s advice, the Estate did not
file a return before the extended deadline of June 2, 2004. On October 4, 2004, the IRS sent a
letter to the Estate inquiring why it had not filed a tax return. Pl.’s Resps. DMF ¶ 30. In
response, Dadakis wrote the IRS on November 4, 2004, setting forth the Estate’s position, as
well as his rationale for concluding that Treasury Regulation § 20.2056A-1(b) allowed a late
filing in order to claim the marital deduction. Cross-Mot. Ex. E; see also Dadakis Decl. ¶ 14.
Dadakis’s letter did not, however, reference his advice that the Estate could wait to file its return
until all ancillary matters were completed. See Cross-Mot. Ex. E. Neither the Estate nor
Dadakis received a response from the IRS. Def.’s Resps. PMF 12.
2
In the same document, the IRS informed the Estate that its request for an extension of
time in which to pay had been forwarded to an IRS district officer “for further review.” Cross-
Mot. Ex. D, at 183.
3
Treasury Regulation § 20.2056A-1(b) provides in relevant part:
For purposes of section 2056(d)(4)(A) . . . , a return filed prior to the due date
(including extensions) is considered filed on the last date that the return is
required to be filed (including extensions), and a late return filed at any time after
the due date is considered filed on the date that it is actually filed.
26 C.F.R. § 20.2056A-1(b).
4
Neither Liftin nor Dadakis remembers the exact language of Dadakis’s advice. Dadakis
Dep. 59:5–16, 125:13–22; Liftin Dep. 19:18–21, 25:17–26:12. Dadakis confirmed to the
Executor on multiple occasions, however, that the Estate’s late-filed tax return would not trigger
a penalty. E.g., Liftin Decl. ¶ 4; Liftin Dep. 21:12–18.
3
On August 3, 2005, Mrs. Liftin became a U.S. citizen. Cross-Mot. Ex. F. In February of
2006, the Estate entered into an agreement settling Mrs. Liftin’s claims against the Estate. Def.’s
Resps. PMF 12–13.
On May 9, 2006, the Estate filed its tax return claiming the marital deduction in the
amount of the value of the property passing to Mrs. Liftin and reflecting a tax due of
$678,572.25 and an overpayment of $198,727.75. Def.’s Resps. PMF 17, 20. The IRS did not
contest the marital deduction, but on June 12, 2006 the IRS issued a Notice of Adjustment
reflecting a penalty of $169,643.06 for late filing and late payment pursuant to I.R.C.
§§ 6651(a)(1) and 6651(a)(2). Def.’s Resps. PMF 20.
In 2006, the Estate filed a refund claim with the IRS, which the agency denied. Id. After
an administrative appeal within the agency, the IRS granted a partial refund in the amount of
$33,928.61, leaving a claim of $135,714.45. Def.’s Resps. PMF 21. In its administrative appeal,
the Estate had argued that the statutes and regulations related to the marital deduction provided
reasonable cause for the Estate’s late filing:
5. By June 2, 2004 (the extended due date for filing Form 706), Mrs. Liftin had
indicated that she would like to take advantage of the marital deduction by
applying for U.S. citizenship. Under IRC § 2056(d)(4), the disallowance of the
marital deduction under IRC § 2056(d)(1) (for property passing to a surviving
spouse who is not a U.S. citizen “before the day on which the return of the tax
imposed by this chapter is made . . . .” Further, Reg § 20.2056A-1(b) provides
that for purposes of IRC § 2056(d)(4)(A), “a late return filed at any time after the
due date is considered filed on the date that it is actually filed.” Therefore until
Mrs. Liftin became a U.S. citizen, the Estate could not file its Federal Estate Tax
Return and still utilize the marital deduction under IRC § 2056. By the time
citizenship would be granted to Mrs. Liftin, in order to have the marital deduction
apply under IRC § 2056, the Estate could only file a late return.
6. On October 4, 2004, the Internal Revenue Service sent a letter to the Estate to
determine why the Estate Tax Return had not been filed. My attorneys replied on
November 4, 2004 . . . , stating that the return would not be filed until a
determination was made as to Mrs. Liftin’s citizenship.
Cross-Mot. Ex. A, at 7.
On September 1, 2010, the Estate filed a complaint in this court seeking a refund of
$135,714.45 (docket entry 1). In January 2011, defendant filed a motion for judgment on the
pleadings (docket entry 9, Jan. 14, 2011) pursuant to Rule 12(c) of the Rules of the Court of
Federal Claims (“RCFC”). The Court denied defendant’s motion. Estate of Liftin v. United
States, 101 Fed. Cl. 604 (2011).
II. Standard of Review
A moving party is entitled to summary judgment when “the movant shows that there is
no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” RCFC 56(a). Thus, any doubt sufficient to create a genuine issue of material fact must be
4
resolved in favor of the party opposing summary judgment. Ricci v. DeStefano, 557 U.S. 557,
586 (2009). When considering cross-motions for summary judgment, courts evaluate each
motion on its own merits and deny both motions if there are any genuine disputes over material
facts. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390–91 (Fed. Cir. 1987).
A fact is material if it affects the outcome of the case under the governing law. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute over a material fact is not genuine if,
were the case to go to trial, no rational trier of fact could find for the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Accordingly, a
party seeking summary judgment may demonstrate the absence of a genuine dispute by
identifying a lack of evidence to support the nonmoving party’s case. Celotex Corp. v. Catrett,
477 U.S. 317, 325 (1986). The Court’s function, however, is “not to weigh the evidence and
determine the truth of the matter but to determine whether there is a genuine issue for trial.”
Anderson, 477 U.S. at 249.
III. Discussion
Section 6651(a)(1) imposes a penalty for failure to file a required return before the
statutory or extended deadline unless the taxpayer can establish that such failure was due to
reasonable cause and not willful neglect. I.R.C. § 6651(a)(1); see also United States v. Boyle,
469 U.S. 241, 244 (1985). The penalty imposes an addition to tax of 5 percent of the estate’s tax
liability for each month or any fraction thereof that the failure to file continues, but the penalty
may not exceed 25 percent. I.R.C. § 6651(a)(1).
The Estate has demonstrated that its failure to file its estate tax return during the fourteen
months after the extended deadline but before Mrs. Liftin became a U.S. citizen was due to
reasonable cause and not willful neglect. Once Mrs. Liftin was naturalized, however, the Estate
waited an additional nine months to file its estate tax return. Its delay in filing after Mrs. Liftin
became a U.S. citizen was not due to reasonable cause. Therefore, for the reasons set forth
below, the Court DENIES the Estate’s motion for summary judgment and GRANTS the
Government’s cross-motion for summary judgment.
A. The Substantial Variance Doctrine Does Not Bar the Estate’s Claim
Defendant argues that the substantial variance rule divests the Court of jurisdiction over
the Estate’s claim. Under the substantial variance doctrine, “[a]ny legal theory not expressly or
impliedly contained in the application for refund cannot be considered by a court in which a suit
for refund is subsequently initiated.” Lockheed Martin Corp. v. United States, 210 F.3d 1366,
1371 (Fed. Cir. 2000) (citations omitted) (quotation marks omitted). The substantial variance
doctrine derives from I.R.C. § 7422(a), which prohibits any lawsuit “for the recovery of any
internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . until a
claim for refund or credit has been duly filed with the Secretary or his delegate according to the
provisions of law in that regard, and the regulations of the Secretary or his delegate established
in pursuance thereof.” I.R.C. § 7422(a). Treasury Regulation § 301.6402-2(b)(1) states:
No refund or credit will be allowed . . . except upon one or more of the grounds
set forth in a claim filed . . . . The claim must set forth in detail each ground upon
5
which a credit or refund is claimed and facts sufficient to apprise the
Commissioner of the exact basis thereof.
26 C.F.R. § 301.6402-2(b)(1). The doctrine applies to both the legal theories and factual bases
for plaintiffs’ claims. Lockheed Martin, 210 F.3d at 1371. The purpose of the statute and
regulations is to provide notice to the IRS so that it may investigate and evaluate a taxpayer’s
claim before it is required to litigate the claim. See id. (“The substantial variance rule (1) gives
the IRS notice as to the nature of the claim and the specific facts upon which it is predicated; (2)
gives the IRS an opportunity to correct errors; and (3) limits any subsequent litigation to those
grounds that the IRS had an opportunity to consider and is willing to defend.”). Courts have
interpreted the substantial variance doctrine to allow plaintiffs to litigate not only those claims
specifically raised in the claim for refund, but also those “comprised within the general language
of the claim.” Ottawa Silica, 699 F.2d 1124, 1138 (Fed. Cir. 1983); Parma v. United States, 45
Fed. Cl. 124, 129 (1999).
Here, plaintiff’s refund claim relied on the theory that the statutes and regulations related
to the marital deduction created reasonable cause for plaintiff’s late filing. But plaintiff’s refund
claim did not specifically argue that plaintiff had received legal advice that also constituted
reasonable cause for plaintiff’s late filing. Defendant asserts that plaintiff’s variation in the
presentation of its reasonable cause argument is sufficiently substantial to preclude the Court
from exercising subject matter jurisdiction over plaintiff’s claim.
The Estate has not varied the legal theory upon which it relies. The Estate has
consistently asserted that its failure to file timely was due to reasonable cause and not willful
neglect. The Estate continued to argue that theory in its refund claim and subsequent appeal
within the IRS. Cross-Mot. Ex. A, at 7. The Estate’s presentation of its legal theory here relies
on an additional fact—that it was receiving advice from Dadakis—that was not necessary to its
presentation before the IRS, but the Estate sufficiently alerted the IRS to that fact. The Estate,
through Dadakis, first described its theory that its efforts to obtain the marital deduction created
reasonable cause for late filing in its letter to the IRS in November 2004. See Cross-Mot. Ex. E.
Thus, the IRS was on notice as early as 2004 that the Estate was relying on the advice of counsel.
See Parma, 45 Fed. Cl. at 128 (citing Davis v. United States, 21 Cl. Ct. 84, 86 (1990)) (“The
Court may inquire beyond the corners of a taxpayer’s claim for refund. Other written
communications to the IRS can also supply adequate notice to support litigation under section
7422.”). As a result, both the Estate’s legal theory and the factual basis for that theory were
comprised within the general language of its administrative claim for refund.
Plaintiff’s claim has relied on the same “reasonable cause” provision of § 6651 at every
stage of this dispute. Plaintiff’s presentation of its claim here is still based on its interpretation of
the marital deduction provisions. Plaintiff’s claims in this court do not therefore “substantially”
vary from its presentation before the IRS. Cf. Parma, 45 Fed. Cl. at 129 (finding that a variation
in the plaintiff’s presentation of their statute of limitations argument was not so substantial as to
violate the substantial variance doctrine); see also Am. Nat. Bank & Trust Co. v. United States,
594 F.2d 1141, 1143 n.1 (7th Cir. 1979) (“[T]here is substantial authority that [I.R.C. § 7422 and
Treasury Regulation § 301.6402-2(b)(1)] do not require the strictness of common-law pleading
or criminal indictment but only require that the statement of facts be reasonably sufficient to
6
make the Commissioner aware of the nature of the claims; the specific legal formulations of
these claims need not be made.”).
B. The Estate’s Reasonable Cause Defense Does Not Entitle It to a Refund of the
Late-Filing Penalty Assessed
To avoid a penalty for a late-filed return, the taxpayer bears the “heavy burden” of
proving its failure to file timely was due to reasonable cause and not willful neglect. Boyle, 469
U.S. at 245 (citing I.R.C. § 6651(a)(1)). In order to prove “reasonable cause,” a taxpayer must
show that it “exercised ‘ordinary business care and prudence’ but nevertheless was ‘unable to file
the return within the prescribed time.’” Id. at 246 (quoting 26 C.F.R. § 301.6651(c)(1)).
“Willful neglect” requires a “conscious, intentional failure or reckless indifference.” Id. at 245.
In Boyle, the Supreme Court observed that “[c]ourts have differed over whether a
taxpayer demonstrates ‘reasonable cause’ when, in reliance on the advice of his accountant or
attorney, the taxpayer files a return after the actual due date but within the time the adviser
erroneously told him was available.” 469 U.S. at 251 n.9. The Court’s decision in Boyle did not
resolve those differences. Id. The Court did state, however, that:
When an accountant or attorney advises a taxpayer on a matter of tax law, such as
whether a liability exists, it is reasonable for the taxpayer to rely on that advice.
Most taxpayers are not competent to discern error in the substantive advice of an
accountant or attorney. To require the taxpayer to challenge the attorney, to seek
a “second opinion,” or to try to monitor counsel on the provisions of the Code
himself would nullify the very purpose of seeking the advice of a presumed expert
in the first place. “Ordinary business care and prudence” do not demand such
actions.
By contrast, one does not have to be a tax expert to know that tax returns have
fixed filing dates and that taxes must be paid when they are due. In short, tax
returns imply deadlines. Reliance by a lay person on a lawyer is of course
common; but that reliance cannot function as a substitute for compliance with an
unambiguous statute. Among the first duties of the representative of a decedent’s
estate is to identify and assemble the assets of the decedent and to ascertain tax
obligations. Although it is common practice for an executor to engage a
professional to prepare and file an estate tax return, a person experienced in
business matters can perform that task personally. It is not unknown for an
executor to prepare tax returns, take inventories, and carry out other significant
steps in the probate of an estate. It is even not uncommon for an executor to
conduct probate proceedings without counsel.
Id. at 251–52 (citation omitted). In short, the Supreme Court distinguished advice from an
attorney involving an interpretation of substantive tax law, which can constitute reasonable
cause, from an attorney’s assistance in meeting the requirements of unambiguous statutes, which
cannot constitute reasonable cause.
7
The Tax Court has since held that reasonable reliance on the erroneous advice of an
attorney regarding the due date of a return can constitute reasonable cause. Estate of La Meres v.
Comm’r, 98 T.C. 294, 320 (1992). The Tax Court attempted to categorize cases in which
reliance on advice of counsel as to the appropriate time for filing can constitute reasonable cause
for a late filing. See id. at 315–20. It noted that, in cases where the expert did not actually give
the advice on which the taxpayer claimed to rely, the taxpayer could not establish reasonable
cause. Id. at 316. Additionally, the taxpayer could not establish reasonable cause where the
taxpayer’s reliance on the advice was unreasonable—for example, when the advice did not come
from an expert or where the taxpayer did not fully disclose all relevant information. Id. Thus,
the Tax Court concluded that a taxpayer may demonstrate that its late filing was due to
reasonable cause when (a) the taxpayer made full disclosure to an expert, (b) the expert gave
advice upon which the taxpayer claims to have relied, (c) the taxpayer relied in good faith on the
expert’s advice, and (d) the taxpayer did not otherwise know that the return was due. La Meres,
98 T.C. at 315–18; see also Liftin, 101 Fed. Cl. at 608.5
1. Dadakis’s Advice Constituted Reasonable Cause For the Estate to Delay
Filing Until Mrs. Liftin Became a Citizen
Here, the Estate fully disclosed all relevant information to Dadakis, “an attorney with
expertise in private wealth services and tax planning.” See Def.’s Resps. PMF 3. Defendant
argues, however, that Dadakis did not actually give the advice plaintiff claims and that the
Executor did not rely in good faith on Dadakis’s advice because the Executor knew the date on
which the return was actually due.
a. Dadakis Advised the Estate Not to File a Return Until After Mrs.
Liftin Became a Naturalized U.S. Citizen
Both Dadakis and the Executor assert that Dadakis advised the Executor “that a late-filed
estate tax return would not trigger a late[-]filing penalty so long as the tax return was filed within
a reasonable time after Mrs. Liftin became a naturalized United States citizen and after all
ancillary matters were completed.” E.g., Dadakis Decl. ¶ 17; Liftin Decl. ¶ 4; see Dadakis Dep.
57:13–59:4; Liftin Dep. 20:4–9. In addition, Dadakis’s November 2004 letter explained the
Estate’s reasoning for not filing using substantially the same language he asserts he used when
he advised the Executor in 2003 and 2004. See Cross-Mot. Ex. E, at 184–85 (explaining his
interpretation of I.R.C. § 2056(d)(4) and Treasury Regulation § 20.2056A-1(b) and stating the
5
The Tax Court acknowledged that certain Eighth Circuit cases have held that the
erroneous advice of counsel as to the date that the law required the taxpayer to file its return
cannot constitute reasonable cause. See Estate of Kerber v. United States, 717 F.2d 454, 454 n.1,
455 (8th Cir. 1983) (per curiam); Smith v. United States, 702 F.2d 741, 742 (8th Cir. 1983). It
traced those results to Estate of Lillehei v. Comm’r, 638 F.2d 65 (8th Cir. 1981). La Meres, 98
T.C. at 319. The taxpayer in Lillehei relied not on an expert’s advice, but on an expert to
complete the nondelegable duty of filing the return. Id. The Tax Court noted that Boyle
distinguished reliance on expert advice from reliance on an expert to file a return, and, since the
later Eighth Circuit cases had not addressed this distinction, the Tax Court found them to be
superseded by Boyle. Id.
8
Estate “intends to delay the filing of its form 706 until Mrs. Liftin has obtained United States
citizenship, such that those assets passing to her from the Decedent’s estate will be eligible for
the estate tax marital deduction”).
Defendant responds only that neither the Executor nor Dadakis could recall Dadakis’s
precise words of advice. Cross-Mot. 49; see also Dadakis Dep. 59:5–16, 125:13–22; Liftin Dep.
19:18–21, 25:17–26:12. Defendant’s argument, however, is insufficient to create a genuine issue
of material fact regarding Dadakis’s advice.
The Estate need not prove the exact words of Dadakis’s advice in order to establish
reasonable cause, therefore the exact wording of Dadakis’s advice is not a material fact. Indeed,
defendant does not cite case law, nor could the Court find any, that would require a taxpayer to
prove the precise words of legal advice in order to demonstrate reasonable cause. Plaintiff need
only show that Dadakis gave the advice in question, and that fact is not in genuine dispute. See,
e.g., Liftin Dep. 19:18–21 (“Q. Okay. And do you remember the exact words that he gave you?
A. I could give you the substance but not the precise words.”).
Defendant implies, however, that plaintiff is taking advantage of the lack of
documentation of Dadakis’s advice to shape the Executor’s and Dadakis’s memories of that
advice to support plaintiff’s litigation strategy. Cross-Mot. 49 (“Plaintiff has failed, however, to
establish clear facts to prove that Dadakis actually gave the specific advice on which plaintiff
claims reliance—as opposed to any post-hoc ‘advice’ that [the Executor] interpreted Dadakis as
having given.”) (emphasis added). To the extent the Government questions the credibility of
Dadakis or the Executor or the statements in their declarations, “[d]efendant must present
sufficient evidence to support its contention that an issue of credibility exists.” Olszonicki v.
United States, 867 F. Supp. 610, 615 (N.D. Ohio 1994). Defendant has provided no such
evidence. Given the lack of evidence to support defendant’s conclusion, its argument is
insufficient to create a genuine dispute regarding the substance of Dadakis’s advice. See
Celotex, 477 U.S. at 325. 6
b. The Estate Reasonably Relied on Dadakis’s Advice Regarding
Waiting to File Until After Mrs. Liftin Became a U.S. Citizen
Defendant argues that the Estate’s reliance on Dadakis’s advice was unreasonable
because the Executor was aware of the statutory due date for filing the Estate’s return. Cross-
Mot. 42–48. But defendant’s argument relies on a misrepresentation of the Executor’s
testimony.
6
It is unclear whether Dadakis advised the Executor that he should wait to file or that he
must wait to file. Cf. Dadakis Decl. ¶¶ 12, 16–17. Defendant argues that Dadakis “never
advised the Executor that ‘the law required’ him to wait to file the estate tax return,” and that if
that had been Dadakis’s advice “it would have been simple for those lawyers [Dadakis and the
Executor] to [so] swear in their declarations.” Reply 8–11. Whether Dadakis advised that the
Estate must, or merely should, wait to file its return is, however, not a material fact. To establish
reasonable cause for late filing, it is sufficient that Dadakis advised that the Estate could file with
no penalty.
9
The relevant facts are not in genuine dispute. The Executor was aware that the original
statutory due date for filing the Estate’s return was December 2, 2003. Liftin Dep. 10:5–8. He
was also aware that the IRS approved the Estate’s request to extend that deadline until June 2,
2004. Liftin Dep. 14:22–15:3. However, as a result of the advice from Dadakis, Liftin
understood the statutory deadline to apply only in the case where there was no reasonable cause
to file after that date. Liftin Dep. 16:1–3. In particular, Dadakis advised the Executor that the
circumstances the Estate faced—the inability to claim the marital deduction pursuant to I.R.C.
§ 2056 until after the statutory due date for filing the return—constituted reasonable cause such
that the Estate would not be penalized for delayed filing. Liftin Decl. ¶¶ 4, 6–7; Liftin Dep.
20:4–16, 25:13–20. Thus, the Executor knew that the statutory deadlines existed, but believed
that they did not apply to the Estate based on advice from Dadakis. See Liftin Dep. 19:14–17.7
In La Meres, the Tax Court stated that a taxpayer’s reliance on the advice of counsel
could not be reasonable cause for late filing when the taxpayer “otherwise kn[e]w that the return
was due.” 98 T.C. at 316–17. The Tax Court was describing a category of cases in which
taxpayers claimed they failed to timely file returns because the taxpayers relied on an expert’s
advice that no penalty would be assessed because “no tax liability existed upon which the
addition to tax is computed.” Id. at 316. In those cases, the expert did not give “erroneous
advice concerning the proper filing date.” Id. Since Dadakis gave erroneous advice concerning
the proper filing date, this case is not one in which the taxpayer otherwise knew that the return
was due.
The undisputed facts establish that the Executor’s reliance on Dadakis’s erroneous advice
was reasonable.8 Dadakis’s advice concerned a substantive question of tax law regarding the
interaction between the statutes and regulations providing for the marital deduction and the
statutes and regulations setting the deadline for filing the Estate’s return. The Executor had no
basis to question Dadakis’s advice. Liftin Dep. 21:1–7. As the circumstances changed, the
Executor continued to ask whether the Estate needed to file sooner, and Dadakis continued to
reassure him that the Estate could wait until Mrs. Liftin became a citizen. Liftin Dep. 21:12–19.
7
Defendant also asserts that Dadakis’s advice was incorrect. Cross-Mot. 39–41. By
describing in detail the reasons Dadakis’s advice was incorrect, defendant implies that “reliance
on advice from [the Estate’s] attorney was not reasonable because [plaintiff] should have known
that the advice was erroneous and should have conducted independent research to verify it.” La
Meres, 98 T.C. at 313. Of course, the principle that reliance on expert advice can constitute
reasonable cause is only relevant in cases in which a taxpayer relies on incorrect advice. If
Dadakis’s advice had been correct, and the marital deduction statutes and regulations created
reasonable cause for late filing, there would be no need to address whether Dadakis’s advice
created an independent basis for late filing because the IRS would not have assessed a penalty.
Accordingly, La Meres holds “that reasonable reliance on the erroneous advice of an attorney
with respect to the due date of a return can constitute ‘reasonable cause’ within the meaning of
section 6651(a)(1).” La Meres, 98 T.C. at 320 (emphasis added).
8
Whether the elements that constitute “reasonable cause” are present in a given situation
is a question of fact, but what elements must be present to constitute “reasonable cause” is a
question of law. Boyle, 469 U.S. at 249. Here, the elements present are not in genuine dispute.
10
Moreover, there is no evidence to suggest that the Executor was acting in bad faith. Therefore
requiring the Executor to challenge Dadakis would “nullify the very purpose of seeking [his
expert advice] in the first place.” See Boyle, 469 U.S. at 251.
2. Dadakis’s Advice Did Not Constitute Reasonable Cause For the Estate to
Delay Filing Until All “Ancillary Matters” Were Concluded
In addition to his advice that the marital deduction statutes and regulations created
reasonable cause for the Estate to delay filing, Dadakis also advised the Estate that it could delay
filing until all ancillary matters were completed. Dadakis Decl. ¶ 17; Liftin Decl. ¶ 4. Dadakis
based this advice on his belief that the Estate should wait to file until the Estate had sufficient
information to file an “accurate” return.9 Dadakis Dep. 98:8–18 (“The need to file a federal
estate tax return is also the need to file an accurate federal estate tax return. And, therefore, the
discussions that we had with John Liftin, especially since we were aware that a refund was due,
entailed the idea that we would file a -- the federal estate tax return subsequent to the
naturalization of the surviving spouse. And all of the other ancillary information that we needed
could be deduced, and then taking time to prepare an accurate federal estate tax return.”).10 As a
result, the Estate did not file until it had settled with Mrs. Liftin and Dadakis had prepared a
complete and correct return, a process beginning in August of 2005 and ending in May 2006,
with the filing of the Estate’s tax return. See Dadakis Dep. 137:14–16.
Because Dadakis’s advice that the Estate could delay filing until it could submit an
accurate return was not an interpretation of substantive tax law, it cannot, as a matter of law,
constitute reasonable cause for the delay in filing the estate tax return. See Estate of Young v.
United States, No. 11-11829, 2012 WL 6585327, at *3 (D. Mass. Dec. 17, 2012) (“[T]he Estate
had an obligation to file a timely return with the best available information. It cannot claim
reasonable cause based on advice that it was necessary to wait for complete information before
filing a return.”); Russell v. Comm’r, 101 T.C.M. (CCH) 1363, at *8 (2011) (“[R]eliance on an
9
Dadakis does not explain how he reached this conclusion, and the law is clear that the
need to file an accurate return cannot constitute reasonable cause for late filing. See, e.g.,
Randall v. Comm’r, 74 T.C.M. (CCH) 258, at *3 n.5 (1997) (“Under petitioner’s position, as
long as a taxpayer did not have all of the information that was needed to prepare a complete, and
therefore accurate, return, he or she will never have to file a return and yet will not be liable for
the addition to tax under [§] 6651(a)(1). We disagree.”); see also In re Craddock, 149 F.3d 1249,
1257 (10th Cir. 1998) (“A tax return does not have to be completely accurate, but must be based
on the best information available, . . . and may be amended later if necessary.”) (citing Oliver v.
Comm’r, 73 T.C.M. (CCH) 2035, 2051, 1997 WL 66769 (1997); Estate of Vriniotis v. Comm’r,
79 T.C. 298, 311, 1982 WL 11136 (1982)).
10
Dadakis concluded that proceeding in this manner would be “administratively
efficient.” Cross-Mot. Ex. A, at 7 n.2.
11
attorney’s advice that it was necessary to wait for complete information before filing a return
does not constitute reasonable cause for a delay in filing.”).
CONCLUSION
The Estate relied on its attorney’s advice regarding the deadline to file its tax return such
that its failure to file until after Mrs. Liftin became a naturalized United States citizen was due to
reasonable cause. However, the Estate did not have reasonable cause to further delay its filing.
The Estate filed its estate tax return on May 26, 2006—nine months after Mrs. Liftin became a
naturalized U.S. citizen in August of 2005. The addition to tax for failure to file timely reaches
the statutory maximum if the delinquency continues longer than four months. E.g., Russell, 101
T.C.M. at *8 (citing I.R.C. § 6651(a)). Therefore, plaintiff’s nine-month delay without
reasonable cause was sufficient to subject plaintiff to the maximum late-filing penalty. The
Court therefore DENIES plaintiff’s motion for summary judgment and GRANTS defendant’s
cross-motion for summary judgment.
The Clerk is directed to enter judgment in favor of defendant.
IT IS SO ORDERED.
s/ George W. Miller
GEORGE W. MILLER
Judge
12