MORTON LIFTIN, the Estate of, JOHN LIFTIN, Executor, Plaintiffs-Appellants,
UNITED STATES, Defendant-Appellee
Appeal from the United States Court of Federal Claims in No. 10-CV-0589, Judge George W. Miller.
JONATHAN E. STROUSE, Holland & Knight, LLP, of Chicago, Illinois, argued for plaintiffs-appellants.
JOHN A. NOLET, Attorney, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were KATHRYN KENEALLY, Assistant Attorney General, and KENNETH L. GREENE, Attorney.
Before NEWMAN, DYK, and TARANTO, Circuit Judges. Opinion for the Court filed by Circuit Judge TARANTO. Dissenting opinion filed by Circuit Judge NEWMAN.
Taranto, Circuit Judge .
The estate of Morton Liftin and its executor, John Liftin, appeal from a decision of the United States Court of Federal Claims that upheld a penalty assessed by the Internal
Revenue Service under 26 U.S.C. § 6651(a)(1) because the executor filed the estate-tax return late. Under the statute, as the case is presented here, the full assessed penalty was mandatory unless advice given by counsel established reasonable cause for not filing the return during a nine-month period from August 2005 to May 2006. The trial court found no reasonable cause. Estate of Liftin v. United States, 111 Fed. Cl. 13 (2013). We affirm.
Morton Liftin died on March 2, 2003. Among his survivors was his wife, who at the time was a citizen of Bolivia and not of the United States. John Liftin, the decedent's son, became the executor of the estate.
Although the executor is an attorney, he obtained assistance in administering the estate by retaining his former law partner, who focused in his practice on providing " private wealth services and tax planning." J.A. 134. It is undisputed that the executor needed to file a federal estate-tax return, Form 706, with the Internal Revenue Service. See 26 U.S.C. § 6018(a). Under 26 U.S.C. § 6075(a), the general rule is that such returns " shall be filed within nine months after the date of the decedent's death" --here, by December 2, 2003. The statute authorizes the IRS to grant an extension, but strictly limits its length: for taxpayers like the Liftin estate, " no such extension shall be for more than 6 months." 26 U.S.C. § 6081(a). An IRS regulation provides that the estate, if it asks on time, is entitled to " an automatic six-month extension of time beyond the date prescribed in section 6075(a) to file Form 706." 26 C.F.R. § 20.6081-1(b). On November 26, 2003, the executor timely sought a six-month extension both to file and to pay, and the IRS granted the extension on January 16, 2004. The new deadline to file the estate-tax return (and to pay the estate tax) was June 2, 2004, with no statutory or regulatory authorization for a further extension.
In preparing to file the estate-tax return, the executor and his specialist counsel discussed two uncertainties material to calculating the proper amount of tax due. The principal one was whether and when Mrs. Liftin, the decedent's widow, would become a United States citizen. A executor, in calculating the value of an estate subject to the estate tax, may deduct the value of property that passes to a surviving spouse, but the general precondition for that marital deduction is that the surviving spouse be a citizen of the United States. 26 U.S.C. § 2056(a), (d)(1). A " [s]pecial rule," however, also permits the deduction if " (A) the surviving spouse of the decedent becomes a citizen of the United States before the day on which the return of the tax imposed by this chapter is made, and (B) such spouse was a resident of the United States at all times after the date of the death of the decedent and before becoming a citizen of the United States." Id. § 2056(d)(4). Under that provision, specialist counsel advised, the estate could not take the marital deduction unless Mrs. Liftin became a United States citizen before the estate actually filed its return. Mrs. Liftin agreed to apply for United States citizenship, and in February 2004, she contacted a law firm to begin the process.
A second uncertainty affected the estate's preparation for its tax filing. The estate was engaged in litigation with the decedent's widow relating to her rights under a prenuptial agreement and the decedent's will. The parties and the Court of Federal Claims have referred to that litigation as " ancillary matters."
Neither uncertainty had been resolved as of June 2, 2004, the extended due date
for paying the tax and for filing the tax return. By then, there was no issue regarding timeliness of payment. In January 2004--which was before the extended June 2004 payment and filing deadline, but after the original, un-extended December 2003 filing deadline--the executor had made an estimated payment to the IRS of $877,300, an amount sufficient to cover the taxes due even if the estate could not claim the marital deduction. J.A. 577. But timely filing of the tax return was an additional, separate obligation. Indeed, the executor did not argue in this case that the payment in January 2004 altered the deadline for filing the return or reduced the penalty for late filing. See note 1, infra .
Specialist counsel advised the executor that " a late Form 706 could be filed after the extended due date." J.A. 135. In his declaration in this litigation recounting his advice, he stated that he " [b]ased [the advice] on [his] review and analysis of" a regulation that concerns citizenship and the marital deduction. Id. He reasoned that " the Regulations allowed for a late return to be filed in order for the [e]state to take advantage of the full marital deduction." Id. Counsel's declaration does not recite any basis for delaying the filing beyond the resolution of the citizenship question, but counsel advised the executor that filing could await not only the citizenship decision but also resolution of " other ancillary settlement issues." J.A. 136. See also J.A. 231-32 (declaration of John Liftin). The estate does not argue here, or cite to any evidence, that specialist counsel, before June 2004 or later, conveyed to the executor any explanation for the latter part of the advice, i.e., for delaying the filing of the return past the citizenship decision. Relying on counsel's advice that he could wait, the executor did not file Form 706 by June 2, 2004.
Several months after the June 2004 filing deadline had passed, the IRS inquired why the executor had not filed an estate-tax return. In a letter to the IRS on behalf of the estate, specialist counsel responded that " the Decedent's estate intends to delay the filing of its [F]orm 706 until Mrs. Liftin has obtained United States citizenship," adding: " we will, of course, file the Decedent's Form 706 as soon as the estate is informed of a determination" regarding her application. J.A. 485. The letter, mentioning only the application for naturalization, said nothing about a need to resolve pending litigation. The IRS did not reply to the letter.
The next summer, on August 3, 2005, Mrs. Liftin became a naturalized United States citizen. The executor, however, did not file the estate-tax return as soon as he was informed of the naturalization. Summer turned to fall, and fall to winter. On February 16, 2006, Mrs. Liftin and the estate settled their dispute over " ancillary matters." Still the executor did not file the return immediately. Not until May 9, 2006, did the executor finally file the return. The filing occurred twenty-three months after the extended June 2004 due date and nine months after Mrs. Liftin became a naturalized United States citizen.
The return claimed a marital deduction for the property passed to Mrs. Liftin. On that basis, it stated a tax liability of $678,572.25. J.A. 309. According to the return, therefore, the estate's January 2004 estimated payment of $877,300 exceeded the tax liability, entitling the estate to a refund of $198,727.75. Id.
The IRS disagreed, but not with the calculation of tax liability. Rather, it assessed a $169,643.06 late-filing penalty under 26 U.S.C. § 6651(a)(1). After an internal agency appeal, the IRS reduced the penalty to $135,714.45--equal to 25 percent of the tax liability (5 percent for each
month the return was late, capped at five months).
In September 2010, the executor, on behalf of the estate, sought recovery of the $135,714.45 late-filing penalty by initiating this action in the Court of Federal Claims under 26 U.S.C. § 7422(a) and 28 U.S.C. § § 1346(a)(1), 1491(a). The parties eventually filed cross-motions for summary judgment. They framed the dispositive issue as whether the executor's reliance on the advice of specialist counsel provided reasonable cause for not filing the estate-tax return until May 2006, almost two years after the extended due date of June 2, 2004.
In granting summary judgment for the government, the Court of Federal Claims divided that two-year delay into two periods--the fourteen months up to the August 2005 grant of U.S. citizenship to Mrs. Liftin, and the nine months from then until the May 2006 filing. The court concluded, first, that " the [e]state 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." Liftin, 111 Fed. Cl. at 18. The court deemed it reasonable in the circumstances for the executor to rely on counsel's specifically explained advice that filing could wait until the citizenship grant (which had to precede filing for the marital deduction to be available). Id. at 20-22.
The court drew the opposite conclusion for the remaining nine months: the " delay in filing after Mrs. Liftin became a U.S. citizen was not due to reasonable cause." Id. The court found no reasonable cause in the executor's reliance on counsel's advice that filing could be delayed past the citizenship determination--advice that the executor did not argue had been separately explained to him at the time and for which the current explanation was simply that final accurate information would not be available until the " ancillary matters" were resolved. Id. at 22-23. Because the " nine-month delay without reasonable cause was sufficient to subject [the estate] to the maximum late-filing penalty," a maximum reached after only five months' of delay without reasonable cause, the Court of Federal Claims granted summary judgment that the IRS correctly assessed the entire late-filing penalty under section 6651(a)(1). Id. at 23.
After the denial of reconsideration, id. at 23-24, the estate timely appealed. We have jurisdiction under 28 U.S.C. § 1295(a)(3). We review the grant of summary judgment by the Court of Federal Claims without deference. Am ...