Close friends and family members often help each other by serving as trustees of family trusts and executors of each other's estates. A recent California case illustrates what can happen when people undertake these responsibilities without the proper advice.
In Baccei, No. C 07-5329 PJH (N.D. Cal. 6/26/08), an estate was penalized because a proper extension to pay was never requested. Although the estate did request a timely extension of time to file the return, a proper extension of time to pay was not requested. A statement was included with the form, but all the information needed to make a request for an extension of time to pay was not included with the extension form. The court denied the nephew-executor's request for a refund of the late payment penalty (which, with interest, amounted to $128,755.28).
ProcedureAn extension of time to file and time to pay for an estate are both granted on Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. The extension of time to file is automatically granted as long as the request is made timely. However, an extension of time for filing a return does not operate to extend the time for payment of tax. To obtain an extension of time to pay, the executor must complete Part III of Form 4768 and enter the requested extension date in the box in that part.
In order for an estate to be granted an extension of time to pay, the executor must follow specific and detailed rules. Regs Sec. 20.6161-1(b) states that an application containing a request for extension of time to pay "shall be in writing, shall state the period of the extension requested, and shall include a declaration that is made under penalties of perjury." In addition, if the application for extension of time to pay is based on a claim of reasonable cause or hardship, a statement of such reasonable cause or hardship must also be included.
Baccei CaseIn Baccei, the court granted summary judgment to the IRS because no proper extension of time to pay was requested. The accountant who prepared Form 4768 did not state the period of the extension requested, failed to include a declaration that the request was made under penalty of perjury, and failed to include a statement asserting reasonable cause or showing why a denial would result in undue hardship to the estate.
Although a statement was included with the extension request, it met none of the requirements of the regulations, and the court stated that there could be no substantial compliance relief because it would permit the plaintiff to "evade the substantive requirements that the IRS has established to govern its determinations regarding extensions of time to pay. The requirements set forth in the regulations are not merely ‘procedural.' . . ."
The executor argued that the IRS should not have asserted a penalty because he relied on the accountant, who had handled the decedent's tax affairs prior to her death. He argued that it was "unreasonable" for the court to require him to determine whether or not the form was properly completed because he did not sign it and he is not a tax professional. The court ruled that although the executor relied on his chosen accountant, that would not be a sufficient basis to abate the penalty because it was not a reliance on bad advice. According to the court, a taxpayer cannot delegate the duty to file returns or pay taxes, and therefore reliance on an agent to file a return or submit a form does not constitute reasonable cause excusing the failure to pay. The court also noted that in the Form 4768 filed with the IRS, the accountant estimated that the tax due was $131,327; the actual tax paid was $1,684,408.
ConclusionWhen selecting an accountant or an attorney for help with an estate, an executor should exercise care in making sure that the individual is not just familiar with the decedent's affairs, but that he or she is also qualified to give advice in the estate tax area. Too often individuals select the professional they are used to dealing with, even if that professional is not experienced in the particular area needed.
Even someone who has prepared a few estate tax returns may not be familiar with the less frequently encountered provisions of the estate tax law, such as the provision dealing with an extension of time to pay. Extensions of time to file are prepared and filed every day; extensions of time to pay are prepared and filed in limited circumstances and come with special rules that must be followed or there can be expensive consequences.
From Randi A. Schuster, J.D., LL.M., New York, NY
Stephen E. Aponte is senior manager at Holtz Rubenstein Reminick LLP, DFK International/USA, in New York, NY.
Unless otherwise noted, contributors are members of or associated with DFK International/USA.
For additional information about these items, contact Mr. Aponte at (212) 792-4813 or email@example.com.