Fleming v. U.S.

• Decision Date: 18 May 1981
• Docket Number: No. 80-1588,80-1588
• Citation: 648 F.2d 1122
• Parties: , 81-1 USTC P 13,410 John B. FLEMING, Personal Representative of the Estate of John J. Fleming, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1122

648 F.2d 1122

61 A.L.R.Fed. 307, 81-1 USTC P 13,410

John B. FLEMING, Personal Representative of the Estate of John J. Fleming, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 80-1588.

United States Court of Appeals Seventh Circuit.

Argued Sept. 24, 1980.

Decided May 18, 1981.

Michael W. Fleming, Michael W. Fleming & Assoc., Milwaukee, Wis., for plaintiff-appellant.

Carleton D. Powell, Dept. of Justice, Washington, D. C., for defendant-appellee.

Before SWYGERT, Judge, SKELTON, Senior Judge ^*, and CUDAHY, Judge.

SKELTON, Senior Judge.

This is an appeal by John B. Fleming (taxpayer), personal representative of the estate of John J. Fleming, deceased, from a judgment of the United States District Court of the Eastern District of Wisconsin, denying him a refund of $28,688.64 and awarding the United States $5,229.62, plus interest, on its counterclaim for interest. The amount not refunded, which is the only amount in issue on appeal, represents penalties paid by the personal representative as a result of his late filing of the federal estate tax return and the late payment of taxes due. The opinion of the District Court (Judge Robert W. Warren), awarding summary judgment in favor of the United States (defendant) is reported at 483 F.Supp. 284. Judgment was entered on February 21, 1980, and the estate filed a timely notice of appeal on April 18, 1980. The jurisdiction of this court is conferred by 28 U.S.C. § 1291.

The facts in this case are not in dispute. The decedent, John J. Fleming, died intestate on January 18, 1972. Under Section 6075 of the Internal Revenue Code of 1954, a federal estate tax return was required to be filed, and the taxes paid, within nine months after the decedent's death, and not later than October 18, 1972. However, the return was not filed or the taxes paid until August 22, 1973, more than 10 months after the due date.

The personal representative of the decedent's estate is the decedent's son (taxpayer). Taxpayer retained, as the attorney for the estate, his cousin, Michael W. Fleming. He had graduated from the Marquette University Law School in May 1966, and had had substantial experience in the preparation of income, inheritance, and estate tax returns. Taxpayer was appointed as personal representative of the estate shortly after the decedent's death, and, upon discovering that the estate of his mother, Carolyn Fleming, (handled by different counsel) had not yet been closed, arranged to be appointed the successor personal representative of her estate. The estate of Carolyn Fleming was closed on August 7, 1972, following the preparation and filing of federal and state fiduciary income tax returns, a Wisconsin inheritance tax return, and a federal estate tax return.

Taxpayer encountered various difficulties in preparing the decedent's tax return. Thus, although the decedent's estate was an heir of the estate of Carolyn Fleming, the value of that interest could not be ascertained until Mrs. Fleming's estate was closed. There were also problems in ascertaining the extent and value of the decedent's interests in various real estate ventures and in certain stock of a corporation conducting business in the Bahama Islands. In light of these difficulties, taxpayer signed and filed with the Milwaukee County Court a petition requesting additional time in which to file an inventory of the decedent's estate in the probate proceedings in that court. The petition was filed on August 28, 1972, and was granted the same day. The inventory was filed on July 18, 1973.

Between May and October of 1972, taxpayer and his attorney had a number of discussions about the deadline for filing the federal estate tax return. Taxpayer was advised by his attorney several times that it had to be filed by October 18, 1972. The attorney also told taxpayer that, in addition to seeking the extension from the Milwaukee County Court for filing the inventory, it would be necessary to apply to the Internal Revenue Service for an extension of time in which to file the return and pay the estate tax of decedent. In early October, 1972, the attorney informed taxpayer that he had prepared such an application and that it had been forwarded to the Internal Revenue Service for filing prior to the due date. The attorney stated in an affidavit that he had never prepared such an application for extension before and that he assumed the time to file the return and pay the tax was extended automatically when the application was filed, unless notice to the contrary was received from the Internal Revenue Service and that no such notice had been received. Taxpayer stated that his attorney told him that the effect of the filing of the application was to automatically extend the time for filing the return and payment of the tax for one year, until October 18, 1973. Taxpayer said that he relied upon this statement of his attorney.

However, the facts show that no application for extension was ever sent to the Internal Revenue Service. While the attorney said that he drafted an application in longhand and turned it over to his secretary for typing and mailing, it was never signed nor sent to the Internal Revenue Service.

Ten months after the due date, on August 22, 1973, the estate filed the tax return and paid a tax of $100,056. On November 13, 1975, the attorney received notice of an addition to tax of $28,688.64, plus a deficiency of $978.17. That amount, totaling $29,666.81, was paid to the government nearly 30 months later, on March 30, 1978. Taxpayer then filed a timely administrative claim for refund, which was denied by the Internal Revenue Service. Thereafter, taxpayer commenced this suit for refund in the district court. The United States denied the material allegations of the complaint and counterclaimed for $5,229.62, plus interest. This amount represents an assessment against taxpayer for the interest that accumulated during the 30-month period between assessment of the late filing and late payment penalties in November, 1975, and their payment by the estate in March, 1978.

Based on the affidavits, exhibits, and answers to interrogatories on file, both parties moved for summary judgment. The district court held in favor of the government, denying all relief to the taxpayer and entering judgment for the United States on its counterclaim. The court held itself bound by this court's decision in United States v. Kroll, 547 F.2d 393 (1977), to the effect that the executor of an estate has a personal, non-delegable duty to file the return on time, and accordingly found that any reliance by taxpayer on his attorney's statements regarding the filing of an alleged extension application and the effect thereof did not constitute "reasonable cause" within the meaning of Section 6651(a), Internal Revenue Code of 1954.

From the portion of the judgment denying any refund, taxpayer now appeals. ¹ The question here presented is whether there was reasonable cause under the statute for the late filing of the return and the late payment of the tax. We affirm the judgment of the district court.

Section 6651(a)(1) of the Internal Revenue Code of 1954 provides in relevant part that if a tax return is not timely filed, there shall be added to the tax due 5 percent for each month the return is unfiled, not to exceed 25 percent of the tax due, "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." Similarly, Section 6651(a)(2) provides for imposition of a penalty of 0.5 percent a month (up to 25 percent of the tax due) for the late payment of the tax, unless reasonable cause for the late payment is established. The applicable regulation states that in order to establish "reasonable cause", a taxpayer filing a late return must show that he "exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." Treasury Regulations on Procedure and Administration (1954 Code), 26 CFR, § 301.6651-1(c)(1). It is well established that when a return is filed late, imposition of the Section 6651(a)(1) penalty is mandatory unless the executor can demonstrate both his lack of willful neglect and the presence of reasonable cause. Logan Lumber Co. v. Commissioner, 365 F.2d 846, 853 and fn. 17 (5 Cir. 1966); Ferrando v. United States, 245 F.2d 582, 587, 589 (9 Cir. 1957); Richter v. United States, 440 F.Supp. 921, 923 (Minn., 1977); Estate of Mayer v. Commissioner, 43 T.C. 403, 405 fn. 1(1964), aff'd per curiam, 351 F.2d 617 (2 Cir. 1965), cert. denied, 383 U.S. 935, 86 S.Ct. 1064, 15 L.Ed.2d 852 (1966).

Taxpayer contends that he had reasonable cause for the late filing of the return because he relied on his attorney's statement that he had filed an application for an extension and that such filing automatically extended the filing date one year to October 18, 1973. He argues that under the circumstances he exercised ordinary business care and prudence but was unable to file the return within the prescribed time due to the complex nature of his father's estate as described above. He says that because of these facts, the late filing penalty should not be assessed. We do not agree.

There are many reasons why taxpayer's reliance on his attorney's statements was not reasonable. In the first place the attorney did not file an extension application. In the second place, even if he had filed it, an extension would not have been automatic. Thirdly, no extension was granted by the IRS. In the fourth place, even if the IRS had granted an extension, it could only have been granted for a maximum of 6 months. See Title 26 U.S.C. § 6081(a). Taxpayer knew that the return had to be filed on or before October 18, 1972, unless an extension was granted. He knew the procedure to be followed, as he had obtained an extension of time within which to file an inventory of his father's estate (the estate involved here) in the probate court...