TAX COURT OPINION

Case: Estate of Marjorie B. Drescher, Deceased, Paul L. Knight, Executor
Docket Number: 10252-14
Judge: Lauber
Opinion Type: bench
Filed: 11/23/2015
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 ESTATE OF MARJORIE B. DRESCHER, DECEASED, PAUL L. KNIGHT, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 10252-14. ) ) ) ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Albert G. Lauber at Washington, D.C., on November 9, 2015, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision is entered under Rule 155. Accordingly, it is ORDERED that the parties shall file computations for entry of decision under Tax Court Rule 155 on or before January 25, 2016. Dated: Washington, D.C. November 23, 2015 (Signed) Albert G. Lauber Judge SERVED NOV 2 4 2015 Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2C 21 22 23 24 25 Bench Opinion by Judge Albert G. Lauber November 9, 2015 Estate of Marjorie B. Drescher, Deceased, Paul L. Knight, Executor v. Commissioner Docket No. 10252-14 THE COURT: THE COURT HAS DECIDED TO RENDER THE FOLLOWING AS ITS ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. This opinion shall not be relied on as precedent in any other case. All section references are to the Internal Revenue Code as in effect for 2009, and Rule references are to the Tax Court Rules of Practice and Procedure. Some of the facts have been stipulated and are so found. The Stipulation of'Facts and attached exhibits are incorporated by this reference. David J. Fisher appeared on behalf of petitioner, and William J. Gregg appeared on behalf of respondent. Respondent determined a deficiency in federal estate tax of $1,160,235 and an accuracy- related penalty under Section 6662 (a) of $232, 047. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 Petitioner has conceded the adjustments that gave rise to the deficiency. The sole issue for decision by this Court is whether petitioner is liable for the accuracy-related penalty. We hold 5. that no penalty is due. 6 7 8 9 10 11 12 13 14 Marjorie B. Drescher died on December 31st, 2009, a resident of Maryland. Paul L. Knight, the spouse of one of the decedent's nieces was appointed as the executor of her estate. Mr. Knight resided in ) the District of Columbia at the time the petition was filed. Mr. Knight is an attorney specializing in legal ethics and criminal defense work. He has been responsible for many of the financial affairs of his 15 wife and her family. He has no training or expertise 16 17 18 19 20 21 22 23 24 25 in tax matters, and regularly engages tax professionals to assist him on such matters. Petitioner engaged Clarington Associates, Inc., and specifically John P. Devlin, CPA, to prepare the estate tax return for the decedent's estate. Mr. Knight had previously engaged Mr. Devlin to prepare numerous tax returns for the decedent and other members of his family, and Mr. Devlin was thoroughly familiar with the decedent's financial affairs. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 Mr. Devlin had been a CPA for 35 years, had an excellent reputation, and was a competent tax professional. Mr. Devlin died several years ago and his practice was acquired by another CPA firm. Deborah Haines, an experienced CPA with that firm, testified at trial concerning the Drescher estate tax files that her firm had_ acquired from Mr. Devlin. The decedent made numerous taxable gifts between 1980 and 2009 totaling $10,227,000. The 10 gifts she made within three years of her death, 11 12 between 2007 and 2009, totaled $4,202,000. She paid federal gift tax in the amount of $1,890,900 on these - 13 latter gifts. 14 15 16 Mr. Knight provided Mr. Devlin with all the information necessary to prepare the estate tax return. In particular, Mr. Knight provided Mr-. 17 Devlin with the decedent's gift tax returns going 18 19 20 21 22 23 2 back to 1980, including the returns filed for 2007, 2008, and 2009. The latter returns showed that gift tax W $1,890,900 had been paid on gifts made within three years of the decedent's death. Mr. Devlin prepared for the estate and petitioner timely filed Form 706 F U.S. Estate and Generation Skipping Transfer Tax 25 Return. This return reported estate tax due of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 $8,912,086. Petitioner paid the tax with the return. The return properly reported on Line 4 the total adjusted taxable gifts made by the decedent during her life. The return also properly reported on Line 7 the total gift tax paid by the decedent on those gifts. By mistake, however, Mr. Devlin neglected to include, as part of the gross estate, the $1,890,900 of gift tax the decedent had paid on the gifts made within three years of her death. This amount should have been separately reported on Schedule D, transfers during decedent's life. Line A on Schedule D requires the reporting and the inclusion in the gross estate under Section 2035(b) of "Gift tax paid or payable by the decedent for all gifts made by the decedent within three years before the decedent's death." The major tax complication confronting the estate involved the valuation of certain hedge fund investments held by the decedent at her death. Mr. 20 Devlin prepared several drafts of the estate tax 21 return(cid:0)575and discussed these matters with Mr. Knight. 22 When the final version of the estate tax return was 23 24 25 ready to be filed, Mr. Knight went to Mr. Devlin's office, and during the course of an hour, reviewed the estate tax return page by page. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Mr. Knight knew that the decedent had made numerous taxable gifts during her life, and he observed that these gifts and the gift tax paid on them were properly reported on Line 4 and Line 7 of the return. Mr. Knight had no knowledge of Section 2035(b) and was not aware that gift tax paid on gifts made within three years of death was supposed to be included as an asset of the estate. ( The return as filed did not include a blank Schedule G, and Mr. Knight was not aware that a completed Schedule G should have been included in the return. )Mr. Devlin repeatedly assured Mr. Knight that the return had been completed correctly, and Mr. Knight accepted these assurances in good faith. The IRS examined the estate tax return and made several adjustments, including an adjustment to include in the gross estate the $1,890,900 of gift tax paid on gifts made within three years of death. 20 Petitioner has conceded the correctness of all these 21 22 23 24 25 adjustments. Notice of Deficiency timely mailed to petitioner on February 7, 2014, also determined an accurac.y-related. penalty of $232,047 under Section 6662(a). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 According to respondent's pre-trial 2 memorandum, this penalty reflected the IRS's 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "determination that the underpayment of tax for the omitted Schedule G and related data was due to negligence or disregard of the rules and regulations . " Section 6662 imposes a 20 percent accuracy- related penalty upon the portion of any underpayment of tax that is attributable to negligence or disregard of rules and regulations. Negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the Code, and disregard means any careless, reckless, or intentional disregard. Sec missioner bears the burden of production ith respect to the Section 6662 penalty. Section 7491(c Respondent has carried his burden of production by showing that the estate is liable for the additional $1,160,235 of estate tax, which petitioner has conceded. The burden thus shifts to petitioners to prove that the penalty does not apply. See Higb Commissioner. The Section 6662 penalty does not apply to any portion of nderpayment if it is shown that there 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 is a reasonable cause for such portion, and that the taxpayer acted in good faith with respect to it. Section 6664(c)(1). The decision whether the taxpayer acted 5 with reasonable cause and in good faith is made on a 6 7 8 9 case-by-case basis, taking into account all pertinent facts and circumstances. Section 1.664-4(b)(1), Income Tax Regs. Circumstances that may signal reasonable 10 cause and good faith include an honest 11 misunderstanding of fact or law that is reasonable in 12 13 14 15 16 17 18 19 23 21 22 23 24 light of all the facts and circumstances, including the experience, knowledge, and education of the taxpayer. Reasonable cause may be shown by demonstrating reliance on the advice of a competent tax professional. See Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99, (2000), aff'd 299 F.3d 221 (3d Cir, 2002). Section 16664-4(b) (1) and (c) Income Tax Regs. In assessing whether the taxpayer reasonably relied on advice, we consider whether the advisor was competent, whether the advisor received accurate and complete information from the taxpayer, 25 whether the taxpayer actually relied in good faith on 866.488.DEPO www.Capita1ReportingCompany.com . Capital Reporting Company the advice he was given. Neonatology Associates, 115 10 T.C. 99. The reliance defense is not available if the taxpayer fails to disclose a fact that he knows, or reasonably should know, to be relevant to the proper tax treatment of an item. Section 1.6664- 4 (b) (1) and (c) , Income Tax Regs. The taxpayer must therefore establish that he supplied the return preparer with all necessary information and that the incorrect return was a result of the preparer ' s mistakes . Wise v. Commissioner, 94 T.C. 473, 487 (1990). Besides furnishing all the necessary information to the r,eturn preparer, the taxpayer must also review the return and make sure, to the best of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 his ability, that the return has been prepared 17 18 19 20 properly. Magil v. Commissioner, 70 T.C. 465, 479- 480 (1978), aff'd 651 F.2d 1233 (6th Cir. 1981) Petitioner has carried his burden of showing reasonable cause and good faith. He provided 21 all the necessary information to Mr. Devlin, a 22 23 24 25 competent tax return preparer. In particular, he provided Mr. Devlin with all gift tax returns filed by the decedent, including the return for 2007, 2008, and 2009. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 These returns on their face informed Mr. 2 Devlin that $1,890,900 of gift tax had been paid on 3 gifts made by the decedent within three years of her 4 5 6 7 8 9 10 11 12 13 14 death. Through oversight, Mr. Devlin neglected to input this data properly into the software program used to prepare the estate tax return, with the result that no Schedule G was ever generated. Mr. Knight had no knowledge of this oversight. He was not himself aware that gift tax paid on gifts made within three years of the -decedent's death must be separately reported, included as an asset of the estate, and reported on Schedule G. Given Mr. Knight's lack of tax training and 15 Mr. Devlin's repeated assurances that the return was 16 17 18 19 20 21 22 23 24 25 correct, we find Mr. Knight's conduct altogether reasonable. He reasonably relied on the advice of a competent tax preparer that the estate tax return he filed was correct. Respondent points to two paragraphs in the petition which recite, "upon information and belief that a Schedule G might have been included in an early draft of the estate tax return, but was later eliminated as a result of a manual override of the output generated by the software. 866.488.DEPO www.CapitalReportingCompany.com . Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 On the basis of this recital, respondent contends that the omission of Schedule G may have been intentional negating Mr. Knight's claim of good faith reliance. We find no factual support for this argument. The paragraphs in the petition to which respondent refers were apparently based on a communication from Mr. Devlin before he died. They represent one possible theory about how the error occurred. The evidence at trial established that this theory was incorrect. Ms. Haines reviewed the various drafts of the estate tax return that were accessible in the electronic files that her firm acquired from Mr. 15 Devlin. These drafts made clear that no Schedule G 16 17 18 19 20 21 22 23 was ever prepared and that Mr. Devlin had simply made a mistake when inputting the relevant data into the software progra < -The tables accompanying the accountant's copy of the return specifically show that there were no inputs of any kind into the portion of the program that would have generated a Schedule G. In sum, we find that due to Mr. Devlin's 24 mistake, no Schedule G was ever prepared as part of 25 the estate tax return. Mr. Knight had no reason to 866.488.DEPO www.CapitalReportingCompany.com ., .. Capital Reporting Company 13 know of this crission and relied reasonably and in good faith on Bir. Devlin's a_ssurances that the return had been preparêd properly. Because Mr. Enight reasonably relied on the advice of a competent tax professional, che estate has carried its ourden cf proving that it is not liable for the accuracy-related penalty. Petitioner rearesents that additional legal fees, interest and other adninistrati-ve expenses have been incurred by the escate after the estate tax return was prepared after the petition in thus case was filed. Petitioner contends, and responden: does not dispute._ that the estate may therefore be enti-ried sc an additional deduction under Section 2053B a)(2) for administration expenses. To enah¯ e the partiss to determine the appropriate deduction and the revised tax computation, we will enter a decision in this case under Rule 155. This concludes the Court's oral findings of fact and opinion _n this case. (Whereupon, at 4:45 p.m.. the above- entitled matter w=ts concluced . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 866.488.DEPO www.CapitalRepartingCompany.com