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Thouron v US: Third Circuit holds reliance on counsel may relieve penalties for late payment of taxes

By Laura Gavioli and Denise Mudigere

In Thouron v United States, No. 13-1603 (3d Cir. May 13, 2014), the Court of Appeals for the Third Circuit held that reliance on tax advice may establish a reasonable cause defence to failure to pay penalties (Slip. Op. at 9.)

This case arises out of estate taxes originally due in 2007. In his will, the decedent appointed a friend as executor of the estate and the friend hired a tax attorney to advise the estate on tax matters. Relying on the advice of the attorney, the estate timely filed an extension for time to file the estate return and remitted a partial payment, but did not file for an extension to pay the remainder of the tax due. The estate claimed its attorney advised it that the extension to pay was not due until the return was filed and that the tax due would be deferred under IRC section 6,166 because the bulk of the estate’s assets were illiquid. The estate further claimed that the attorney advised it that no penalty would be imposed. The Internal Revenue Service (IRS) assessed the mandatory penalties of IRC section 6,651 and the estate filed a refund claim in district court asserting reasonable cause and reliance on its tax expert as a penalty defence.

The district court for the District of Pennsylvania held that reliance on the tax adviser was not reasonable cause for the late payment of the estate taxes and granted summary judgment in the government’s favour. To support its conclusion, the lower court relied heavily on United States v Boyle, 469 US 241 (1985), a Supreme Court decision holding that an estate could not rely on its attorney for the ministerial task of timely filing a return. The district court read Boyle to preclude any finding of reasonable cause based on reliance on an expert or other agent in failure-to-file and failure-to-pay cases…

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