ESTATE OF CHARANIA v. Shulman

United States Court of Appeals
For the First Circuit

No. 09-2430

ESTATE OF NOORDIN M. CHARANIA ET AL.,

Petitioners, Appellants,

v.

DOUGLAS L. SHULMAN, COMMISSIONER OF INTERNAL REVENUE SERVICE,

Respondent, Appellee.

APPEAL FROM THE UNITED STATES TAX COURT

[Hon. Mary Ann Cohen, Judge]

Before

Lynch, Chief Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.

William F. Sheehan, with whom Goodwin Procter LLP was on
brief, for appellants.
Patrick J. Urda, Attorney, Tax Division, U.S. Dep't of
Justice, with whom John A. DiCicco, Acting Assistant Attorney
General, and Richard Farber, Attorney, Tax Division, were on brief,
for appellee.

June 17, 2010

*
Hon. David H. Souter, Associate Justice (Ret.), of the
Supreme Court of the United States, sitting by designation.
 SELYA, Circuit Judge. In a letter written on November

13, 1789, Benjamin Franklin famously warned that "in this world

nothing is certain but death and taxes." This appeal proves the

enduring wisdom of Franklin's pithy admonition. The tale follows.

`Refined to bare essence, the appeal presents two

interconnected questions. The first, which concerns the amount of

tax due, turns on whether shares of stock held in the name of a

decedent were community property under the marital property regime

of Belgium (where the decedent and his wife resided when he

acquired the shares and when he died) or the decedent's separate

property under the marital property regime of England (which was

the marital property regime in effect where the decedent and his

wife resided at the time they celebrated their marriage). The

second question concerns a refusal to abate a fragment of a penalty

assessed in consequence of the late filing of the decedent's estate

tax return.

The tax court held that England's separate property

regime applied and that, therefore, all the shares were includable

in the decedent's gross estate for federal estate tax purposes.

Estate of Charania v. Comm'r, No. 16367-07, 133 T.C. No. 7, 2009 WL

2924091, at *8 (Sept. 14, 2009). It simultaneously refused to

abate the fragment of the late-filing penalty. Id. at *10. The

decedent's estate and heirs (collectively, the Estate) assign error

to both rulings.

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 We affirm in part and reverse in part. We agree with the

tax court that the disputed shares were the decedent's separate

property and, thus, were includable in full in his gross taxable

estate. We disagree, however, with the tax court's refusal to

abate the balance of the penalty.

I. BACKGROUND

The raw facts are set forth in a stipulation submitted to

the tax court pursuant to Tax Court Rule 122. See Estate of

Charania, 2009 WL 2924091, at *1. We offer a thumbnail sketch,

beginning with the identities of the protagonists, proceeding

through the more important of the stipulated facts, and ending with

the travel of the case.

The decedent, Noordin M. Charania, and his wife,

Roshankhanu Dhanani, married in Uganda in 1967. Both of the

newlyweds were native Ugandans. Uganda had been under the hegemony

of the United Kingdom for many years and, therefore, both spouses

were citizens of the United Kingdom.

After their nuptials, the couple made their home in

Uganda. The decedent worked as an agent for a Belgian shipping

company. In 1972, Idi Amin, then the ruler of Uganda, ordered the

expulsion of Ugandans of Asian descent. Mindful of this edict, the

decedent and his wife, who were both of Asian descent, fled to

Belgium. They took only a few items of personal property; all of

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their assets within Uganda were expropriated by the Ugandan

government.

The couple arrived in Belgium in October of 1972,

intending to remain there indefinitely. The decedent resided in

that country until he died on January 31, 2002. He was survived by

his wife and children, Farhana and Mehran. His will, without

specific enumeration of particular assets, bequeathed one-third of

his property to his wife and one-third to each of his two children.

At no time had the decedent and his wife availed

themselves of a mechanism, available under Belgian law, that

permits married couples to modify or change the matrimonial regime

governing their property. By the same token, they had not entered

into any prenuptial agreement or other contractual arrangement

touching upon the ownership of assets acquired during their

marriage.

To this point, the tale would not seem to implicate the

taxing power of the United States. But under the Internal Revenue

Code (I.R.C.), the Internal Revenue Service (IRS) has a long reach.

Its interest here stems from the decedent's purchase, in August of

1997, of 50,000 shares of stock in an American financial services

company: Citicorp. These shares were later converted into 125,000

shares of stock in another (related) American company: Citigroup.

After a series of stock splits and stock dividends, the investment

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grew to a total of 250,000 shares of Citigroup stock. The value of

the shares at the time of the decedent's death was $11,790,000.

A federal estate tax return was due on October 31, 2002.

I.R.C. § 6075. On that day, the Estate filed an application for an

extension of time to (i) file a return and (ii) pay any estate tax

that was due and owing. The IRS approved the requested filing

extension but not the requested delay in payment.

Nearly two weeks after the deadline for paying estate

tax, the Estate paid $1,150,732.33 to the IRS. The Estate also

missed the now-extended deadline for submitting the estate tax

return, filing that document on April 29, 2004 (almost one year

late).

The estate tax return set the value of the decedent's

gross estate for federal estate tax purposes at $4,156,250, which

was the value of 125,000 shares of Citigroup stock (one-half of the

total bloc of stock held in the decedent's name) on a valuation

date permitted by the tax code.1 The Estate explained that the

gross estate did not include all 250,000 shares because the stock,

although issued in the decedent's name alone, was owned as the

community property of the decedent and his wife under the laws of

Belgium.

1
The tax code affords an executor, in some circumstances, the
option of valuing property as of the date six months after the
decedent's death. I.R.C. § 2032. In this instance, the Estate
opted to value the shares as of July 31, 2002.

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 On June 21, 2004, the IRS assessed unpaid taxes in the

amount of $1,156,341.49 against the Estate, together with a penalty

of $289,085.37 for the late filing of the return, id. § 6651(a)(1),

and a penalty of $7,115.33 for late payment of tax, id.

§ 6651(a)(2).

After making these assessments, the IRS proceeded to

complete its examination of the Estate's tax return. It concluded

that all 250,000 shares of Citigroup stock were includable in the

gross taxable estate. Accordingly, the IRS issued a notice of

deficiency for unpaid tax in the amount of $2,070,000.01. See id.

§ 6212. The notice also increased the section 6651(a)(1) late-

filing penalty by $511,758.93 to reflect the newly assessed tax

deficiency.

Having received a demand for payment of both the initial

$289,085.37 late-filing penalty and the $7,115.33 late-payment

penalty, the Estate sought a waiver of those penalties on the

ground that any shortcomings were based on reasonable cause and did

not reflect willful neglect. The IRS granted the waiver and abated

the penalties.

On July 19, 2007, the Estate repaired to the United

States Tax Court. Invoking I.R.C. § 6213, it sought

redetermination of the sums claimed in the notice of deficiency.

The Estate's petition contained two prayers for relief. First, it

contended that the decedent held the shares of Citigroup stock as

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community property with his wife under Belgium's marital property

regime and, therefore, only one-half of the shares were properly

includable in his gross estate. Second, it contended that the

$511,758.93 portion of the late-filing penalty should be abated.

The parties submitted the case to the tax court on

stipulated facts. See Fed. Tax Ct. R. 122. To explain the fine

points of their arguments, they also filed briefs and reports about

relevant foreign law. See Fed. Tax Ct. R. 146.

The tax court upheld both the determination of the tax

deficiency and the challenged portion of the late-filing penalty.

With respect to the former issue, the court concluded that the

decedent held the shares not as community property under the

marital property regime of Belgium but, rather, as his separate

property under the marital property regime of England. Estate of

Charania, 2009 WL 2924091, at *8. With respect to the latter

issue, the court found insufficient justification for the untimely

filing. Id. at *9. Relatedly, it concluded that the IRS's earlier

abatement of a portion of the late-filing penalty did not compel

the abatement of the remainder of the late-filing penalty. Id. at

*9-10. This timely appeal ensued. We have jurisdiction by

designation of the parties. I.R.C. § 7482(a), (b)(2); see also

Estate of Charania, 2009 WL 2924091, at *4 (noting parties' joint

designation of First Circuit).

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II. ANALYSIS

We bifurcate our discussion of the Estate's claims of

error, separately addressing the tax and penalty issues.

A. The Tax.

Every nonresident decedent who is not a citizen of the

United States is subject to federal estate tax on the transfer of

certain assets within his taxable estate. I.R.C. § 2101(a).

Pertinently, such a decedent's taxable estate includes stock owned

in domestic corporations. Id. §§ 2104(a), 2106(a). The dollar

amount that is includable in the gross estate is equal to "the

value of [the] property to the extent of the interest therein of

the decedent at the time of his death." Id. § 2033. This

calculation may, in certain circumstances, be premised on an

alternate valuation date. Id. § 2032.

The controversy here hinges on a narrow issue. The

Estate does not dispute that Citigroup is a domestic corporation

within the meaning of these statutory provisions. The Commissioner

does not contest the Estate's right to use the alternate valuation

date. The parties part ways, however, as to how many of the

250,000 Citigroup shares were includable in the decedent's gross

taxable estate.

On this critical issue, the Estate asserts that only one-

half of the shares were includable in the decedent's gross taxable

estate because, under the marital property regime of Belgium, the

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stock was community property. The Commissioner responds that all

the shares were includable in the decedent's gross taxable estate

because, under the marital property regime of England, they were

the decedent's separate property. This dispute presents a question

of foreign law and, thus, the tax court's resolution of it

engenders de novo review. See Textron Inc. v. Comm'r, 336 F.3d 26,

30 (1st Cir. 2003); see also Fed. Tax Ct. R. 146 (noting that the

tax court's determination of foreign law "shall be treated as a

ruling on a question of law").

Even on this compact battlefield, the parties occupy some

common ground. They agree that, for federal estate tax purposes,

ownership of intangible personal property is controlled by the

whole law of the decedent's domicile at the time of death.2 The

parties further agree that the decedent in this case was domiciled

in Belgium when he died and that a Belgian court, applying Belgian

choice-of-law rules, would look to the whole law of the country of

the spouses' common nationality. Finally, the parties agree that

2
We express no opinion on the appropriateness of this
conclusion. Rather, we work within the framework to which the
parties have agreed. Borden v. Paul Revere Life Ins. Co., 935 F.2d
370, 375 (1st Cir. 1991) (explaining that when parties have reached
a plausible agreement about what law governs, a federal court is
free to forgo independent choice-of-law analysis and accept the
agreement); cf. Restatement (Second) of Conflict of Laws § 187
(explaining that courts generally honor the parties' choice of law
selections in contract disputes).

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the country of the spouses' common nationality is England.3 So

framed, the question reduces to what marital property regime an

English court would apply to determine the spouses' property rights

in the Citigroup shares.

The Estate argues that an English court would adhere to

the doctrine of mutability. Under the doctrine of mutability, the

marital property regime of the jurisdiction in which the spouses

were domiciled when the property was acquired governs questions of

ownership. J.G. Collier, Conflict of Laws 282 (3d ed. 2001). In

this case, the spouses were living in Belgium when the decedent

purchased the stock. That jurisdiction has a community property

regime. Thus, if an English court were to follow the doctrine of

mutability, ownership of the Citigroup shares would be split.

The Commissioner counters that an English court would

apply the doctrine of immutability. Under the doctrine of

immutability, the marital property regime of the jurisdiction in

which the spouses were domiciled at the time of their marriage

governs all personal property that they acquire thereafter,

regardless of where they are living when the property is acquired

3
We use "England" as a convenient shorthand for the United
Kingdom. Both the decedent and his wife were born in Uganda, at a
time when that country was part of the United Kingdom. The parties
have stipulated that they were citizens of the United Kingdom at
all relevant times.

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or whether their domicile changes.4 Id. Thus, because the spouses

were domiciled at the time of their nuptials in Uganda, and because

the parties have stipulated that Uganda's marital property regime

corresponded, at the relevant time, to England's marital property

regime, the doctrine of immutability would call for application of

England's marital property regime. That is a separate property

regime, so that if an English court were to follow the doctrine of

immutability, all the Citigroup shares would be the decedent's

property.

The question of which jurisdiction's marital property

regime should prevail after spouses have changed their domicile is

a recurring one in conflict of laws analysis. In the United

States, courts have tended to favor the doctrine of mutability.

See, e.g., United States v. ITT Consumer Fin. Corp., 816 F.2d 487,

490 (9th Cir. 1987); Saul v. His Creditors, 5 Mart. (n.s.) 569 (La.

1827). The primary rationale undergirding this approach is that

the jurisdiction in which a couple was domiciled at the time of the

acquisition of property has the most significant interest in both

the spouses and the property. See Restatement (Second) of Conflict

of Laws § 258. In continental European countries, the doctrine of

4
We caution that under either the doctrine of immutability or
the doctrine of mutability, the situation may vary if the spouses
execute a prenuptial or postnuptial agreement, or affirmatively
elect to be governed by some other country's marital property
regime. Dicey, Morris & Collins, The Conflict of Laws 1288-1295
(14th ed. 2006). We do not probe the limits of this exception
because nothing of the sort occurred in the case at hand.

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immutability is favored. See Dicey, Morris & Collins, The Conflict

of Laws 1295 (14th ed. 2006); Friedrich K. Juenger, Marital

Property and the Conflict of Laws, 81 Colum. L. Rev. 1061, 1061-62

(1981). Champions of the immutability doctrine tout its ease of

administration and the desirability of applying a single marital

property regime to the entire inventory of a couple's personal

property. See, e.g., Ernest G. Lorenzen, The French Rules of the

Conflict of Laws, 38 Yale L.J. 165, 177 (1928); J. Thomas Oldham,

What if the Beckhams Move to L.A. and Divorce?, 42 Fam. L.Q. 263,

264-65 (2008).

This background is interesting, but our task is neither

to decide which policy rationale is more attractive nor to

determine which view is more prevalent across the globe. Rather,

it is our task to inquire which of the competing doctrines an

English court would place into service on these facts. We

undertake that inquiry.

Historically, the House of Lords has been the court of

last resort in England.5 See Appellate Jurisdiction Act 1876, 39

& 40 Vict., c. 59 (Eng.); see also Glenn Dymond, House of Lords

Library, The Appellate Jurisdiction of the House of Lords 5-10

(2007). The only relevant decision of the House of Lords is De

Nicols v. Curlier, [1900] A.C. 21 (H.L.) (appeal taken from C.D.).

5
In 2009, the newly created Supreme Court of the United
Kingdom assumed that role. That court has generated no precedent
that is relevant here.

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That case involved two French citizens, who married in France. Id.

at 23. They did not enter into either a prenuptial agreement or

other contractual arrangement relating to the disposition of assets

acquired during the marriage. Id.

After nine years, the spouses moved to England, and the

husband became a British subject. Id. They spent the next thirty-

four years in England, amassing a considerable fortune. Id. at 31.

When the husband died, a question arose as to which marital

property regime — France's or England's — governed the ownership of

the couple's personal property (the bulk of which was acquired

after they moved to England). Id. at 23-24.

The De Nicols court looked to the marital property regime

of the jurisdiction in which the spouses were domiciled when they

celebrated the marriage to determine their rights in each other's

personal property. Id. at 24, 31. That brought French law to the

forefront, and the court concluded (i) that an immutability rule

was baked into French law, and (ii) that law impressed a community

property regime on a married couple's rights in personal property.

Id. at 24-26. The court considered this immutability rule to be

rooted in implied contract theory: under the French Civil Code,

entering into a marriage without a prenuptial agreement placed the

spouses in the same legal position as if they had executed a

contract that expressly adopted the community property regime of

the French Civil Code. Id. at 24. Once that regime attached, it

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could not be changed except by the spouses' express agreement to a

different arrangement or by the occurrence of certain external

events (e.g., divorce). Id. at 26. Wielding this reasoning, the

court held that the French community property regime governed, even

as to property that had been acquired in England. Id. at 30.

This decision lights our path. The rule of De Nicols is

that a change in marital domicile does not, in itself, effect a

change in the marital property regime governing the spouses' rights

in personal property acquired throughout the course of the

marriage. This, then, is a clear indication that, in this context,

England adheres to the doctrine of immutability. See Dicey et al.

(14th ed.), supra, at 1295.

De Nicols is the only English precedent on point. It is

still good law; it has never been overruled or discredited. Like

the tax court, we are persuaded that we must follow it. We add

that the rule of immutability is also commended to us by the

absence of any English precedent suggesting that its obverse — the

rule of mutability — applies with respect to the marital property.6

See Dicey et al. (14th ed.), supra, at 1299 (noting that there is

"no English authority" for the proposition that the mutability

6
Lashley v. Hog, (1804) 4 Paton 581 (H.L.), cited by the
Estate, is not such a case. The De Nicols court persuasively
distinguished Lashley, explaining that the question in Lashley was
not one of marital property rights but, rather, a question of the
law of succession.

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doctrine may prevail). Therefore, the rule of immutability applies

here.

As part of a campaign to convince us that mutability is

the English rule, the Estate points to the eleventh edition of

Dicey and Morris's treatise, which states that the English rule

governing spouses' rights in each other's property is one of

mutability. See Dicey & Morris, On Conflict of Laws 1068 (11th ed.

1987). There are two principal reasons why this endeavor fails.

First, even this cited version cautions that whether a

mutability rule obtains in England is controversial and not settled

law. Id. at 1069. Second — and more important — the most recent

edition of the same treatise reversed direction and states that

immutability is the rule in England. See Dicey et al. (14th ed.),

supra, at 1295 ("Rule 158 — A change in the matrimonial domicile

after marriage does not in itself alter the rights of the husband

and wife to each other's property."). The clear import of this

about-face is that the authors, having reconsidered the point, now

agree that De Nicols heralds a rule of immutability.

Taking a different tack, the Estate tries to distinguish

De Nicols on the ground that the De Nicols opinion was driven by

French — not English — law. This theory posits that the result in

De Nicols proceeds solely from the fact that French law implied a

contract between the spouses to adopt France's marital property

regime. But the text of De Nicols belies this reading.

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 Before the De Nicols court gave any consideration to the

content of French law, it applied the forum's choice-of-law rules

and decided that French substantive law governed the rights of the

spouses in each other's property. See [1900] A.C. at 24 ("The

parties, as I have said, were married according to French law, and

the first thing to do is to see how the matter would be dealt with

in respect of such a marriage by French law.") (Halsbury, L.C.);

id. at 31 ("[T]he only question would seem to be what was the

effect according to French law of the marriage of Mr. and Mrs. De

Nicols . . . .") (Lord Macnaghten). The fact that France's choice

of a marital property regime could be traced to an implied contract

theory had nothing to do with the court's decision, in the first

instance, to apply the law of the initial matrimonial domicile. To

suggest otherwise is to put the substantive law cart before the

choice-of-law horse.

Next, the Estate suggests that, even if De Nicols is not

distinguishable and announced a rule of immutability, a modern

English court would scrap it and adopt a rule of mutability. This

suggestion presents the Estate with a difficult row to hoe. We

have indicated, time and again, a reluctance to expand non-federal

law to embrace a doctrine that no local court has espoused. See,

e.g., A.W. Chesterton Co. v. Chesterton, 128 F.3d 1, 7 (1st Cir.

1997) (explaining that federal courts should hesitate to expand a

state's law beyond its clearly established boundaries); Kassel v.

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Gannett Co., 875 F.2d 935, 980 (1st Cir. 1989) (explaining that,

when called upon to apply state law, a federal court should

normally "take state law as it finds it"). Here the Estate

advances three arguments as to why an English court might decline

to follow De Nicols in the case at bar. Whether viewed simply or

in combination, these arguments do not compel the conclusion that

a modern English court would disavow De Nicols.

To begin, the Estate notes that today's society, in

contrast to that of a century ago, is characterized by increased

longevity and mobility. That is true as far as it goes, but it

does not take the Estate very far. One of the chief attractions of

the rule of immutability is that it provides a uniform property

regime regardless of how long people live or how often they move.

The second purported basis for soughing off De Nicols

focuses on the fact that the spouses in De Nicols voluntarily

departed from their original marital domicile, whereas the spouses

in this case were exiled. But while De Nicols did not speak

specifically to the effect (if any) of exile, it is far from clear

that an English court would necessarily view this distinction

either as meaningful or as cutting in favor of adopting a rule of

mutability.

The Estate's final basis for urging us to vaticinate that

England's highest court would overrule De Nicols and adopt the

mutability rule is no more cogent. This argument posits that a

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mutability rule is needed in order to avoid unfair results. Here,

however, applying the De Nicols rule of immutability would not

frustrate any clearly expressed intent of the decedent and his

wife. After all, the decedent took title to the shares in his own

name and never altered that form of ownership. Moreover, the

couple had multiple opportunities to select a marital property

regime other than that of their original marital domicile, but they

eschewed those opportunities. For example, they could have

selected a marital property regime by means of either a prenuptial

or postnuptial contract. See Dicey et al. (14th ed.), supra, at

1285. Similarly, Belgian law afforded them a mechanism that

allowed spouses to switch or modify the marital property regime

governing their holdings, see Belgium Code Civil art. 1394 (Codes

Larcier, Vol. I, Droit Civil et Judiciaire 2008) (Belg.), but they

never invoked that mechanism.

Let us be perfectly clear. We do not presume to decide

that England's highest court, if asked either to reexamine De

Nicols or to apply it to somewhat different facts, would

necessarily hold firm to the rule of immutability. That sort of

prediction is beyond our proper purview. We are, however, bound to

adhere to the rule of De Nicols absent a compelling showing that

the English courts would scuttle that rule. No such showing has

been made here.

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 To say more on this point would be superogatory. For the

reasons elucidated above, we follow De Nicols and apply the rule of

immutability in this case. Therefore, the English marital property

regime — a regime of separate property — governed the property

rights of the decedent and his wife in the Citigroup stock. It

follows inexorably that all the shares were includable in the

decedent's gross estate for federal estate tax purposes.

B. The Penalty.

This leaves the Estate's plaint that the tax court erred

by upholding the unrescinded portion of the late-filing penalty.

To put this plaint into perspective, we chronicle the relevant

events.

The IRS assessed a total late-filing penalty of

$800,844.30 against the Estate. This penalty was assessed in two

stages. First, the IRS assessed a penalty of $289,085.37 shortly

after the Estate filed the estate tax return. The IRS then

augmented that penalty by assessing an additional $511,758.93 in

the notice of deficiency.

The IRS abated the initial portion of the penalty, but

did not withdraw the incremental portion of the penalty (added in

the notice of deficiency). The tax court refused to abate this

incremental portion, Estate of Charania, 2009 WL 2924091, at *10,

and the Estate assigns error to this ruling. It asseverates that

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because the IRS abated one portion of the late-filing penalty,

consistency demanded abatement of the remainder.

In evaluating this asseveration, we start with the text

of the relevant statutory provision. We then address the merits of

the Estate's claim. Because that claim raises a question of law,

our review is de novo. See, e.g., State Police Ass'n of Mass. v.

Comm'r, 125 F.3d 1, 3-4 (1st Cir. 1997).

Persons subject to the federal estate tax are required to

file estate tax returns within fixed time parameters. I.R.C.

§ 6075. If such a person fails to file an estate tax return in a

timeous manner, he has the burden of showing "that such failure is

due to reasonable cause and not due to willful neglect." Id.

§ 6651(a)(1). In the absence of such a showing, "there shall be

added to the amount required to be shown as tax on such return" a

late-filing penalty. Id. Imposition of this penalty is mandatory

unless the failure to file on time was due to reasonable cause and

not due to willful neglect. See Comm'r v. Lane-Wells Co., 321 U.S.

219, 224 (1944) (holding late-filing penalty mandatory, absent

reasonable cause, under a similarly worded predecessor statute);

Plunkett v. Comm'r, 118 F.2d 644, 649 (1st Cir. 1941) (same).

The amount of the impost is not discretionary but,

rather, dictated by the statute. The penalty for returns that are

tardy by one month or less is five percent of the amount of tax

required to be shown on the return. I.R.C. § 6651(a)(1). An

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additional five percent is added for each further month (or

fraction thereof) that elapses before a return is filed. Id. The

maximum penalty is twenty-five percent. Id.

In this instance, the Estate filed its return on April

29, 2004 (almost one year late). The IRS responded on June 21,

2004, assessing a late-filing penalty of $289,085.37. This penalty

was twenty-five percent of the amount of tax shown on the return —

an amount calculated on the assumption that the gross estate

included only one-half of the Citigroup shares.

After examination of the return, the IRS determined that

all the Citigroup shares were includable in the gross estate. This

led to the issuance of a notice of deficiency for additional tax in

the amount of $2,070,000.01. The notice also memorialized an

increase in the late-filing penalty to correspond with its new tax

computation. This added $511,758.93 to the previously assessed

late-filing penalty.

After service of the notice of deficiency, the Estate's

total tax liability — according to the IRS — stood at $3,226,341.50

(the sum of the $1,156,341.49 tax assessed on June 21, 2004, and

the additional $2,070,000.01 assessed by means of the notice of

deficiency). The total late-filing penalty stood at $800,844.30

(the sum of the initial portion of the penalty — $289,085.37 —

assessed on June 21, 2004, and the incremental portion of the

penalty — $511,758.93 — assessed in the notice of deficiency). But

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the $289,085.37 portion of the penalty was abated during the

administrative phase of this case, leaving the remainder of the

penalty ($511,758.93) intact.

The Estate asked the tax court to abate what remained of

the late-filing penalty, arguing among other things that the IRS

already had determined that reasonable cause existed for the delay

in filing and that the delay was not due to willful neglect.

The tax court rejected this argument, Estate of Charania,

2009 WL 2924091, at *9-10, allowing this portion of the penalty to

stand.

The tax court's ruling does not survive scrutiny.

Although the late-filing penalty was imposed in two stages, it is

a single penalty punishing a single default (an untimely filing of

the estate tax return). The entire penalty was assessed in

pursuance of section 6651(a)(1). Under that statute, unless the

IRS determines that a taxpayer has demonstrated both reasonable

cause for the delay in filing and an absence of willful neglect,

the IRS must assess a late-filing penalty. The IRS abated the

initial portion of the penalty. This action necessarily signified

that it had determined that reasonable cause existed for the late

filing and that the failure to file on time was not due to willful

neglect. See I.R.C. § 6651(a)(1). On the face of the matter,

these determinations would seem to apply equally to the remainder

of the penalty (which was calculated according to the same

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statutory algorithm and imposed for precisely the same late

filing). The Commissioner has pointed to no basis for treating one

portion of this unitary penalty differently from the other, and the

record suggests no such distinction.

The whole is but the sum of its parts, and logically, the

two portions of the late-filing penalty should stand or fall

together. There may be special circumstances that would justify

splitting the baby, but the Commissioner has the burden of

identifying those circumstances. Cf. Estate of Abraham v. Comm'r,

408 F.3d 26, 35 (1st Cir. 2005) (holding that where notice of

deficiency fails adequately to describe the basis on which the

Commissioner relies for his deficiency determination, burden shifts

to the Commissioner to prove the accuracy of the deficiency

determination). Absent a plausible explanation, the only

conclusion that can be drawn from the abatement of the initial

portion of the penalty is that the remainder of the penalty should

have been abated as well. Any other result would be arbitrary,

capricious, and in derogation of the government's duty to turn

square corners in dealing with taxpayers. See Rotolo v. Merit Sys.

Protection Bd., 636 F.2d 6, 8 (1st Cir. 1980).

Here, the Commissioner has not proffered a plausible

explanation that would justify the apparent aberration. Without

such an explanation, we are constrained to conclude that the tax

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court erred in refusing to abate the balance of the late-filing

penalty.7

III. CONCLUSION

We need go no further. We affirm the tax court's ruling

that all 250,000 Citigroup shares were the separate property of the

decedent for federal estate tax purposes and, thus, were includable

in his gross taxable estate. Accordingly, the amount of tax

claimed in the notice of deficiency was due. Nevertheless, the tax

court's approbation of the $511,758.93 late-filing penalty was in

error, and that ruling must be reversed.

Affirmed in part and reversed in part.

7
Simple arithmetic confirms this conclusion. After
completion of the IRS's examination of the return, the total amount
of estate tax due was $3,226,341.50. Under section 6651(a)(1)'s
algorithm for a return that is filed more than eleven months late,
the late-filing penalty is twenty-five percent of that amount.
That amount is fixed by the statute, and the Commissioner has no
discretion to vary it. A late-filing penalty of $511,758.93,
however, would represent approximately sixteen percent of the tax
due. Thus, the statutory formula does not allow for a stand-alone
late-filing penalty of $511,759.93.

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