T.C. Memo. 2009-84
UNITED STATES TAX COURT
ESTATE OF KWANG LEE, DECEASED,
ANTHONY J. FRESE, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14511-06. Filed April 27, 2009.
Frank Agostino, Soh-Yung Erica Son, Michael P. Mattaliano,
and Barbara L. de Mare, for petitioner.1
Lisa M. Rodriguez, for respondent.
1
Barbara L. de Mare (Ms. de Mare) entered her appearance on
Aug. 10, 2006. She was allowed to withdraw her appearance on
Sept. 2, 2008, because of a conflict of interest. Frank Agostino
entered his appearance on Sept. 9, 2008. Soh-Yung Erica Son and
Michael P. Mattaliano entered their appearances on Sept. 23,
2008.
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MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Respondent determined a $1,020,129 deficiency
in the Federal estate tax of the Estate of Kwang Lee, Deceased
(decedent’s estate), a $255,032 addition to that tax under
section 6651(a)(1) for untimely filing, and a $204,026
accuracy-related penalty under section 6662(a) for negligence or
disregard of rules or regulations, or alternatively, for a
substantial understatement of income tax.2 In Estate of Lee v.
Commissioner, T.C. Memo. 2007-371, the Court decided through
partial summary judgment that decedent’s estate did not qualify
for a marital deduction. Our decision was predicated on our
holding (contrary to the argument of petitioner) that language
included in the wills of Kwang Lee (decedent) and his wife,
Kyoung Lee (Ms. Lee; collectively, the Lees), could not change
the order of their actual deaths for purposes of determining who
was the surviving spouse within the meaning of section 2056(a).
See id. The only issues remaining in dispute, and which we
decide herein, are whether decedent’s estate is liable for the
accuracy-related penalty and the addition to tax. Following a
trial on these issues, we hold that decedent’s estate is liable
for neither of these items.
2
Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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FINDINGS OF FACT
I. Preliminaries
The parties filed with the Court numerous stipulations of
fact accompanied by various exhibits described in the
stipulations. The Court also deemed some facts and exhibits
stipulated pursuant to Rule 91(f). We incorporate herein the
stipulated facts and exhibits, and we find the stipulated facts
accordingly.
II. Decedent
Decedent was born on January 4, 1941, and he later married
Ms. Lee. The Lees had a significant combined wealth that was
attributable primarily to life insurance and stock options that
were decedent’s employee benefits. Those benefits were titled in
decedent’s name alone. A minimal part of the Lees’ combined
wealth consisted of assets owned jointly by the Lees and assets
owned by Ms. Lee alone.
Ms. Lee died testate on August 15, 2001. Decedent died
testate on September 30, 2001. The will of each of the Lees was
dated June 21, 2001.
III. Judge Frese
Anthony J. Frese (Judge Frese) has been a presiding
municipal court judge for the last 23 years. Cases in his court
relate primarily to motor vehicle and parking citations and to
minor criminal charges. Judge Frese also is a practicing
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attorney affiliated with the law firm of Nowell Amoroso Klein
Bierman, P.A. (Nowell). Judge Frese practices primarily in the
defense of individuals or entities charged with violating liquor
laws. Judge Frese does not practice tax law, and he has no
specialized knowledge of Federal tax. Judge Frese has limited
experience in estate planning and in estate administration.
IV. The Lees Seek the Expeditious Preparation of Their Wills
Judge Frese and decedent were neighbors and good friends.
In the spring of 2001, decedent informed Judge Frese that the
Lees wanted their wills prepared expeditiously because they were
dying of cancer. Decedent asked Judge Frese if he would prepare
their wills for them. Judge Frese declined because, he stated,
he was unqualified to prepare their wills in the manner they
desired.
V. Ms. de Mare
Judge Frese asked Henry Amoroso, a partner at Nowell, to
recommend an estate planning attorney whom Judge Frese could
recommend to the Lees. Henry Amoroso recommended Ms. de Mare.
Henry Amoroso told Judge Frese that estate planning and will
preparation were two of Ms. de Mare’s specialties and that she
had been practicing law in those areas for many years. Ms. de
Mare was a partner at Nowell who had specialized in estate
planning, estate administration, and the preparation of Federal
estate tax returns for over 30 years.
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Following Judge Frese’s conversation with Henry Amoroso,
Judge Frese read the section of Nowell’s practice brochure that
described Ms. de Mare’s education, experience, and professional
affiliations. He also met and spoke with her personally. Judge
Frese concluded from his review of Ms. de Mare’s qualifications
and from his conversations with her and Henry Amoroso that Ms. de
Mare was a qualified estate planning attorney, a qualified estate
administrator, and a qualified preparer of Federal estate tax
returns. Judge Frese advised the Lees to retain her to prepare
their wills. The Lees followed that advice.
VI. Preparation of Wills
Ms. de Mare concluded that the Lees could minimize Federal
estate taxes payable on their estates if decedent transferred
some of his assets to Ms. Lee. Ms. de Mare first considered
having decedent disclaim or actually transfer some of his
employee benefits to Ms. Lee. Ms. de Mare ascertained, however,
that decedent could neither transfer nor disclaim those benefits.
Ms. de Mare concluded that decedent had to predecease Ms. Lee to
cause the desired transfer of assets. Because Ms. de Mare could
not be sure that decedent would actually die first, she included
a deemed survivorship provision in each of the Lees’ wills. Ms.
Lee’s will states: “For purposes of this Will, any person who
shall die within six (6) months after my death shall be deemed to
have predeceased me”. Decedent’s will states:
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A. For purposes of this Will, any person, other than
my wife, who shall die within six (6) months after my
death shall be deemed to have predeceased me.
B. In the event that my wife shall die at the same
time as I, or under circumstances such as to render it
difficult or impossible to determine who died first, my
wife shall be deemed to have survived me.
VII. Judge Frese Appointed Executor of Estates
Judge Frese was appointed executor of each of the Lees’
estates shortly after they died. These appointments were made
pursuant to the Lees’ wills and were the first two times that
Judge Frese served as an executor. Judge Frese asked Ms. de Mare
to help him administer the estates because she was an attorney
familiar with the Lees’ assets and she had drafted their wills.
Judge Frese asked Ms. de Mare to prepare the necessary tax
returns for him to sign and to file. Judge Frese understood that
he had to file a Federal estate tax return for decedent’s estate
and that the unextended due date of the return was June 30, 2002.
Judge Frese provided Ms. de Mare with all of the information
she requested to help him administer decedent’s estate and for
her to prepare its Federal estate tax return. Judge Frese spoke
regularly with Ms. de Mare about the administration of decedent’s
estate and about her preparation of its estate tax return. Judge
Frese monitored the extent that Ms. de Mare was working on
decedent’s estate through his conversations with her and through
his review of the legal bills that she tendered to the estate for
payment.
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VIII. First Request for Extension
On June 28, 2002, Ms. de Mare, as an attorney for and on
behalf of decedent’s estate, signed and mailed to the Internal
Revenue Service a Form 4768, Application for Extension of Time To
File a Return and/or Pay U.S. Estate (and Generation-Skipping
Transfer) Taxes. She requested through that form an automatic
6-month extension of time to file the estate tax return of
decedent’s estate. She included with the request a check for
$250,000. That check was given to her by Judge Frese, and the
amount of the check represented her estimate of a little more
than the Federal estate tax that would ultimately be due on
decedent’s estate. Her filing of this form extended the due date
of the estate tax return of decedent’s estate to December 30,
2002. She provided Judge Frese with a copy of the form as filed,
and he was aware of the extended due date.
IX. Second Request for Extension
On December 30, 2002, Ms. de Mare went to her office
intending to complete the estate tax return for decedent’s
estate. Judge Frese had told her he would be in his office on
that day to sign and to file the return, and she believed that
only minor portions of the return remained to be completed. Ms.
de Mare prepared Federal estate tax returns for her clients using
a software program on her computer. When she tried to access
that program on December 30, 2002, all of her client’s returns
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were gone. She attempted to retrieve the estate tax return of
decedent’s estate but to no avail.
Ms. de Mare concluded late that afternoon that she would be
unable to retrieve the return, and she informed Judge Frese of
her situation. She advised him not to worry because she had
everything under control. She advised him that she would simply
request a second 6-month extension of time to file the return
which, if denied, would give decedent’s estate 10 days after
notification of the denial to file the return timely. She
advised him that decedent’s estate should enclose a $100,000
check with the request so that it would definitely not owe
anything with respect to the return. She advised him that the
$100,000 would be refunded to decedent’s estate after its estate
tax return was filed.
Judge Frese questioned Ms. de Mare on her advice, and she
assured him it was correct. Judge Frese understood from his
conversations with Ms. de Mare that decedent’s estate was
entitled to request a second extension which would result in
either a 6-month extension or, at the least, the 10-day extension
referred to by Ms. de Mare. Judge Frese accepted Ms. de Mare’s
advice and authorized her to request a second extension. Unknown
to Judge Frese at that time, Ms. de Mare had never before
requested from the Internal Revenue Service a second extension of
time to file a Federal estate tax return. She also had not
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researched whether such an extension could be requested, or
consulted Form 4768 or its instructions for guidance as to this
matter.
By letter dated December 30, 2002, Ms. de Mare informed the
Internal Revenue Service that she and Nowell were requesting an
additional extension of time to file the estate tax return of
decedent’s estate. The letter stated:
We are still unable to file the estate tax return,
although it is nearly completed, as our computerized
tax service has self-destructed, and we cannot recall
the completed portions of the return. We are working
with our service to retrieve the return, and will file
it within a few days after retrieval. Therefore an
additional extension of time to file and to pay is
requested.
Ms. de Mare included with the letter a $100,000 check given to
her by Judge Frese. Ms. de Mare provided Judge Frese with a copy
of the letter.
Ms. de Mare’s letter was received by the Internal Revenue
Service on January 6, 2003, and it was stamped “MAIL” “RECE’VED
IRS”. The accompanying $100,000 check was cashed shortly
thereafter. The letter with the stamp mark was returned to Ms.
de Mare shortly after January 6, 2003. The letter as returned
did not indicate that the requested second extension was granted,
denied, or even considered.
In February 2003, Ms. de Mare received the canceled $100,000
check with her monthly bank statement. Shortly thereafter, she
advised Judge Frese that an additional 6-month extension had been
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granted to decedent’s estate by virtue of the fact that the
Internal Revenue Service had cashed the $100,000 check and had
not notified her that her second request was denied. Ms. de Mare
advised Judge Frese that the due date for the estate tax return
was now June 30, 2003. Judge Frese questioned Ms. de Mare as to
her advice, and she assured him it was correct.
X. Filing of Estate Tax Return of Decedent’s Estate
On May 5, 2003, the Internal Revenue Service sent a taxpayer
delinquency notice to decedent’s estate. Sixteen days later, Ms.
de Mare finished preparing the estate tax return of decedent’s
estate. One week after that, Judge Frese, as executor of
decedent’s estate, signed and mailed the return to the Internal
Revenue Service. The return contained a copy of the Form 4768
mailed to the Internal Revenue Service on June 28, 2002, and a
copy of Ms. de Mare’s letter mailed to the Internal Revenue
Service on December 30, 2002.
The estate tax return of decedent’s estate was prepared as
though decedent had predeceased Ms. Lee and claimed a marital
deduction under section 2056 of $1,618,225. The return also
claimed a deduction of $427,331.29 for Federal and New Jersey
estate taxes paid on the estate of Ms. Lee, asserting that those
taxes were a liability of decedent’s estate because he was
considered to have predeceased her. The return reported that
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decedent’s estate had overpaid its Federal estate tax by
$124,676.40.
Judge Frese reviewed the entire return with Ms. de Mare
before filing it. He also questioned her at that time on certain
aspects of the return, including the reversal of the Lees’ actual
deaths in order to claim a marital deduction and a deduction for
the taxes paid on the estate of Ms. Lee. Ms. de Mare assured
Judge Frese that the return was correct and that the claimed
deductions were proper. Judge Frese accepted the advice of Ms.
de Mare, noting to himself that she had prepared the return
consistently with her prior advice that decedent’s estate would
receive a refund of the $100,000 paid with the second extension
request.
XI. Notice of Deficiency
On April 26, 2006, respondent issued a notice of deficiency
to decedent’s estate. The notice reflected respondent’s
determination that the estate was not entitled to deduct either
the $1,618,225 or the $427,331.29 because Ms. Lee died before
decedent. Judge Frese, acting in his capacity as executor of
decedent’s estate and with a mailing address in Hackensack, New
Jersey, petitioned the Court to redetermine respondent’s
determination.
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OPINION
I. Accuracy-Related Penalty
We decide first whether decedent’s estate is liable for the
accuracy-related penalty. Respondent determined that the
accuracy-related penalty was appropriate because decedent’s
estate had improperly claimed the $1,618,225 and $427,331.29
deductions on the basis of its position that decedent was deemed
to have predeceased Ms. Lee. We rejected that position in Estate
of Lee v. Commissioner, T.C. Memo. 2007-371.
Pursuant to section 7491(c), respondent must produce
sufficient evidence indicating that it is appropriate to impose
the accuracy-related penalty against decedent’s estate. See also
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Neither
party disputes (and we discern from the record) that respondent
has met this burden of production. Petitioner thus bears the
burden of proving that the accuracy-related penalty does not
apply because of reasonable cause, substantial authority, or the
like. See id.
Petitioner argues that decedent’s estate is not liable for
the accuracy-related penalty because the executor of the estate,
Judge Frese, was reasonable and acted in good faith in relying on
the advice of Ms. de Mare that decedent’s estate could treat
decedent as predeceasing Ms. Lee. Under section 6664(c)(1), an
accuracy-related penalty is not imposed upon any portion of an
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underpayment as to which a taxpayer acted with reasonable cause
and in good faith. Whether the taxpayer satisfies those tests is
a factual determination, where the taxpayer’s effort to assess
the proper tax liability is a very important consideration. See
sec. 1.6664-4(b)(1), Income Tax Regs. Reliance on the advice of
a tax professional may constitute reasonable cause and good faith
if, under all facts and circumstances, the reliance is reasonable
and the taxpayer acted in good faith. See Neonatology
Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd.
299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c)(1), Income Tax
Regs. This Court has stated that reasonable cause and good faith
is present where the record establishes by a preponderance of
evidence that: (1) The taxpayer reasonably believes that the
professional upon whom the reliance is placed is a competent tax
adviser who has sufficient expertise to justify reliance; (2) the
taxpayer provides necessary and accurate information to the
adviser; and (3) the taxpayer actually relies in good faith on
the adviser’s judgment. See Neonatology Associates, P.A. v.
Commissioner, supra at 99.
We conclude that petitioner has met the reasonable cause
exception to the accuracy-related penalty because, we find, Judge
Frese relied reasonably and in good faith on the advice of Ms. de
Mare as to the legitimacy of the deductions. Judge Frese
performed an adequate due diligence review of the qualifications
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of Ms. de Mare before he retained her to prepare the estate tax
return of decedent’s estate. He reasonably concluded from his
review that Ms. de Mare was a competent estate tax attorney upon
whom he could rely in this area of tax law in which he had no
special knowledge. He gave her all of the documents and
information that she requested to prepare the return. He
reviewed the return in detail with her before filing it. He
questioned her specifically on the legitimacy of the deductions.
We do not believe that Judge Frese in the setting at hand was
under any further obligation to second-guess or independently
research whether Ms. de Mare’s advice was correct.3 We hold that
decedent’s estate is not liable for the accuracy-related penalty.
II. Addition to Tax
We now decide whether decedent’s estate is liable for the
addition to tax for late filing. Section 6651(a)(1) imposes an
addition to tax for failure to file a return by its due date
unless the taxpayer can establish that such failure is due to
reasonable cause and not due to willful neglect. Because the
3
Respondent asserts that Judge Frese did not reasonably
believe Ms. de Mare to be a competent tax professional upon whom
he could rely. We disagree. Judge Frese is an attorney and a
longtime judge. He reviewed Ms. de Mare’s qualifications and
concluded on the basis of his review that Ms. de Mare was an
expert upon whom he could rely as to the propriety and operation
of the deemed survivorship provisions included in the Lees’
wills. He also concluded that Ms. de Mare was an expert upon
whom he could rely to prepare correctly the estate tax return of
decedent’s estate.
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parties’ agree that the estate tax return of decedent’s estate
was filed untimely, petitioner must prove that the untimely
filing of the return was due to reasonable cause. See sec.
7491(c); Rule 142(a); Higbee v. Commissioner, supra at 446-447.
The untimely filing would be due to reasonable cause if Judge
Frese, the executor of the estate, exercised ordinary business
care and prudence but nevertheless was unable to file the return
timely. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Willful neglect denote a “conscious, intentional failure or
reckless indifference”. United States v. Boyle, 469 U.S. 241,
245 (1985).
Petitioner concedes that decedent’s estate was not entitled
to receive a second 6-month extension to file its estate tax
return and that Ms. de Mare’s advice to the contrary was
erroneous. Petitioner argues that Judge Frese filed the estate
tax return late because he relied reasonably on the advice of Ms.
de Mare that decedent’s estate had received a second 6-month
extension of time to file its return. Petitioner points the
Court to various cases where this Court has held that a
taxpayer’s reliance on the erroneous advice of an attorney as to
the due date of a return may constitute reasonable cause if the
reliance was reasonable. See, e.g., Estate of La Meres v.
Commissioner, 98 T.C. 294, 321-324 (1992), where the Court held
that reasonable reliance on erroneous advice that a second
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extension for the filing of an estate tax return could be
obtained beyond a 6-month extension already received was
reasonable cause for failing to file the return timely.
We conclude that decedent’s estate is not liable for the
addition to tax because, we find, Judge Frese relied reasonably
upon Ms. de Mare’s advice that a second 6-month extension could
be and was received. Although that advice proved to be
erroneous, the facts at hand persuade us that Judge Frese acted
diligently as to fulfilling his obligation to file the estate tax
return timely and that the late filing of the return was
attributable to his receipt of the erroneous advice from Ms. de
Mare. We hold that decedent’s estate is not liable for an
addition to tax for untimely filing.
III. Conclusion
We have considered all arguments respondent has made for
contrary holdings and, to the extent not discussed, we have
rejected those arguments as without merit.
Decision will be entered
under Rule 155.