Despite Late Filing New Jersey District Court Abates $450,959.50 Late Filing Penalty
In the just decided case of the Estate of Agnes R. Skeba v. United States; No. 3:170-cv-10231, the New Jersey District Court abated a $450,959.50 late filing penalty even though the federal estate tax return was filed nine months late. On March 10, 2014, the due date for the estate tax return, a request for an automatic six-month extension to file the return was submitted. Along with the extension request was included a payment of $725,000.00. In a cover letter the attorney for the estate also requested a six-month extension to make full payment.
On March 18, 2014, eight days after the initial filing due date of the estate tax return, the estate obtained funds by securing a mortgage on real property owned by the estate. On that day the estate made a second payment of $2,745,000.00 to the IRS. On June 25, 2014 the estate received approval of its application to extend the time to file its estate tax return. The extended date was September 10, 2014. On July 8, 2014 the estate received approval of its application to extend the time to full pay its estate tax liability.
For a variety of reasons, the estate tax return was not filed until June 30, 2015, approximately nine months beyond the extension to file date. The estate tax return reflected a tax of $2,528,838.00 and payments of $3,470,000.00. A refund of $941,162.00 was requested. The IRS refunded $488,719.34 to the estate and retained $450,959.50 as an assessed late filing penalty.
The IRS argued that the due date of the return was March 10, 2014 and since the estate tax return was filed nine months after the extension date, the late filing penalty began to run on March 10, 2014. Since the final estate tax was determined to be $2,528,838.00, and as of March 10, 2014 only $725,000.00 had been paid, the late filing penalty was imposed on $1,803,838.00. Pursuant to I.R.C. Section 6651(a)(1) a penalty of 5% was imposed for each month the return was late not to exceed 5 months. The penalty amount imposed was 25% of $1,803,838.00 or $450,959.50.
The District Court disagreed with the position of the IRS. In reaching its decision the court noted that both the late filing penalty (I.R.C. Section 6651(a)(1)) and the late payment penalty (I.R.C. Section 6651(a)(2)) are determined based upon the statutorily prescribed filing dates “to be determined with regard to any extensions of time for filing.” Under each penalty, the penalty percentage is to be added to the “amount required to be shown as tax on such return.” The Court then pointed to I.R.C. Section 6651(b)(1) which provides “the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax.” Since the entire estate tax liability was paid prior to the date prescribed for payment (the extension date), the Court concluded there was no tax to which a late filing penalty could be added.