A tax newsletter that I read reported on a court decision that I think is worth passing along to you, my loyal readers. It’s a decision from the United States Court of Federal Claims that addresses this timely question: if I file a tax return late (without requesting an extension), what excuses might be good enough to avoid having to pay penalties for the late filing?
The taxpayer in the reported case gave gifts of $2 million to each of her daughters on January 1. The taxpayer owed approximately $1,800,000 in gift taxes for the year, mainly because of the gifts to her daughters. The taxpayer’s gift tax return (it’s Form 709, in case you’re interested) and payment were due on April 15 of the following year.
During the period between the date the gifts were made, January 1, and the date that the gift tax return was due and the gift tax was payable, April 15 of the following year, the taxpayer did such things as reviewing deeds for transferring real property, visiting notaries, telephoning tax attorneys, and mailing completed documents to her tax attorneys. The taxpayer also reviewed her federal and state income tax returns for the preceding year and her state estimated tax returns for the current year, made out checks, and mailed the checks for her income tax payments along with payment vouchers before April 15. She did not, however, file the gift tax return or pay the gift tax for the gifts she made 15½ months earlier, and which were due on the same day as the income tax filings and payments that she did make.
The taxpayer’s health problems in that 15½ month period included pneumonia, recurrent upper respiratory infections, knee pain, knee replacement surgery, a thyroid growth, heart palpitations and cataract surgery.
In September, about five months after the due date, the taxpayer finally filed a gift tax return for the gifts that she had made on January 1 of the preceding year. The IRS assessed a penalty and interest for the late filing. The taxpayer asked the IRS for an abatement of the penalty and interest, but the request was denied.
The taxpayer then went to court to try to get a refund of the penalty and interest, claiming that her health problems excused her from filing the gift tax return and paying the tax on time. The court found that the penalty and interest were proper because the taxpayer’s health problems did not render her continuously incapacitated during the period of time when she should have filed her gift tax return and paid the tax. The court went further and said that the things the taxpayer was able to do showed that she was only “selectively incapacitated” as to her gift tax obligations. Since the taxpayer did not show reasonable cause to excuse the late filing, the court dismissed her appeal.
The lesson from this case is pretty simple: if you’re going to claim a medical excuse for not filing your tax return on time, make sure you can prove you were sick enough that you were continuously incapacitated from the time when you first could have filed the return until the date the return was due. If you were able to do other business (which in the reported case included filing other tax returns and paying other taxes to the IRS), the court probably isn’t going to buy the excuse that you were too sick to file the late tax return on time.
It’s Worth Keeping In Mind That The Federal Estate Tax Exclusion Amount Will Change
The federal estate tax exclusion amount is the value that you can leave to your beneficiaries without having to pay any federal estate tax. Prior to adoption of the Tax Cuts and Jobs Act in 2017, the basic exclusion amount was $5 million. The Tax Cuts and Jobs Act increased the basic exclusion amount to $10 million, but only through 2025. Here’s what the Internal Revenue Code actually says about it, in section 2010(c):
(3) Basic exclusion amount
(A) In general
For purposes of this subsection, the basic exclusion amount is $5,000,000.
(B) Inflation adjustment
In the case of any decedent dying in a calendar year after 2011, the dollar amount in subparagraph (A) shall be increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting “calendar year 2010” for “calendar year 2016” in subparagraph (A)(ii) thereof.
If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such amount shall be rounded to the nearest multiple of $10,000.
(C) Increase in basic exclusion amount
In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting “$10,000,000” for “$5,000,000.”
According to Thomson Reuters, the inflation adjustment in subsection (B) raises the exclusion amount to $11,400,000 for 2019. The important thing to keep in mind here, however, is not that the exclusion amount will probably increase, at least a little, every year as long as that code section isn’t changed. The important thing to keep in mind is that if the code isn’t changed before the end of 2025, the basic exclusion amount will revert to $5 million.
Since there’s never any predicting what Congress might do, or not do, when it comes to legislation, you might want to plan ahead.
Nathan B. Hannah is a Shareholder in the Tucson office, and practices in the areas of estate planning and administration, real estate, and commercial transactions. He is also a noted blogger, and you can find more of his articles on his private blog,
Contact Attorney Hannah: firstname.lastname@example.org or 520/ 322-5000
This communication is designed to bring legal developments of interest to the attention of our clients and others. It should not be relied upon as a substitute for specific legal advice in a particular matter. For further information on any of the subjects discussed, or for legal advice in connection with any particular matter, please contact us.