Leighton v. United States

FRANK T. LEIGHTON, as personal representative of ESTATE OF DAVID T. LEIGHTON, Plaintiff, v. THE UNITED STATES, Defendant.

No. 21-840T

United States Court of Federal Claims

August 9, 2021

Stephanie Loomis-Price, Winstead, PC, Houston, Texas, for Plaintiff.

Patrick Phippen, Trial Attorney, G. Robson Stewart, Assistant Chief, David I. Pincus, Chief, U.S. Department of Justice - Tax Division, Court of Federal Claims Section, David A Hubbert, Acting Assistant Attorney General, Washington D.C. for Defendant.

MEMORANDUM OPINION AND ORDER

DAVID A. TAPP, JUDGE

In this tax case, the Executor-Plaintiff, Frank "Tom" Leighton (the "Executor"), seeks to recover a penalty the Internal Revenue Service ("IRS") collected for failure to timely file an estate tax return and pay the resulting obligations. The belated filing and payment were based on tax information unknown by the Executor at the time the return was due. The issue before the Court is whether that missing information could constitute reasonable cause for delay, thereby entitling the Executor to relief from that penalty.

The United States moves to dismiss this action pursuant to RCFC 12(b)(6) for failure to state a claim upon which relief can be granted. (Def.'s Mot. to Dismiss (Def.'s Mot."), ECF No. 16). The United States asserts that the Executor cannot establish reasonable cause based on the facts set forth in the Amended Complaint, (Am. Compl., ECF No. 13). The Court disagrees. Finding that the Complaint states a plausible claim upon which relief could be granted, the United States' Motion is DENIED.

I. Background^[1]

David Leighton passed away in January of 2017 leaving behind two sons-the Executor and David Leighton, Jr. (Am. Compl. at 2). The administration of the estate involved three key actors to which this opinion frequently refers-Freshwater Consultants of Alexandria, VA ("Freshwater"), JDJ Family Office Services ("JDJ Services"), and Richard Allen ("Mr. Allen"). (Id.). Prior to his death, the late Mr. David Leighton ("Decedent") utilized Freshwater for tax preparation services for several years. (Id. at 3-4). Subsequent to his death, Decedent's heirs contacted JDJ Services^[2] to "learn of next steps that each needed to take in light of their father's death." (Id. at 2-3). The Executor then hired Mr. Allen, an attorney with Fraser & Allen, LLC, "to assist with administration of the Estate," and "authorized Mr. Allen to communicate with JDJ Services on [the Executor's] behalf." (Id.).

On March 23, 2017, Mr. Allen informed the Executor that an estate tax return needed to be filed only if the value of the Decedent's estate exceeded $5, 490, 000. (Id. at 3). Based on the readily available information, Mr. Allen, the Executor, and JDJ Services all operated under the assumption that the estate was worth approximately $1-2 million. (Id. at 4). Had that valuation been correct, an estate tax return was unnecessary. 26 U.S.C. § 2010. Freshwater worked in conjunction with JDJ Services and Mr. Allen to file the Decedent's 2016 individual income tax return, but the matter of possible lifetime gifts was apparently not discussed. (Am. Compl. at 4).

Per the Amended Complaint, the parties completed various steps in the fact-gathering process to effectively fulfill the estate's tax obligations.

. . . As part of the fact-gathering process, a representative from JDJ Services on behalf of the Executor responded to a questionnaire that served as a primary information source for Mr. Allen's representation of the Executor. (Mr. Allen also conduc[t]ed further independent investigation for necessary information to administer the Estate, including, but not limited to, requesting all original estate planning documents from the attorneys who prepared them for the Decedent.) In response to the questionnaire's section on gifts, which asked for details of any gifts in excess of annual exclusion amounts and any United States Gift (and Generation-Skipping) Transfer Tax Return (Forms 709) previously filed, JDJ Services wrote, "We are coordinating with tax preparer, Barbara Tymec/Freshwater Consultants in Alexandria, VA." . . . These efforts did not result in any indication of lifetime gifts by the Decedent. Rather, throughout the Estate's administration until the very last stages, specifically final funding from the Estate to its beneficiaries, Mr. Allen's communications with JDJ Services and Freshwater merely confirmed his initial understanding of the scope of Decedent's assets during life and at death.

. . .[T]he Estate as they knew it did not exceed the exemption amount. And while JDJ Services and Mr. Allen worked with Freshwater throughout 2017 to ensure that Decedent's final income tax return was filed, Freshwater did not inform the Executor, Mr. Allen, or JDJ Services of any previously filed Forms 709. And although Freshwater did not prepare any subsequent tax returns for Executor or his estate, JDJ Services and Mr. Allen remained in communication with Freshwater during the Estate's administration as other tax needs arose. Freshwater was generally responsive, and none of the Executor, JDJ Services, or Mr. Allen had any reason to suspect that Freshwater had previously undisclosed information regarding Decedent's lifetime gifts or any other subject relevant to the Estate's administration.

(Am. Compl. at 3-4).

Throughout the above-recited process, David Leighton, Jr. had not been involved in the estate preparation and administration-for example, he had declined to serve as a co-executor. (Id.). On February 26, 2019, almost two years after his father's death, David Leighton, Jr., indicated that the Decedent "might have" established and funded various trusts during his lifetime, and an estate tax return may have been necessary. (Id. at 5). Mr. Allen inquired about those trusts with Freshwater, to which Freshwater responded with a copy of the Decedent's 2012 gift tax form confirming the existence of lifetime gifts. (Id.). This was new information to the Executor, Mr. Allen, and JDJ Services. That form illuminated leeward gifts totaling $5, 094, 000-an amount that would put the value of the estate over the threshold for an estate tax return. (Id.). Under 26 U.S.C. § 6075(a), that return was due within nine months of the Decedent's death, i.e., not later than October 6, 2017-a deadline long passed.

On April 9, 2019, after coordinating with JDJ Services, Freshwater, and the Executor, Mr. Allen prepared and filed the Decedent's belated estate tax return. (Am. Compl. at 5). The estate paid $1, 626, 928.00, an amount representing tax and estimated penalties and interest at that time. (Id.). After processing the return, the IRS assessed the following obligations: estate tax liability of $1, 145, 387.00, a late-filing penalty of $257, 712.07, a late-payment penalty of $85, 904.02, and interest totaling $87, 858.88. (Def.'s Mot., App. 2). The IRS refunded the resulting overpayment of $50, 066.03 on May 21, 2019. (Def.'s Mot., App. 3).

The Executor subsequently filed a refund claim with the IRS, insisting that it was improper to impose penalties resulting from the untimely filing of the estate tax return because he reasonably relied on Mr. Allen's advice and that all parties were unaware of the Decedent's lifetime gifts. (Am. Compl. at 3). After more than six months passed without the IRS acting on his refund claim, it was deemed denied on November 27, 2020. (Id. at 6; see also IRC § 6532(a)). The Executor initiated this action on February 2, 2021, (Compl., ECF No. 1), arguing that his failure to timely file the estate tax return was "due to reasonable cause and not due to willful neglect," thereby entitling him to a refund. (Id. at 5-6).

The United States moved to dismiss the Executor's original Complaint for purported failure to state a claim on April 5, 2021. (ECF No. 8). On April 26, 2021, that Complaint was amended as a matter of right pursuant to RCFC 15(a)(1). (Am. Compl.). The United States moved to withdraw^[3] the first Motion to Dismiss Plaintiff's Original Complaint on May 5, 2021, (ECF No. 15), and filed the pending Motion to Dismiss Plaintiff's First Amended Complaint on the same grounds on May 10, 2021, (ECF No. 16).

II. Analysis

The United States moves to dismiss the claims before the Court pursuant to RCFC 12(b)(6). The Executor responds that the Amended Complaint sufficiently pleads the requisites for reasonable cause to justify the belated filing and payment. As explained in greater detail below, the Court agrees with the Executor.

A. Jurisdiction and Standard of Review

This Court possesses jurisdiction over claims for tax refunds when a plaintiff has "duly filed" a refund claim "according to the provisions of law in that regard, and the regulations of the [IRS] established in pursuance thereof[, ]" I.R.C. § 7422(a), and has waited at least six months without a decision from the IRS, I.R.C. § 6532(a)(1). In this case, the Executor filed a refund claim with the IRS on May 27, 2020, more than six months prior to commencing this action on February 2, 2021. (Am. Compl. at 6; see also Compl., ECF No. 1). Since that time, the Executor's claim has lain dormant at the IRS. (Am. Compl. at 6). Accordingly, the Court has jurisdiction over this matter. See I.R.C. §§ 1346(a)(1) (predicating civil action for refund on full payment of disputed penalty); 7422 (requiring taxpayer to file claim for refund before filing civil action for refund); 6532 (prohibiting taxpayer from initiating civil action for refund under § 7422 sooner than 6 months after claim for refund is filed).

The United States' Motion is predicated on the assertion that, based on the pleadings, the Executor cannot establish reasonable cause for the belated filing. (Def.'s Mot. at 7-19). A motion to dismiss for "failure to...