Last month, the Sixth Circuit reiterated the long-held precedent that penalties for failure to file a tax return and to pay a tax liability are mandatory under §6651(a)(1) and §6651(a)(2). Generally, executors grasp the concept that penalties will be due where they drop the ball by forgetting to timely file a tax return or miscalculating the estate tax liability. But what if the executor hires an experienced attorney to handle all estate tax matters and the attorney fails to timely file the estate tax return and pay the estate tax liability? What if the executor checks in with the attorney on numerous occasions, and the attorney reassures the executor that everything will be filed and paid in a timely manner but fails to do so? Many executors likely would consider this the responsibility of the attorney. However, according to the Sixth Circuit in Specht v. United States, the executor is responsible because the executor must supervise and monitor the actions of the professionals hired to administer an estate.

In Specht, the Sixth Circuit affirmed the district court’s order for summary judgment in favor of the government. The district court found that the Estate of Virginia Escher (Estate) did not show that the failures to file the estate tax return and pay the tax liability were not the result of willful neglect by the executor. So what are the facts that led to this decision?

Eight months prior to Virginia Escher’s death, she executed her will. Escher’s cousin, Janice Specht, agreed to be the executor of Escher’s estate. Sound familiar? Many persons agree to be the executor of a family member’s estate without actually understanding an executor’s duties and obligations. The Sixth Circuit emphasized that Specht, age 73, had no formal education after graduating from high school, had never served as an executor, and had never been in an attorney’s office. Consider that many people find the duties of an executor to be overwhelming and would likely consider themselves unqualified, even with college degrees or experience in business, finance, or law.

When Escher died, Specht did what most executors would do — she found an experienced estate planning and administration attorney. This sounds reasonable. In fact, many treatises require an executor to seek professional assistance when the executor cannot reasonably perform certain estate administration tasks. The attorney properly notified Specht that the Estate would have to file an estate tax return and pay an estate tax liability. If we give Specht the benefit of the doubt, the attorney likely sounded professional, knowledgeable, experienced, and reliable. Specht, however, was not aware that her attorney was suffering from brain cancer and was experiencing deterioration of her mental capacity. When an attorney sounds so knowledgeable and convincing because the attorney has practiced law for thirty years and is well-respected in the legal community, how is an executor supposed to determine that the attorney is unreliable and incompetent?

The answer to this question is as follows:

  1. When the attorney suggests that the law firm can pay a $6,000,000 estate tax liability and seek reimbursement from the Estate at a later date.
  2. When the executor receives multiple notices from the probate court that the Estate missed probate deadlines and more notices that the Estate failed to file a first accounting.

  3. When a friend notifies the executor that the attorney recently exhibited signs of incompetence when administering another estate and that the friend was seeking removal of the attorney as co-executor of the estate.
  4. When the state tax department notifies the executor that the Estate’s state tax return was delinquent.
  5. When the executor contacts UPS to determine whether the attorney initiated the sale of UPS stock to pay the Estate’s tax liabilities, and learns that UPS never received any communication from the attorney to such effect.

  6. When the attorney notifies the executor, after over one dozen warning signs, that the attorney has filed the proper extensions and is currently resolving the estate administration matters.

The Estate sought to avoid penalties under §6651(a)(1) and §6651(a)(2) because Specht, the unqualified executor, relied upon the incompetent attorney and the attorney failed to file the estate tax return and pay the estate tax liability. The penalties were mandatory unless the Estate could demonstrate that the failure was due to reasonable cause and not due to willful neglect. The Sixth Circuit provided that “reasonable cause” means “something that is beyond the taxpayer’s possible control and oversight, not something under his authorization and subject to his control.”

At first glance, it appears that the Estate may satisfy the criteria for reasonable cause. After all, the attorney’s incompetence was beyond Specht’s control, especially considering the reassurances that the attorney continuously provided. The problem is that Specht completely (and blindly) relied upon the attorney despite multiple warning signs. The Sixth Circuit held that Specht’s reliance upon the attorney did not relieve Specht of her nondelegable duties to file a tax return and pay taxes. Additionally, Specht had a duty to supervise and monitor the attorney, which included replacing the attorney after receiving multiple notifications of the attorney’s incompetence. Instead, Specht buried her head in the sand and hoped that the attorney would administer the estate in a professional and timely manner.

Anybody is capable of being an executor. An executor, however, has certain duties and obligations. One of the duties is to supervise and monitor the actions of any agent to whom the executor delegates estate administration matters. Even the most unsophisticated executor can administer an estate by surrounding himself or herself with competent professionals; however, the executor cannot then turn a blind eye to those professionals. The executor must follow up and meet with the professionals, request documentation that demonstrates progress on estate administration matters, and act accordingly when certain estate administration matters are not being completed timely, efficiently, or proficiently.