UNITED STATES OF AMERICA, PETITIONERS V. ROBERT W. BOYLE, EXECUTOR OF THE ESTATE OF MYRA W. BOYLE, DECEASED No. 83-1266 In the Supreme Court of the United States October Term, 1983 The Solicitor General, on behalf of the United States, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Seventh Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit TABLE OF CONTENTS Opinions below Jurisdiction Statutes involved Statement Reasons for granting the petition Conclusion Appendix OPINIONS BELOW The opinion of the court of appeals (App. A, infra, 1a-16a) is reported at 710 F.2d 1251. The opinion of the district court (App. D, infra, 21a-24a) is unofficially reported at 49 A.F.T.R.2D 82-1507. JURISDICTION The judgment of the court of appeals (App. B, infra, 17a-18a) was entered on June 24, 1983. A petition for rehearing was denied on October 11, 1983 (App. C, infra, 19a-20a). On December 30, 1983, Justice Stevens extended the time within which to petition for a writ of certiorari to and including January 29, 1984 (a Sunday). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES INVOLVED The relevant portions of Sections 6018, 6075, and 6651 of the Internal Revenue Code of 1954 (26 U.S.C.) are set out in a statutory appendix (App. E, infra, 25a-26a). QUESTION PRESENTED Section 6651(a)(1) of the Internal Revenue Code imposes a penalty for failure to file a tax return on time, "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." The question presented is whether a taxpayer's reliance on an attorney to prepare a tax return for him constitutes "reasonable cause" sufficient to defeat the late-filing penalty, where the return is filed late in part because of the attorney's negligence. STATEMENT 1. Myra W. Boyle died on September 14, 1978. Her will appointed her son, respondent Robert W. Boyle, as executor of her estate. Respondent was 64 years old at the time of his appointment and was then employed as an engineer at a nuclear power plant (App. A, infra, 13a; R. Doc. 6, Ex. A). /1/ Respondent had previously served as executor of his father's estate and, for many years, had been the president of an earth-moving company that employed 20 persons (App. A, infra, 2a n.2, 12a-13a). As president of that company, respondent had regularly signed corporate tax returns (ibid.). Shortly after his mother's death, respondent retained Ronald Keyser of the law firm of Eliff, Keyser & Hallberg to serve as attorney for the estate (App. A, infra, 2a). Keyser had practiced law for 20 years, specializing in real estate and probate law (ibid.). In discussing respondents' duties as executor, Keyser advised that the estate would be required to file a federal estate tax return pursuant to Section 6018(a)(1) of the Code. /2/ That Section provides that "the executor shall make a return with respect to the estate tax" if the gross estate exceeds a specific dollar amount. Although respondent was told that a return had to be filed, he was not informed (nor did he inquire) as to its due date, leaving its preparation entirely up to Keyser (App. A, infra, 2a). Section 6075(a) provides that an estate tax return "shall be filed within 9 months after the date of the decedent's death." Since Myra Boyle died on September 14, 1978, respondent as executor was required to file an estate tax return on or before June 14, 1979. The return, however, was not filed until September 13, 1979, some three months late (App. A, infra, 22a). Keyser testified that the practice in his law office was to "post" the due date for a return on a "master calendar" so that the responsible attorney could be alerted at least ten days before the filing deadline (R. Doc. 6, Ex. B). Keyser testified that the Boyle estate "was not listed upon said calendar and (that) the reason for (its omission therefrom was) unknown to (him) or anyone else in (his) law firm" (ibid.). Respondent did not ask Keyser about the status of the return until September 6, 1979, by which time the return was already 11 weeks overdue (App. A, infra, 3a). 2. Section 6651(a)(1) imposes an "(a)ddition to the tax," commonly referred to as a "penalty," for failure to file a tax return (including an estate tax return) on time. The penalty is 5% of the amount "required to be shown as tax on such return" for each month the return is delinquent, up to a maximum of 25% in the aggregate. The penalty is applicable unless the taxpaper demonstrates that his failure to file on time was "due to reasonable cause and not due to willful neglect" (ibid.). A delay is due to reasonable cause "(i)f the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." Treas. Reg. Section 301.6651-1(c)(1). The Commissioner determined that respondent had not shown "reasonable cause" for filing the return late and accordingly asserted a penalty against the estate, in the amount of $17,124, under Section 6651(a)(1). /3/ Respondent paid the penalty and sued for a refund in the United States District Court for the Central District of Illinois, alleging that he had relied on Keyser to file a timely estate tax return and that such reliance constituted "reasonable cause" for the later filing (App. D, infra, 22a-23a). The district court, on cross-motions for summary judgment, accepted respondent's argument, citing the Seventh Circuit's previous decision in Rohrabaugh v. United States, 611 F.2d 211 (1979). 3. A divided panel of the Seventh Circuit affirmed (App. A, infra, 1a-16a). The majority adhered to the standard set forth in Rohrabaugh, under which reliance on counsel constitutes "reasonable cause" for the late filing of a tax return if (App. A, infra, 4a): (1) the taxpayer is unfamiliar with the tax law; (2) the taxpayer makes full disclosure of all relevant facts to the attorney or accountant * * * ; and (3) the taxpayer has exercised ordinary business care and prudence. Emphasizing that this was a facts-and-circumstances test, the court held that respondent had shown "reasonable cause." It noted that, while Boyle had business experience, his experience "did not encompass the preparation or filing of tax returns and therefore would not support any inference that he, in fact, knew the filing deadline" (App. A, infra, 4a). It found that respondent had made full disclosure to the estate's attorney. And it held that respondent had exercised "ordinary business care and prudence" in hiring competent counsel, in maintaining contact with the attorney rather than "simply abandon(ing) the estate once he had delegated the legal functions" (id. at 4a-5a), and in taking steps to ensure that the return was filed promptly after learning that the filing deadline had lapsed (id. at 5a). The court acknowledged that its holding conflicted with decisions of the Fifth, Eighth, and Ninth Circuits, each of which "ha(d) unequivocally adopted a per se rule that reliance on counsel is not 'reasonable cause' within the meaning of (I.R.C.) Section 6651(a)(1)." App. A, infra, 5a, citing Millette & Associates, Inc. v. Commissioner, 594 F.2d 121 (5th Cir.), cert. denied, 444 U.S. 899 (1979); Estate of Lillehei v. Commissioner, 638 F.2d 65 (8th Cir. 1981); Ferrando v. United States, 245 F.2d 582 (9th Cir. 1957). Judge Posner dissented (App. A, infra, 12a-16a). He emphasized that respondent "knew he had to file an estate tax return (and) must have known that the return was due within a fixed period of time after the decedent's death -- that it could not be filed whenever he took a fancy to file it" (id. at 13a). Under these circumstances, Judge Posner believed, "ordinary business care and prudence" required that a fiduciary of respondent's business experience at least ask his attorney what the filing deadline was (id. at 15a). If respondent were to pay the penalty, Judge Posner noted, he would almost certainly have a claim for reimbursement against his lawyer, "whose admitted negligence was the primary cause of the late filing" (id. at 16a). But instead of creating incentives for timely filing by shifting liability to the person who was at fault, the majority improperly "adopt(ed) an approach that rewards both the active negligence of the lawyer and the passive negligence of his client" (ibid.). The government's petition for rehearing was denied, with Judges Posner and Cudahy voting for rehearing en banc. REASONS FOR GRANTING THE PETITION The court of appeals has decided an important question of federal tax law in a way that conflicts with the decisions of at least three other circuits. The decision below is erroneous, permitting taxpayers to secure immunity from the late-filing penalty even though their returns are negligently filed late. The question recurs frequently, as evidenced by the large number of decided cases, and involves substantial amounts of revenue. Review by this Court is therefore appropriate. 1. As the Seventh Circuit acknowledged, the decision below squarely conflicts with the holdings of at least three other courts of appeals. In Millette & Associates, the Fifth Circuit held that "reliance on tax advisors is not reasonable cause for failure to file a return on time; the responsibility for assuring a timely filing is the taxpayer's." 594 F.2d at 124-125. Accord, e.g., Logan Lumber Co. v. Commissioner, 365 F.2d 846, 854 (5th Cir. 1966); Dritz v. Commissioner, 28 T.C.M. (CCH) 874, 882 (1969), aff'd per curiam, 427 F.2d 1176 (5th Cir. 1970). In Ferrando, the Ninth Circuit held that "one does not have to be a * * * probate lawyer to know that taxes have to be paid when they are due," and that a taxpayer's duty to file a timely return "is not a delegable one." 245 F.2d at 586, 587-588. And in Estate of Kerber v. United States, 717 F.2d 454 (8th Cir. 1983), petition for cert. pending, No. 83-1038, the Eighth Circuit reaffirmed a long line of decisions holding that "(t)he executor or executrix has a personal and nondelegable duty to file a timely return," and that reliance on counsel "is not sufficient to constitute 'reasonable cause' for failing to fulfill that duty." 717 F.2d at 455, quoting Boeving v. United States, 650 F.2d 493, 495 (8th Cir. 1981). Accord, e.g., Crouse v. United States, 711 F.2d 102, 104 (8th Cir. 1983); Smith v. United States, 702 F.2d 741, 743 (8th Cir. 1983); Estate of Lillehei, 638 F.2d at 66. /4/ 2. The Seventh Circuit erred in holding, contrary to these decisions, that a taxpayer can insulate himself from the penalty for a negligent late filing by entrusting preparation of the return to someone else. The Code and Regulations provide that "any person made liable for any tax * * * shall make a return" (I.R.C. Section 6011(a)) and that each individual (including a fiduciary) shall sign the return "required to be made by him" (Treas. Reg. Section 1.60661-1(a)). The Regulations permit a return to be executed by an agent on behalf of the taxpayer in certain circumstances, /5/ provided that the return is "accompanied by a power of attorney * * * authorizing (the agent) to represent his principal in making, executing, or filing the return." Treas. Reg. Section 1.6012-1(a)(5). The Code and Regulations specify the time for filing tax returns. I.R.C. Sections 6071-6076; Treas. Reg. Section 1.6071-1. If a taxpayer fails to file a return on time, he is liable for the late-filing penalty unless he shows that the delay was "due to reasonable cause." I.R.C. Section 6651(a)(1). A delay is due to reasonable cause "(i)f the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." Treas. Reg. Section 301.6651-1(c)(1). These general rules apply no less to executors of estates. An executor is a fiduciary charged with certain duties, one of which is the duty to file tax returns on the estate's behalf. Section 6018(a) provides that "the executor shall make a return with respect to the estate tax," and the Regulations require tax returns "(to) be signed by * * * the fiduciary, if the person required to make the return is a trust or estate." Treas. Reg. Section 31.6061.1 An estate tax return may be executed by a duly authorized agent, provided that an acceptable power of attorney is filed with the I.R.S. empowering the agency to act on behalf of the estate. Treas. Reg. Sections 31.6061-1, 31-6011(a)-7 (a). Estate tax returns must be filed "within 9 months after the date of the decedent's death" (I.R.C. Section 6075(a)) and, if the return is not timely filed, the estate is liable for the late-filing penalty "unless it is shown that such failure (was) due to reasonable cause" (I.R.C. Section 6651(a)(1)). /6/ "Reasonable cause" is defined, for estates as for other taxpayers, by an objective "ordinary business care and prudence" standard (Treas. Reg. Section 301.6651-1(c)(1)), a standard consistent with the general rule that a fiduciary in managing an estate "is required to manifest the care, skill, prudence, and diligence of an ordinarily prudent man engaged in similar business affairs." Bogert, Trusts and Trustees Section 541, at 157 (2d rev. ed. 1977). The vast majority of courts that have considered the question have interpreted these Code and regulatory provisions, correctly, to impose on taxpayers (including executors) a personal, nondelegable duty to file tax returns on time. E.g., Estate of Kerber, 717 F.2d at 455; Millette & Associates, 594 F.2d at 124-125; Kroll, 547 F.2d at 396-397; Ferrando, 245 F.2d at 586. This obligation inevitably entails a duty, in the exercise of "ordinary business care and prudence," to ascertain the due date of the return, since a taxpayer otherwise will obviously be unable to ensure that his timely-filing obligation is met. If a taxpayer, pursuant to a valid power of attorney, entrusts preparation and execution of the return to an agent, the taxpayer, under hornbook agency doctrine, is responsble as principal for any negligence of his agent in failing to meet the timely-filing requirement. See, e.g., Fleming, 648 F.2d at 1125-1126; Rohrabaugh, 611 F.2d at 219-220 (Swygert, J., dissenting). In rejecting the majority view, the Seventh Circuit below relied primarily on a finding that respondent's business experience "did not encompass the preparation or filing of tax returns" (App. A, infra, 4a). Respondent's individual experience, however, is irrelevant to the outcome. The Regulations and established fiduciary law set forth an objective, "reasonable man" test -- whether the executor "exercised ordinary business care and prudence." Treas. Reg. Section 301.6651-1(c)(1). And even if an executor's particular experience were relevant, one does not need to be expert at the preparation of tax returns to realize that returns have due dates. Indeed, "(a)ny layman with the barest modicum of business experience knows that there is a deadline for the filing of returns and knows that he must sign the return before it is filed." Kroll, 547 F.2d at 396. Respondent here knew that he had to submit an estate tax return, and he is presumed to have known that the return had a filing deadline. "Ordinary business care and prudence" necessarily required him, as executor of the estate, to inquire what that filing deadline was. 3. The majority view, rejected by the court below, is supported both by common sense and by sound considerations of tax policy. The government is entitled to receive its taxes when they are due. Congress enacted the late-filing penalty, not so much to punish taxpayers, but "to protect the revenue." Logan Lumber Co., 365 F.2d at 854 & n.18, quoting Plunkett v. Commissioner, 118 F.2d 644, 650 (1st Cir. 1941). If a taxpayer can defeat the penalty by relying on his agent's negligence, the government -- which cannot collect the penalty, an "addition to the tax," from the agency either -- will be deprived of revenue, even though a return has indisputably been filed late in violation of the Code. The right answer is to let the I.R.S. collect the penalty from the taxpayer, and have the taxpayer seek reimbursement from his agent on grounds of malpractice or breach of fiduciary duty. "In this way," Judge Posner noted below, "proper incentives would be created to avoid a persistent problem in the enforcement of the tax laws" by having liability "come to rest on the person whose fault was primarily responsible" (App. A, infra, 16a). As among the I.R.S., the executor and the attorney, the only party who one can say with assurance was not negligent in situations of this sort is the I.R.S. It would thus be an odd notion of equity to deprive the government of the penalty for a return negligently filed late, to let the passively-negligent executor have the use of the government's money, and to let the actively-negligent lawyer escape completely unscathed. And public policy considerations surely do not favor "immuniz(ing) a negligent attorney from what appears to be an open and shut malpractice suit." Rohrabaugh, 611 F.2d at 220 (Swygert, J., dissenting). 4. The question presented has considerable administrative importance. The I.R.S. advises that 237 similar cases, involving more than $2 million in tax, are now pending administratively in the estate tax area alone. The importance of the question, however, is not limited to estate tax cases. The penalty involved here applies equally to the late filing of income, excise, and gift tax returns -- indeed, of any tax return other than an information return. See I.R.C. Section 6651(a)(1). Literally thousands of taxpayers now have their income tax returns prepared by professional return preparers. The Seventh Circuit's reasoning could enable such taxpayers to defeat the penalty for late filing of those returns simply by alleging that they had relied on their preparer to take care of it. 5. The taxpayer in Estate of Kerber, No. 83-1038, has filed a petition for a writ of certiorari seeking review of a question identical to that presented in this case. The facts of the two cases are substantially different, particularly regarding the executors' respective levels of business experience and their patterns of dealing with the tax advisors entrusted with preparing the returns. Although we believe that the availability of a "reliance on counsel" defense to the late-filing penalty should generally not turn on the facts of a particular case, that belief has not been shared by some lower courts (including the court below) that have considered the question. In our view, the instant case offers a somewhat better vehicle for deciding the legal issue involved. As pertitioner in No. 83-1038 acknowledges (Pet. 3-4 & n.1), "the record is not clear" in that case as to two important facts -- whether the estate's tax advisors informed the executrix of the return's due date, and, if so, whether the date of which they informed her was the correct one. See 83-1038 Pet. App., A2 & n.1, A8 & n.1. There was likewise dispute about the extent of the executrix's contacts with the estate's attorney concerning the probate administration. See id. at A2 n.1. The district court in No. 83-1038 noted these uncertainties, but held that it "need not decide whether genuine issues exist(ed) as to these factual matters, (since) the facts (were) not material to (its) decision" under Eighth Circuit precedents holding the "reliance on counsel" defense unavailable as a matter of law. Id. at A2 n.1, A5. Since a number of courts (including the court below) have found facts of this sort pertinent in determining the availability of the "reliance on counsel" defense (see, e.g., Rohrabaugh, 611 F.2d at 216-218), and since there is no ambiguity as to the analogous facts in the instant case (see pages 2-3, supra), we suggest that the Court grant certiorari in this case and hold No. 83-1038 pending decision here. Alternatively, if the Court deems it beneficial to have the divergent factual patterns before it as an aid to decision, we urge that certiorari be granted in both cases. In the latter event, the Court may wish to consolidate the cases for briefing and argument. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. REX E. LEE Solicitor General GLENN L. ARCHER, JR. Assistant Attorney General ALBERT G. LAUBER, JR. Assistant to the Solicitor General CARLETON D. POWELL JO-ANN HORN Attorneys JANUARY 1984 /1/ "R. Doc." refers to documents contained in the original record on appeal, as numbered by the clerk of the district court. /2/ Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as amended ("the Code" or "I.R.C."). /3/ The Commissioner also assessed the estate $1,326 in interest, at the then-prevailing annual rate of 6%, for the three-month period during which the estate tax payment was overdue. See I.R.C. Section 6601(a); 26 U.S.C. (Supp. V) 6621(b); Rev. Rul. 77-411, 1977-2 C.B. 480. Respondent did not contest the estate's liability for interest, and no question as to that liability is presented here. /4/ The Second and Sixth Circuits, while not explicitly adopting a per se approach, have generally rejected the "reliance on counsel" defense to the late-filing penalty. See, e.g., Estate of Lammerts v. Commissioner, 456 F.2d 681, 683 (2d Cir. 1972) (per curiam); Estate of Geraci v. Commissioner, 502 F.2d 1148, 1149-1150 (6th Cir. 1974); Estate of Duttenhofer v. Commissioner, 49 T.C. 200, 204-205 (1967), aff'd per curiam, 410 F.2d 302 (6th Cir. 1969). The Seventh Circuit itself has adopted strikingly divergent tests for determining when the defense is available. Compare United States v. Kroll, 547 F.2d 393, 396-397 (7th Cir. 1977) (rejecting defense on ground that "the taxpayer has a personal, nondelegable duty to file the tax return when due"), and Fleming v. United States, 648 F.2d 1122, 1125-1126 (7th Cir. 1981) (same), with Rohrabaugh, 611 F.2d at 216 (upholding defense on facts presented). Several courts have upheld the defense where a taxpayer consults an attorney and is advised that no return is required to be filed as a matter of law. See, e.g., Estate of Lammerts, 456 F.2d at 683 (citing and distinguishing such cases); Fleming, 648 F.2d at 1125 (same). Those cases, in which a taxpayer relies on a lawyer's substantive legal advice, have little to do with the situation (presented here) in which a taxpayer knows that a return must be filed and simply neglects to ascertain what the due date is. /5/ In the case of income tax returns, a return may be executed by an agent if the taxpayer is unable to make a return "by reason of disease or injury" or "by reason of continuous absence from the United States" for a specified period, or if the taxpayer requests written permission from the district director and the latter "determines that good cause exists for permitting the return to be so made." Treas. Reg. Section 1.6012-1(a)(5). /6/ The courts have uniformly interpreted Section 6651(a)(1), in accord with its plain language, to make imposition of the late-filing penalty mandatory unless the executor (or other taxpayer) provides both the absence of willful neglect and the presence of reasonable cause. See, e.g., Fleming, 648 F.2d at 1124; Rubber Research, Inc. v. Commissioner, 422 F.2d 1402, 1407 (8th Cir. 1970); Logan Lumber Co., 365 F.2d at 853; Ferrando, 245 F.2d at 589; Daley v. United States, 480 F.Supp. 808, 810 (D.N.D. 1979); Richter v. United States, 440 F.Supp. 921, 923 (D. Minn. 1977); Estate of Mayer v. Commissioner, 43 T.C. 403, 405 n.1 (1964), aff'd per curiam, 351 F.2d 617 (2d Cir. 1965), cert. denied, 383 U.S. 935 (1966). APPENDIX APPENDIX MATERIAL NOT AVAILABLE ON JURIS