Tax Court in Brief: Elstein v. Commissioner – Reasonable Cause Defense for Failure to File

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Tax Litigation:  The Week of July 25th, 2022, through July 29th, 2022

Elstein v. Comm’r, T.C. Summary Opinion 2022-14 | July 18, 2022 | Panuthos, J. | Dkt. No. 18272-17S


Short Summary: The IRS declared deficiencies against the taxpayer for years 2011, 2012, 2013. The IRS issued corresponding accuracy-related penalties and additions to tax under § 6662(a) and § 6651(a)(1), respectively. The taxpayer conceded deductions related to self-employed health insurance, alimony payments, medical and dental expenses on Schedule A, Itemized Deductions, and Schedule A miscellaneous deductions. The IRS conceded that the taxpayer was not liable for accuracy-related penalties. Therefore, all issues pertaining to deficiencies and penalties were resolved and the only issue for trial was additions to tax. In years 2012, 2013, and 2014, the taxpayer timely requested extensions to file tax returns for the prior year. However, the taxpayer failed to timely file his return by the October 15 extension deadline for each year. The taxpayer worked as a partner at a law firm from 2011-2015. In 2019, the California Bar placed him on involuntary inactive status because of an illness.

Key Issue:

  • Whether the taxpayer was liable for any additions to tax under § 6651(a)(1)?

Sub Issues:

  • Did the IRS meet its burden of production?
  • Did the taxpayer establish reasonable cause for failure to file a timely return?

Primary Holdings:

  • Ultimately, the taxpayer owed the additions to tax. The IRS established its burden of production because the record clearly reflected that all three returns were untimely filed. Furthermore, the taxpayer unsuccessfully raised a reasonable cause defense because he merely showed that his illness put him on inactive status in 2019.

Key Points of Law:

  • 6651(a)(1) Failure to File or Pay: Pursuant to § 6651(a)(1), an additional tax is imposed on the taxpayer unless it is shown that such failure was due to reasonable cause and not willful neglect.
  • 6651(a)(1) Reasonable Cause: A reasonable cause may be established if the taxpayer exercised ordinary business care and prudence but nevertheless failed to timely file within the prescribed deadline. McMahan v. Comm’r, 114 F.3d 366, 368-69 (2d Cir. 1997), aff’g T.C. Memo. 1995-547; Treas. Reg. § 301.6651-1(c)(1). If the taxpayer shows that an illness caused the untimely filing, then the court maintains that the taxpayer established reasonable cause. E.g., Williams v. Comm’r, 16 T.C. 893, 906 (1951).
  • 7491 Burden: The IRS bears the initial burden of production to establish an individual’s liability for additions to tax. § 7491(c). If the burden is met, then the taxpayer must come forward with persuasive evidence that the IRS errored or an affirmative defense. See Higbee v. Comm’r, 116 T.C. 438, 447 (2001).

Insights: This case is pretty straightforward. The IRS will issue, and the Tax Court will assess, additions to tax under § 6651 if you do not timely file and fail to establish an affirmative defense for that failure. The taxpayer attempted to assert that his illness reasonably caused his late filings. However, he never produced any information linking his 2019 status and his tax returns from 2011-2013. He generally stated that his illness made it difficult to complete tasks on time. On cross examination, the taxpayer declined to speak about the circumstances of his involuntary active status. Thus, his reasonable cause failed, and he owed the additions to tax.

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