Estate of Margaret S. Henderson v. Commissioner of Revenue (October 3, 2005)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


ESTATE OF MARGARET S. 	   v.	COMMISSIONER OF REVENUE
HENDERSON	   

Docket No. C262769				Promulgated:
							October 3, 2005


This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 6 and G.L. c. 62C, § 39 from the refusal of the appellee to grant an abatement of penalties for late filing of a return imposed pursuant to G.L. c. 62C, § 33(a), and late payment of tax imposed pursuant to G.L. c. 62C, § 33(b), assessed against the Estate of Margaret S. Henderson (the "Estate").     
Commissioner Gorton heard the appeal and was joined in the decision for the appellee by Commissioners Egan and Rose.  
These findings of fact and report are made at the request of the appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

William E. Halmkin, Esq. and David J. Nagle, Esq. for the appellant.

John J. Connors, Jr., Esq. and Arthur M. Zontini, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
On the basis of a statement of agreed facts and testimony and exhibits submitted during the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.  This appeal pertains to penalties that the Commissioner of Revenue ("Commissioner") assessed against the Estate for the late filing of a Massachusetts inheritance tax return, Trustee's Inventory ("Form L-2"), and the late payment of inheritance tax assessed under former G.L. c. 65, § 27, now appearing at G.L. c. 65C App. § 27.  The parties agreed that Form L-2 and payment of tax were due from the Estate on February 22, 1999, but Form L-2 was filed with the Commissioner and taxes were paid on May 25, 2001.  The amount of penalties at issue is $68,139.66.  
On September 28, 2001, the Commissioner issued to the Estate an Inheritance Tax Closing Letter showing an assessment of tax in the amount of $158,231.84, together with interest and the penalties at issue in this appeal.  The Estate paid the assessments of tax and interest on October 24, 2001, and the assessment of penalties on May 9, 2002.  On October 25, 2001, the Estate timely filed an Application for Abatement with the Commissioner seeking abatement of the penalties.  The Commissioner sent the Estate a Notice of Abatement Determination dated January 25, 2002, denying the abatement application.  On March 26, 2002, the Estate seasonably filed its petition with the Board.  On the basis of the foregoing, and as will be further explained, the Board found that it had jurisdiction over this appeal.  
This appeal concerns inheritance tax obligations arising from a trust (the "Trust") established under the Will of Margaret S. Henderson (the "Decedent").  The Decedent died on March 12, 1959 while domiciled in Massachusetts.  Pursuant to the terms of the Trust, the trustees were to hold and manage the Trust property and from time to time pay the net income from the Trust to the Decedent's husband, Elliot Henderson.  After his death, the income would go to the Decedent's daughter, Mary Merritt, and then, to her lawful issue by right of representation.    
Elliot Henderson died on October 16, 1986.  As a result of the change in beneficiaries under the Trust, inheritance tax became due on April 16, 1987 pursuant to G.L. c. 65C App. § 7.  The Estate did not file a timely Form L-2.  Sometime late in 1988, after the due date for the Form L-2, Attorney Sandra Steele became a trustee of the Trust.  Attorney Steele testified that she had no familiarity with the Massachusetts inheritance tax.  After she learned that the Estate was delinquent in its inheritance tax obligations, Attorney Steele contacted Jerry Simpkins, an auditor with the Estate Tax Bureau of the Massachusetts Department of Revenue (the "Estate Tax Bureau" and "DOR," respectively), who instructed her to file Form L-2.  The Estate filed Form L-2 on September 26, 1989 (the "1989 Form L-2") and paid taxes plus accrued interest.  The Commissioner did not waive the penalty assessed pursuant to G.L. c. 62C, § 33(c) for the Estate's failure to timely pay tax after the issuance of a Notice of Assessment but waived all penalties assessed pursuant to § 33(a) and (b) for the late filing of the return and the late payment of tax.  The Estate paid and did not further contest the § 33(c) penalty. Consequently, no matter relating to the 1989 Form L-2 is at issue in the current appeal.  
The Estate Tax Bureau subsequently sent an Inheritance Tax Closing Letter (the "1990 Closing Letter"), dated June 7, 1990, to Attorney Steele at her Boston office.  The 1990 Closing Letter detailed an amount due of $80,519.00 on a line entitled "State Inheritance Tax on present/all interests."  The subsequent "Tax due" line included a handwritten notation of "10-16-87" next to the $80,519.00.  The following line showed "Interest due" of $28,986.84.  The last line on the printed form referred to a "Final Amount due," but the word "Final" had a handwritten scratch-mark over it, and beneath this line was the handwritten notation, "DIST. PAID TO MARY MERRITT."  The amount shown as due was $119,538.13, which included the "Tax due" and "Interest due," plus an additional $10,027.29, labeled on the form with a handwritten notation, "late Int & Penalty," and an additional $5.00 charge, labeled on the form with a handwritten notation, "demand."   
Attorney Steele treated the 1990 Closing Letter as a final accounting, interpreting the reference to "present/all interests" as reflecting the Trust's final obligation to pay inheritance taxes on all future interests.  She assumed that the Trust would have no further inheritance tax obligations.  In fact, the $80,519.00 "Tax due" referred to in the 1990 Closing Letter had become due as a result of the change in beneficiaries upon the death of Elliot Henderson and the consequent vesting of a future interest in Mary Merritt.  Believing that the Estate's inheritance tax obligations had been extinguished, Attorney Steele retained the accounting firm of Bacall & Conniff, P.C. ("Bacall & Conniff") to prepare the fiduciary income tax returns on behalf of the Estate.  
The Board found that the 1990 Closing Letter was not written advice given by the DOR, and it was not issued to the Estate in response to any specific written request made by the Estate or its trustees.  The Board also found that the 1990 Closing Letter's reference to "present/all" interests was unclear, and thus Attorney Steele did not reasonably rely on it.  
The taxable event giving rise to this appeal was the change in beneficiaries under the Trust upon the death of Mary Merritt on February 21, 1998.  Pursuant to G.L. c. 65C App. §§ 7 and 22, Mary Merritt's death required the Estate to file Form L-2 by February 22, 1999.  The Estate mailed Form L-2 on May 23, 2001, 27 months late.  Attorney Steele and another individual, Robert Snyder, were serving as trustees of the Estate when Form L-2 was due. 
The Commissioner attempted to communicate with the Estate before the Estate filed the Form L-2 at issue in this appeal.  The Commissioner sent a letter, dated October 13, 1999 (the "October 13, 1999 letter") requesting information about the status of the Trust and any additional inheritance tax which might be due.  The October 13, 1999 letter included several questions, including the question, "Has the trust or life estate terminated?"  Responses to the questions were handwritten on the back of the letter, including the response, "No," to the question relating to the trust or life estate termination.  The October 13, 1999 letter was returned to the Commissioner's office.  
The October 13, 1999 letter was from Mr. Simpkins to Attorney Steele and George Lovejoy, Jr., as trustees.  However, Mr. Lovejoy never served as a trustee of the Trust.  Moreover, the letter was addressed and mailed to Bacall & Conniff at its office in Boston rather than to Attorney Steele's office.  The parties agreed that prior to receiving the Commissioner's discovery responses from this appeal, the trustees had no knowledge of the October 13, 1999 letter or the responses.  Neither the appellant nor the appellee knew who answered the questions posed in the October 13, 1999 letter, when the answers were completed, or when they were received by the Commissioner.  Bacall & Conniff had timely filed the Massachusetts Fiduciary Income Tax Return ("Form 2") for 1998, which disclosed the change in the Trust's beneficiaries resulting from the death of Mary Merritt.  However, there was no Power of Attorney on file with the DOR authorizing Bacall & Conniff to receive communications from the Commissioner on behalf of the Estate.      
The parties agreed that Attorney Steele discovered by chance that the Estate was delinquent in filing its Form L-2 when, in the spring of 2001, she contacted Mr. Simpkins on another matter.  Mr. Simpkins remembered Attorney Steele's involvement with the Estate.  He asked Attorney Steele if Mary Merritt had died.  When Attorney Steele answered affirmatively, Mr. Simpkins informed her that the Estate owed inheritance tax as a result of Mary Merritt's death.  Attorney Steele took immediate steps to bring the Estate into compliance with its inheritance tax obligations, including contacting an attorney competent in Massachusetts inheritance tax matters.
For the reasons explained more fully in the Opinion, the Board found that penalties for failure to file an inheritance tax return and pay inheritance tax are imposed pursuant to G.L. c. 62C, § 33, and the Board has jurisdiction over abatement of these penalties.  The Board accordingly found that it had jurisdiction to hear this appeal. 
As to the merits of the appeal, the Board found that Attorney Steele did not exercise ordinary business care and prudence when, rather than further investigate, she simply assumed that the 1990 Closing Letter signified the discharge of the Estate's present and future inheritance tax obligations in their entirety.  The Board found that the appellant did not meet its burden of proving reasonable cause for failing to file Form L-2 or pay the tax on a timely basis, and therefore the Estate was not entitled to an abatement of the penalties assessed against it.  The Board issued a decision for the appellee in this appeal.  

OPINION
This appeal arose under the inheritance tax imposed under former G.L. c. 65, now appearing as an appendix to chapter 65C.  The Massachusetts inheritance tax, which still applies to estates of decedents who died before January 1, 1976, imposed a tax on the amount of property received from a decedent by each beneficiary, but only when the property vested in possession or enjoyment.  G.L. c. 65C App. § 7.  Accordingly, the inheritance tax becomes due as future interests vest upon the expiration of one or more life estates.  Id.
1.  The Board has jurisdiction to hear and decide this
    appeal.  

Because the abatement remedy is created by statute, the Board has only that jurisdiction which the Legislature has conferred on it.   Comm'r of Revenue v. Pat's Super Market, Inc., 387 Mass. 309, 311 (1982) (citing Stilson v. Assessors of Gloucester, 385 Mass. 724, 732 (1982)). The Commissioner argued that the Board lacked jurisdiction over the instant appeal because it arose from the Commissioner's determination under G.L. c. 65C App. § 27A, which specifically precludes review of the Commissioner's decision: "[t]he decision of the commissioner shall be final."  The Commissioner cited Ross v. State Tax Commission, ATB Findings of Fact and Reports (Docket No. 90023, May 16, 1979) ("Ross"), in which the Board found it lacked jurisdiction to hear an appeal from the Commissioner's abatement determination under former G.L. c. 65, § 27A.  However, as elaborated below, the Board found and ruled that the penalties at issue were imposed pursuant to G.L. c. 62C, § 33, not former G.L. c. 65.  Ross pertained to the Commissioner's refusal to abate an inheritance tax imposed under former G.L. c. 65, not a penalty imposed under G.L. c. 62C.  Thus, Ross is inapposite.     
G.L. c. 62C, § 2 provides that the administrative provisions of G.L. c. 62C "shall, so far as pertinent and consistent, apply to the taxes imposed . . . by chapters sixty-two through sixty-five C, inclusive . . . ."  Prior to 1970, former G.L. c. 65, § 22 contained a provision which provided a penalty for late filing of Form L-2, but not one for late payment of tax.  Chapter 338 of the Acts of 1970 deleted this provision.  Penalty provisions relating to the late filing of state tax returns and late payment of state taxes are now contained in G.L. c. 62C, §§ 33(a) and (b), respectively, and no provision in G.L. c. 62C, § 33 exempts the inheritance tax from its application.  Based on the foregoing, the Board found that the penalty provisions of G.L. c. 62C, § 33 apply to the late filing of Form L-2 and late payment of inheritance tax.
G.L. c. 62C, § 39 grants the Board jurisdiction over appeals arising from the Commissioner's refusal to abate a tax.  As defined in G.L. c. 62C, § 1, "tax" includes "any  . . . penalty or addition to tax imposed by this chapter."  While the underlying tax in this appeal was assessed under G.L. c. 65C App. § 27 , the penalties were imposed under G.L. c. 62C, § 33.  In particular, the late filing penalty of $39,657.94 was imposed under § 33(a) and the late payment penalty of $28,481.71 was imposed under § 33(b).  These penalties became part of the "tax" that the Commissioner refused to abate, and over which the Board has jurisdiction pursuant to G.L. c. 62C, § 39.  See e.g., Stella, Executor v. Commissioner of Revenue, ATB Findings of Fact and Reports 2003-44 ("Stella"); and Fogarty, Administrator v. Commissioner of Revenue, ATB Findings of Fact and Reports 1987-219.  In fact, the Notice of Abatement Determination dated January 25, 2002 notified the appellant of its right to appeal the Commissioner's determination "in accordance with the provisions of Massachusetts General Laws, Chapter 62C, § 39."  Accordingly, the Board ruled that it had jurisdiction over the instant appeal.
2. The appellant failed to demonstrate that its failure to 
timely file and timely pay were due to reasonable cause and not willful neglect.

The Estate did not timely fulfill its obligation to file an inheritance tax return with the Commissioner after the death of Mary Merritt, the life beneficiary.  The Estate, therefore, was assessed penalties for late filing of a return and late payment of tax provided under G.L. c. 62C, §§ 33(a) and (b):
If any return is not filed with the commissioner on or before its due date or within any extension of time granted by him, there shall be added to and become a part of the tax, as an additional tax, a penalty of one per cent of the amount required to be shown as the tax on such return for each month or fraction thereof during which such failure continues, not exceeding, in the aggregate, twenty-five per cent of said amount.
If any amount of tax is not paid to the commissioner on or before the date prescribed for payment of such tax, determined with regard to any extension of time for payment, there shall be added to the amount shown as tax on such return a penalty of one-half of one per cent of the amount of such tax for each month or fraction thereof during which such failure continues, not exceeding, in the aggregate, twenty-five per cent of said amount.

"[P]enalties accrue by operation of law in accordance with G.L. c. 62C, § 33."  Fields Corner Plate Glass Co., Inc. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1994-186, 195-96.  Even so, the Commissioner has discretion to waive or abate penalties pursuant to G.L. c. 62C, § 33(f): 
If it is shown that any failure to file a return or to pay a tax in a timely manner is due to reasonable cause and not due to willful neglect, any penalty or addition to tax under this section may be waived by the commissioner, or if such penalty or addition to tax has been assessed, it may be abated by the commissioner, in whole or in part.

The issue in this case is whether the Estate's failure to file the Massachusetts inheritance tax return and pay the requisite tax in a timely manner was due to reasonable cause and not willful neglect, thereby relieving the Estate of the § 33 penalties.  "Because the appellant bears the burden of proving its right to the abatement, he also bears the burden of establishing reasonable cause."  Stella, ATB Findings of Fact and Reports 2003 at 54 (citing Blakeley v. Commissioner of Revenue, 28 Mass. App. Ct. 499, 501 (1990) and Q Holdings Corp. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1996-412, 419 ("Q Holdings Corp.")).  The Board found that the appellant failed to meet this burden.
	The Supreme Judicial Court has ruled that "reasonable cause" in § 33(f) establishes an "objective standard," whereby "[a]t a minimum, the taxpayer must show that he exercised the degree of care that an ordinary taxpayer in his position would have exercised."  Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 665 (1990).  This objective standard requires a factual analysis to determine if the taxpayer exercised "ordinary business care" and prudence with respect to filing returns and paying taxes in a timely manner.  Id.  The Supreme Judicial Court stated that there was no place in this objective analysis for considerations of fairness, finding that the Board erred in "focus[ing] on what it perceived to be the equities involved" in the situation.  Id. at 664.  
The Massachusetts penalties statute, G.L. c. 62C, § 33(f), was modeled after Internal Revenue Code § 6651, which provides a penalty for failure to file a tax return or pay a tax "unless it is shown that such failure is due to reasonable cause and not due to willful neglect . . . ."
The standard of ordinary business care and prudence applied by the Board in this appeal is consistent with the standard applied by federal courts in cases pertaining to the federal statute.  See, e.g., Estate of Bradley v. Commissioner of Revenue, 33 T.C.M. (CCH) 70, 72-73 (1974), aff'd, 511 F.2d 527 (6th Cir. 1975) ("We think [the taxpayer's] inquiry and his reliance on the accountant's response, in the circumstances of this case, were consistent with the ordinary business care and prudence standard prescribed by the applicable regulation.").
The Board has found reasonable cause to abate penalties for late filing of a return and late payment of a tax in certain circumstances, in particular, when a taxpayer reasonably relied on the advice of a competent tax professional. In Samia v. Commissioner of Revenue, ATB Findings of Fact and Reports 1993-127, the appellants, Florida residents, sought the advice of an attorney specializing in Massachusetts tax matters.  In finding reasonable cause to abate the late filing and late payment penalties assessed against the appellants, the Board found that "the appellants made, or in good faith attempted to make, full disclosure of all relevant information to their tax attorney regarding the tax matter in issue, [] the appellants' tax attorney was a competent tax expert . . . [and] the tax attorney's advice was on the specific tax matter at issue."  Id. at 133.  Therefore, the Board ruled that "the appellants reasonably relied upon their tax attorney's opinion in failing to timely file their Massachusetts nonresident personal income tax return and pay the tax," and accordingly, "the appellants exercised ordinary business care and prudence."  Id. at 134.  See also Universal Instruments, Corp. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1998-407, 416-17 (finding reasonable cause for failure to file timely and pay timely where the taxpayer relied on the Director of the parent company's tax department, a certified public accountant and tax attorney, who in turn, in the absence of a DOR public written statement, had relied upon Public Law 86-272 and relevant Massachusetts tax cases in rendering his opinion); and Q Holdings Corp., ATB Findings of Fact and Reports 1996 at 420 (finding that appellant's failure to file was due to reasonable cause where appellant relied upon "a nationally recognized certified public accounting firm doing substantial business in Massachusetts"). 
In the instant appeal, Attorney Steele admitted at the hearing that she is neither a tax expert nor an inheritance tax expert.  Still, she did not consult a tax expert or the Estate Tax Bureau until she discovered that the inheritance tax return and the requisite inheritance tax payment were late.  Attorney Steele attempted to interpret the 1990 Closing Letter herself.  Because the reference to "State Inheritance Tax on present/all interests" was unclear, she mistakenly believed that no further inheritance taxes were due.  
The appellant argued that the penalties should be abated because the inheritance tax is poorly understood, especially by attorneys admitted to practice after 1975, when it was replaced by the estate tax.  However, the Board found that, rather than support a finding of reasonable cause, the near obsolescence of the inheritance tax heightens the need to consult a tax expert to be deemed to have acted reasonably in failing to timely file a return and timely pay a tax.  
The fact that the Estate Tax Bureau misdirected communications with the Estate, particularly the October 13, 1999 letter, does not create reasonable cause so as to warrant the abatement of penalties, because consultation with an inheritance tax expert or the Estate Tax Bureau upon the receipt of the 1990 Closing Letter would have clarified the Estate's tax obligations.  There is no requirement on the part of the Commissioner to remind taxpayers of their filing obligations under the inheritance tax statutes.  The Board thus did not find reasonable cause to warrant abatement of the penalties assessed against the Estate. 
In addition to G.L. c. 62C, § 33(f), penalties may be waived or abated by the Commissioner pursuant to G.L. c. 62C, § 36B, which provides:
The Commissioner shall waive or abate any portion of any penalty or addition to tax assessed under this chapter attributable to erroneous advice furnished to the taxpayer in writing by an officer or employee of the department of revenue, acting in such officer's or employee's official capacity, provided that (a) the written advice was reasonably relied upon by the taxpayer and was in response to a specific written request of the taxpayer, and (b) the portion of the penalty or addition to tax did not result from a failure by the taxpayer to provide adequate or accurate information. 

This provision was approved on July 18, 1990, and made effective upon passage.  The 1990 Closing Letter was dated June 7, 1990, prior to the passage of G.L. c. 62C, § 36B, and therefore, the Board found that the provision was inapplicable to this appeal.  Moreover, the Board found that the 1990 Closing Letter was not "advice furnished to the taxpayer," nor was it issued "in response to a specific written request of the taxpayer."  Finally, the Board found that the reference to "present/all interests" in the 1990 Closing Letter was not clear. Therefore, Attorney Steele did not reasonably rely on the letter's contents.  The Board found and ruled that this provision did not apply to the facts of this case.

Conclusion
The Board found and ruled that Attorney Steele, as trustee of the Estate, did not exercise the requisite degree of care so as to avoid the imposition of the penalties at issue, and there is no legal basis for their abatement.  Accordingly, the Board issued a decision for the appellee in this appeal.

				THE APPELLATE TAX BOARD


By:  ____________________________________
Anne T. Foley, Chair

     
____________________________________
Donald E. Gorton, III, Commissioner


     ____________________________________
Nancy T. Egan, Commissioner

  
____________________________________
James D. Rose, Commissioner 

   A true copy,



Attest:_____________________________
  	    Assistant Clerk of the Board

 The Estate has filed a separate Application for Abatement for the assessment of the underlying tax and interest, which are not herein at issue.  
 Attorney Steele agreed to become trustee because she was a close friend of Kate Merritt, the Decedent's granddaughter, and she had previously represented Mary Merritt on real estate matters.  
  Attorney Steele testified that she was not certain whether she was serving as a trustee when the 1989 Form L-2 was filed, but was assisting the Estate with its compliance obligations.
  Mr. Snyder began serving as trustee, together with Attorney Steele, sometime in 1999.  Attorney Steele testified that Mr. Snyder was a CPA and was handling financial matters for the Estate.  However, she did not identify him further than to explain that he served with her as a trustee during the relevant time period.
  The Estate's post-hearing submissions to the Board criticized the Estate Tax Bureau for subsequently sending another letter pertaining to the Estate to the wrong addressee.  This second letter, dated June 25, 2002 (the "June 25, 2002 letter"), was from Kevin Conway, a tax auditor with the Estate Tax Bureau, to Attorney James Conniff, and it was mailed to Bacall & Conniff's office in Boston.  Bacall & Conniff was no longer retained by the Estate at this time.  For the reasons stated in the Opinion, the Board found that the misdirected October 13, 1999 letter and the June 25, 2002 letter did not affect the outcome of the appeal.
  In contrast, the Massachusetts estate tax, which applies to estates of decedents who died on or after January 1, 1976, is a transfer tax imposed upon the entire value of the estate of a decedent.
  This provision is now located at G.L. c. 65C App. § 27A.
  The provisions of former G.L. c. 65, § 22 provided a penalty for the failure to file a complete inheritance tax return in the amount of 5 percent per month or any fraction thereof, but not in excess of 25 percent of the total due, for each month by which the filing was late.  
  Where the Massachusetts Legislature has enacted a tax statute that incorporates language from the federal statute, the construction of the federal statute given by the federal courts is persuasive in the construction of the Massachusetts statute.  See, e.g., Commissioner of Revenue v. Franchi, 423 Mass. 817, 857 (1996).

ATB 2005-601