Advice of Counsel Defense Avoids Penalties

It has been my experience that taxpayers who attempt to be excused for late filing of a return due to reliance on a legal or tax professional are unsuccessful.  However, an exception to this general rule occurred  in the case of Estate of Hake v. United States.  Upon the decedent’s death, her sons, as executors overpaid the state tax by $100,000 but filed the Form 706 approximately six months late, relying upon advice from counsel.  The     estate was assessed a penalty and interest of approximately $114,000, which the estate paid.  Litigation ensued, and eventually based on their particular circumstances, the penalities and interest was refunded.  The executors then sued to government to recover attorney’s fees and costs.  They were denied their motion because although the government lost, they were “substantially justified” in assessing the penalties and interest.  Further, in order to seek attorney’s fees and costs, the estate must have a net worth under $2,000,000.  The Estate of hake was valued at approximately $8,200,000.