Estate of Trompeter v. Commissioner

Swift, J., concurring: Judge Ruwe’s dissent acknowledges that under section 2053(a) an estate, or a preparer of an estate tax return, may estimate and claim on the estate tax return expenses not yet incurred if such expenses are reasonably anticipated and an amount therefor can be reasonably estimated. See sec. 20.2053-(b)(3), Estate Tax Regs.

In Estate of Trompeter v. Commissioner, T.C. Memo. 1998-35 , we found that the executor in this case “knowingly” filed a fraudulent estate tax return. Because the fraud was “known” at the time the estate tax return was filed, it would appear that it would not have been unreasonable (albeit perhaps a poor strategy) for the tax return preparer to have anticipated respondent’s audit and the litigation that followed and, under section 2053, to have estimated on the estate tax return a reasonable amount for legal fees likely to be incurred in connection with the litigation and to have claimed such expenses as deductions.

I note that under current law and ethical guidelines, tax return preparers may no longer consider the audit lottery when evaluating the “reasonableness” of tax return positions. See Treas. Dept. Circular No. 230 (Regulations Governing the Practice * * * Before the Internal Revenue Service); AICPA Statements on Responsibilities in Tax Practice No. 1, par. 03a and Interpretation No. 1 — 1, par. 05; ABA Ethics Opinion 85-352.

Circular No. 230 at section 10.34(a)(4)(i) provides as follows:

The possibility that a position will not be challenged by the Service (e.g., because the taxpayer’s return may not be audited or because the issue may not be raised on audit) may not be taken into account.

In other words, in considering the “hazards of litigation” or the reasonableness of a particular tax return position, tax return preparers are now to assume that tax returns will be audited by respondent and that questionable items reported and claimed on the returns will be disallowed by respondent.

Accordingly, with regard to questionable items knowingly reported on estate tax returns, taxpayers and tax return preparers generally are to anticipate that an audit will occur and that questionable items will be disallowed by respondent, and they are to anticipate that the estate will incur additional legal expenses associated with that disallowance. Thus, under section 20.2053-l(b)(3), Estate Tax Regs., it appears that legal expenses likely to be associated with a dis-allowance by respondent of questionable items reflected on estate tax returns could be claimed on the returns when filed, based on reasonable estimates therefor.

I have two further points.

If a taxpayer and a tax return preparer jointly and knowingly participate in the preparation and filing of a grossly fraudulent tax return to such an extent that the fraud— when first raised by respondent on audit — should have been immediately conceded by the taxpayer and by the taxpayer’s legal representative, then the taxpayer should not have contested either the resulting tax deficiency or the imposition of the fraud penalty. A contest involving such a patently fraudulent return would be frivolous.

Under the above approach, postaudit administrative hearings and Tax Court litigation contesting an estate tax deficiency and imposition of a fraud penalty ought to be regarded as unnecessary and frivolous, and legal expenses relating thereto should be disallowed under section 2053 and section 20.2053-3(a), Estate Tax Regs., as unreasonable and as incurred not for the benefit of the estate, but for the benefit of the beneficiaries (i.e., as merely an attempt by the beneficiaries to postpone payment of the proper estate tax and penalties due). See, for example, Hibernia Bank (Estate of Clark) v. United States, 581 F.2d 741, 746 (9th Cir. 1978); Estate of Dutcher v. Commissioner, 34 T.C. 918, 923 (1960); Estate of Bartberger v. Commissioner, T.C. Memo. 1988-21 ; and Estate of Pudim v. Commissioner, T.C. Memo. 1982-606 , affd. without published opinion 942 F.2d 1433 (2d Cir. 1983), each of which illustrates the disallowance, for estate tax purposes, of legal and other fees and costs due to the fact that the costs were not incurred in the good faith administration of the estate but for the benefit of the beneficiaries.

I would think that the above authority would provide the mechanism to handle the dissent’s hypothetical situation that reflects bad faith and frivolous litigation.

Lastly, if, on policy grounds, 1 expenses of the type in dispute herein should be denied as a matter of law, it would appear appropriate for Congress to do so by legislation, rather than by opinion of this Court and by respondent’s strained interpretation of the statutory provisions, under which the expenses in dispute would be deductible under section 2053 for civil tax deficiency purposes but, as a matter of law, would not be deductible for purposes of the computation of the fraud addition to tax. If Congress intends significant disparate treatment in the allowance of identical expenses for two closely related purposes, I would expect such disparate treatment to be clearly set forth in the statutory scheme.

A strong policy argument certainly can be made that because the items in question in this case were fraudulent, they never should have been claimed on the estate tax return in the first place, and the subsequent and related litigation expenses then never would have been incurred.