United States v. Boyle

PETITIONER:United States
RESPONDENT:Boyle
LOCATION:United States District Court House

DOCKET NO.: 83-1266
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 469 US 241 (1985)
ARGUED: Oct 10, 1984
DECIDED: Jan 09, 1985

ADVOCATES:
Albert G. Lauber, Jr. – on behalf of Petitioner
Thomas E. Davies – on behalf of the Respondent

Facts of the case

Question

Audio Transcription for Oral Argument – October 10, 1984 in United States v. Boyle

Warren E. Burger:

We’ll hear arguments next in United States against Boyle.

Mr. Lauber, I think you may proceed whenever you are ready.

Albert G. Lauber, Jr.:

Mr. Chief Justice, may it please the Court:

This case presents a question about the addition to the tax often referred to colloquially as a penalty for failure to file a tax return on time.

Section 6651(a)-1 of the Internal Revenue Code provides that in case of failure to file any return on the date prescribed therefor, there shall be added to the tax an amount up to a total of 25 percent of the total tax due unless it is shown that such failure is due to reasonable cause and is not due to willful neglect.

The question here is whether a taxpayer can demonstrate reasonable cause for a late filed return even though that return’s late filing is in fact attributable to negligent by citing the fact that he relied on his attorney or other agent to prepare the return for him.

The facts were not in dispute below and are not very complicated.

The taxpayer here is the executor of an estate.

Among the duties of an executor, imposed both by relevant state law and by the Revenue Code, is the duty to file a federal estate tax return.

Warren E. Burger:

Well, would it be any different in your view if it was for a personal return and he was involved in filing the return, a delinquent return as an individual?

Albert G. Lauber, Jr.:

No, it would not, Your Honor.

We think the same reasoning would apply to an income tax return, a gift tax return, almost any kind of return.

Here the executor hired a lawyer to take care of administering most of the estate’s affairs.

The executor met with the lawyer; he was told that the estate would in fact be required to file a federal estate tax return.

The executor was also told that there existed a specific deadline by which the return would have to be filed–

The lawyer in fact knew what that correct deadline was, namely, a date nine months after the date of death, but the lawyer did not recall having informed the executor of the exact due date, only that there was a due date.

As it turned out, the lawyer, through carelessness, forgot all about the return until well after the filing period had elapsed.

As a result, the return was filed three months late.

The Commissioner determined that the executor’s late filing was not due to reasonable cause, and accordingly, asserted an addition to the estate tax in the appropriate amount.

The Court of Appeals expunged the penalty.

It recognized that under longstanding Treasury regulations, the determination of reasonable cause is governed by an objective test, that is, whether the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.

But the Court of Appeals held that here the executor’s late filing was due to reasonable cause.

It relied primarily on two facts, the fact that the executor lacked personal knowledge of the filing date, and that he relied on his attorney to prepare the return for him.

The Court of Appeals acknowledged that three other circuits had ruled as a matter of law that reliance on counsel standing alone is not a defense to the late filing penalty in this kind of a case.

We think the Court of Appeals was wrong both for reasons of technical tax law and also for reasons of common sense.

We start from the premise that where, as here, it is clear that a tax return is required to be filed, the taxpayer has a personal and nondelegable duty to file that return on time.

This premise we think follows from a variety of code provisions that state that the taxpayer shall make a return, he shall sign the return under penalties of perjury, and that he shall file it by a specified date.

The personal and nondelegable nature of his timely filing obligation has been recognized by almost every lower federal court to address the question, and we think from this premise two conclusions inevitably follow.

First of all, because the taxpayer’s duty to file on time is personal, he has a concomitant duty personally to find out what the filing date is, and that we think is just a matter of common sense.

If a person knows he has a duty to perform and knows it must be performed by a deadline, ordinary business care and prudence require him, plainly require him to find out what that date is.

Warren E. Burger:

Are you able to tell us, Mr. Lauber, if you know whether… what is the policy of IRS?

Do they dispense mercy very often in this area?

Albert G. Lauber, Jr.:

Well, we… the IRS tries to be reasonable, but I don’t think they would be inclined to be particularly clement in a case like this, and I will try and explain why it would be–

Warren E. Burger:

Well, I don’t mean as to this case.

Are there many dispensations granted in a given year, if you know?

Do they forgive late filings with very many people?

Albert G. Lauber, Jr.:

–I really don’t know the answer to that, to that question.

And secondly, because the taxpayer’s duty to file on time is nondelegable, he cannot escape liability for a late filing simply by having somebody else prepare the return for him; rather, if the taxpayer is going to show ordinary business care and prudence, he has got to supervise his agent and make sure the agent gets about the business of preparing the return.

Moreover, if the agent is negligent himself, that negligence, we think, under agency doctrine, must be imputed to the taxpayer as the principal.

And we think if the Court agrees with us about these general rules in the area, reversal of the Court of Appeals decision is required.

Here, the executor knew that he had to file a return; he knew he had to file it by a certain date; but he simply failed to find out what that date was.

He also failed to use the kind of care that an ordinarily prudent businessman who faced a liability would use in making sure that his agent was prompt in preparing the return.

I think in both those respects the taxpayer was negligent.

Moreover, the attorney was plainly negligent because he forgot about the return altogether, and that negligence must be imputed to the taxpayer.

And since both of them were negligent, we think that there was no reasonable cause and the penalty was properly assessed.

This result, we think, is not only dictated by well-settled tax principles, but makes perfect sense.

And here it is helpful to recall the words of the statute.

It says that where a return is filed late, an addition to the tax shall be imposed unless it is shown that the failure to file was due to reasonable cause.

Here, if one looks at all the acts and omissions committed by the executor and the lawyer that in fact caused the return to be filed late–

Warren E. Burger:

Well, somewhere in the archives of IRS, in the law department, there must he a sort of code, guidelines as to when this dispensation should be granted?

Albert G. Lauber, Jr.:

–Well, the regulations set out–

Warren E. Burger:

I mean apart from the regulations.

Albert G. Lauber, Jr.:

–And the prior–

Warren E. Burger:

There must be some explanatory material about the regulations themselves.

Albert G. Lauber, Jr.:

–Well, the only thing I know of is the Internal Revenue manual lists eight examples of cases where the penalty will not be assessed, and they are listed in a footnote in our brief.

I don’t know of any other secret law on the subject.

But the IRS would not assess the penalty if it looks like there is a reasonable basis for a late filing, and it is only when there is no reasonable basis that they will go after the taxpayer.

But I think if you look at all the acts and omissions that actually caused the late filing here, it could not be shown that that late filing had a reasonable cause.

Indeed, the cause of the late filing was failure of oversight by the executor and carelessness by the lawyer.

And plainly, if one person, the taxpayer, had committed all those acts and been guilty of all those omissions, he couldn’t possibly escape the late filing penalty.

William H. Rehnquist:

But the Court of Appeals thought that the taxpayer should be able to rely on the doctrine of advice of counsel since it really was the lawyer’s failings that prevented the thing from being filed on time.

Albert G. Lauber, Jr.:

Well, that’s right, Justice Rehnquist, and that would bring me to defining of proper scope of the reliance on counsel defense which I was going to get to shortly.

Thurgood Marshall:

Well, just before that, and along the same line, if the lawyer misled or negligently advised the executor and the executor was penalized for it, couldn’t the executor get that money back from the lawyer–

Albert G. Lauber, Jr.:

He certainly could, Justice Marshall.

Thurgood Marshall:

–in any court in the world?

Albert G. Lauber, Jr.:

I would think so.

I would be very surprised if he couldn’t.

But let me address Justice Rehnquist’s–

Lewis F. Powell, Jr.:

May I ask this before you move on?

Is the standard that CA-11 purports to follow substantially identical with the standard prescribed by the regulations, reasonable care?

Albert G. Lauber, Jr.:

–Well, that’s hard to say, Justice Powell, because–

Lewis F. Powell, Jr.:

Don’t they use the same words, essentially?

Albert G. Lauber, Jr.:

–They use the same words, but they really did not apply an objective test because… they quoted the regulations and they trotted them out, but when they performed their analysis, they didn’t use an objective test.

They looked at a personal knowledge of that particular executor.

He didn’t know–

Lewis F. Powell, Jr.:

Are you advocating the rule of CA-5 and a couple of other circuits, that the duty is nondelegable in all circumstances?

Albert G. Lauber, Jr.:

–That is our position.

Lewis F. Powell, Jr.:

You are?

Albert G. Lauber, Jr.:

Yes.

Lewis F. Powell, Jr.:

That’s not what the regulation says.

Albert G. Lauber, Jr.:

The regulations about reasonable cause you mean.

Lewis F. Powell, Jr.:

Yes.

Albert G. Lauber, Jr.:

The regulations about reasonable cause say that the executor must exercise ordinary business care and prudence.

Lewis F. Powell, Jr.:

Yes.

Albert G. Lauber, Jr.:

And our position is that ordinary business care and prudence per se require the executor, A, to find out the due date, and B, to make sure his agent, if he has an agent, is prompt in performing his agency activity.

So we think that is a… that is per se inherent in the notion of ordinary business care and prudence.

Lewis F. Powell, Jr.:

With respect to a filing date, perhaps you are right, but there are so many complications in preparing some tax returns, you are not arguing, I suppose, that a layman, for example, has to assume nondelegable obligations with respect to things of which he knows no–

Albert G. Lauber, Jr.:

Oh, exactly right.

Well, perhaps I should get to the reliance on counsel defense point.

Warren E. Burger:

–Do you think there is any analogy between filing dates of this kind and filing dates for petition for writ of certiorari in this Court?

Albert G. Lauber, Jr.:

It simply is jurisdictional, period.

One has to… well, I think that is a good analogy.

The sanction is a little different.

It is a monetary sanction rather than not being able to get into court, but I think it must be policed rigorously.

Otherwise, the whole system just will crumble.

Here, the Court of Appeals did reach their result by finding that reliance on counsel defense should be available to the executor here.

Now, we of course, agree that reliance on counsel in appropriate conditions is, may be a defense to various tax penalties, including the addition to the tax for late filing.

But we think those conditions are not present here.

The law is fairly clear in the lower courts that reliance on counsel defense is available where basically four conditions are met: the taxpayer must consult a competent attorney, he must make a full disclosure of all the facts, the attorney must opine on the question presented, and the taxpayer must rely in good faith on the advice given.

And if those conditions are met, it is normally not relevant whether the lawyer was wrong.

But here we think this doctrine has no application.

The attorney… the executor did not request any legal advice from the attorney, and the attorney gave him no legal advice, whether erroneous or not.

It was clear to both the executor and the lawyer that a tax return had to be filed.

It was clear to both of them that the filing date, the specific deadline for filing the return, the lawyer knew what the deadline was and did not advise his client about it.

So the whole predicate for invoking a reliance on counsel defense, the giving of a reliance on legal advice, simply is not present here.

And for that reason, we think that the personal nondelegable duty doctrine governs the case, and the result then would be a perfectly sensible result, we think, for all concerned, because we think it is clear here that if the taxpayer himself had committed all the steps that caused late filing, he would clearly be liable for the penalty.

What the Court of Appeals basically said is that if two people, the taxpayer and his agent, commit all the acts and omissions, the penalty is not collectable, that it kind of falls between the two stools.

The IRS can’t collect from the taxpayer because he can rely on his agent as a defense.

The Commissioner can’t–

Byron R. White:

But you don’t go any farther than the filing date and the fact of filing, do you, for a per se rule?

Albert G. Lauber, Jr.:

–No.

As far as… even as far as obligation–

Byron R. White:

As far as the accuracy of the return or the intent or the legal problems involved in it?

Albert G. Lauber, Jr.:

–No, we would not go that far in our position.

Our position is really confined to the timely filing of the return.

Byron R. White:

Right.

Albert G. Lauber, Jr.:

As to–

Sandra Day O’Connor:

Mr. Lauber, would you apply that strict per se approach to someone such as a mentally retarded person who inherits property and has to file a return and relies on someone like a lawyer to help him?

Would you really want to stick to that standard under any and circumstances in every case?

Albert G. Lauber, Jr.:

–Well, hard cases make bad law.

Sandra Day O’Connor:

Yes.

Albert G. Lauber, Jr.:

But I think I would have to say yes, we would stick to our standard there.

If you had an incompetent who had a fiduciary appointed to take care of his or her affairs, I think the fiduciary is an alter ego of the incompetent, and they are stuck.

Sandra Day O’Connor:

Well, you’ve added something, a fiduciary appointed, and that was not part of my inquiry.

Would you agree that generally speaking these heavy penalties don’t fall on people who are indigent?

Albert G. Lauber, Jr.:

Well, they generally don’t because the penalty is one quarter, maximum, one quarter of the tax due.

If there is no tax due, generally speaking, there is no penalty in the estate tax area at least.

Warren E. Burger:

Even though the executor or trustee may be not as affluent as his… the beneficiaries of the trust or of the estate, nevertheless, the penalty is deliberately aimed by Congress to fit the size of the problem, isn’t it?

Albert G. Lauber, Jr.:

It is 5 percent per month for every month up to 25 percent that the return is late.

But I think what the case boils down to is a fairly, as Justice Marshall said, a fairly common sense proposition.

Here, what the Court of Appeals held is that the IRS cannot collect from the taxpayer because he relies on the agent.

It can’t collect from the agent because the agent, not being a taxpayer, can’t be liable for the addition to the tax, and the result is the IRS can collect from no one, even though it is plain in that precisely what Congress spoke of in the penalty provision, a filing not due to reasonable cause, it is late, has happened.

And we think this outcome just makes no sense, as a matter of statutory construction or tax policy or common sense or even fairness to the parties involved.

Congress designed the late filing addition to the tax as an incentive to timely payment of taxes.

It is designed to protect the revenue.

Now, the effect of this incentive will be destroyed if a taxpayer can escape liability for a negligent late filing merely by having somebody else prepare his return.

Indeed, the harmful effect of that kind of holding is clear because literally tens of millions of American citizens how have income tax returns prepared by professional return preparers.

We think the sensible approach in this kind of situation where the negligence is somehow shared in an unclear way between the taxpayer and his agent, is to let the IRS collect the penalty that it is entitled to collect under the statute, let the taxpayer and his agent sort out among themselves who will bear the cost of the penalty.

Sandra Day O’Connor:

How about an approach like that suggested by Judge Posner in his dissent?

Albert G. Lauber, Jr.:

I think that’s exactly what we would advocate.

Justice Marshall’s–

Sandra Day O’Connor:

Well, it isn’t… I think it’s not quite as–

Albert G. Lauber, Jr.:

–Simple.

Sandra Day O’Connor:

–black and white and arbitrary as you’ve described yours, as I read it, anyway.

Albert G. Lauber, Jr.:

Well, he did have that final sentence that let us–

He did qualify it.

Albert G. Lauber, Jr.:

–by all means have an escape clause for the truly inexperienced.

We think that is wrong.

We think his good old Chicago school free market approach is the correct approach, you simply let the people who are at fault fight it out among themselves by a malpractice action for breach of fiduciary duty, and let the cost fall on negligent people.

But the IRS should not be forced to bear the cost.

Albert G. Lauber, Jr.:

They have done nothing wrong.

They are entitled to their penalty.

But even if he was right, it wouldn’t reach this case.

Albert G. Lauber, Jr.:

No, because here, he didn’t–

Byron R. White:

I mean, if you had the… even if you had that, that final sentence wouldn’t save the taxpayer in this case.

Albert G. Lauber, Jr.:

–No.

Byron R. White:

Do you think he and Judge Swygert take the same position on this issue?

Albert G. Lauber, Jr.:

Swygert, he was the one who wanted to have the malpractice action brought.

John Paul Stevens:

He dissented in the earlier Seventh Circuit case.

Albert G. Lauber, Jr.:

I think they are quite similar because Judge Posner–

John Paul Stevens:

They are not both from the Chicago school, you know.

Albert G. Lauber, Jr.:

–And we think that makes a very sensible approach in which a taxpayer, in answer to Justice O’Connor’s question, the poor incompetent person is… have to pay up, he world surely have a claim against the lawyer–

Sandra Day O’Connor:

Well, Judge Posner would have reserved a situation for that person, I suggest.

Albert G. Lauber, Jr.:

–But I think his reservation doesn’t fit with his basic theory that if it is true that the poor, wronged taxpayer has an action over, or for reimbursement against a lawyer, why make an exception that only operates to hurt the IRS when it is clearly entitled to a penalty because the return has in fact been filed late and negligently.

And as long as a taxpayer is made whole for whatever errors his agent committed, the taxpayer is not going to be out any money, and the IRS will get what Congress wished it to get when taxes, returns are filed late.

And what we think really makes no sense at all is to deprive the IRS of the penalty, let the taxpayer in effect borrow money from the government at will and let the negligent lawyer get off completely free.

I would like to address briefly the–

Sandra Day O’Connor:

You would require, I suppose, that the taxpayer have a solvent tax preparer.

He should be sure–

Albert G. Lauber, Jr.:

–Well, if he doesn’t, it’s his fault for not picking a very good tax return preparer.

I think most of them must be bonded, I believe.

But in any event, the IRS shouldn’t be stuck with that, left holding the bag there.

I would like to address briefly the analysis of a statute that the Respondent has put forward in his brief.

Respondent nowhere argues that the executor’s conduct here amounted to ordinary business care and prudence within the meaning of the regulations.

He contends for the first time in this Court that the regulation is invalid and that the penalty should be imposed only where the taxpayer is guilty of willful conduct.

And that interpretation we think simply won’t wash under the terms of the statute Congress drafted.

The statute says that the penalty is collectable unless it is shown that the failure to file on time is due to reasonable cause and not due to willful neglect.

Since the burden of proof is on the taxpayer, and since the terms reasonable cause and willful neglect are used conjunctively, the Commissioner has an option of proving either the absence of reasonable cause or the presence of willful neglect.

He can prove either one.

Now, of course, the practice, because the absence of reasonable cause is basically negligence, it is easier to prove that than to prove willful activity with the subjective content.

Albert G. Lauber, Jr.:

But the fact that one option is easier than the other for the Commissioner doesn’t mean that one is redundant.

William H. Rehnquist:

–Well, is there a kind of a lacuna between reasonable cause and willful neglect?

Albert G. Lauber, Jr.:

Well, I think that… I don’t think the statute is incongruous, but I agree that they are not literally opposites.

But that is not uncommon in the Revenue Code.

In fact, the penalty for negligence in Section 6653(a) says that a penalty is applicable if the understatement of tax is due either to negligence or to intentional disregard of rules and regulations.

William H. Rehnquist:

If you prove reasonable cause, you would surely prove that the failure to file was not from willful neglect, I assume.

Albert G. Lauber, Jr.:

I think that’s almost certainly true.

William H. Rehnquist:

Except what is willful neglect?

That in itself is a contradiction in terms.

Neglect suggests unconsciousness or carelessness of what you are doing, willful suggests and intent.

Albert G. Lauber, Jr.:

Well–

Warren E. Burger:

Is it very much different from willful negligence as against ordinary negligence?

Albert G. Lauber, Jr.:

–I guess that’s an accurate… an example of willful neglect might be, you know, a tax protester.

Warren E. Burger:

Well, the courts frequently refer to willful negligence, do they not?

Albert G. Lauber, Jr.:

They do.

It is a heightened form of negligence.

William H. Rehnquist:

Do you think that is a very artistic way of speaking about negligence, to speak of willful negligence?

Albert G. Lauber, Jr.:

Well, no, I didn’t draft the statute.

This goes… this language goes back a long way, and I think one often finds in these old provisions… this goes back to 1916… a certain funny way of drafting them.

But it makes perfect sense.

What the statute really says is that the penalty is applicable unless the taxpayer proves both that he acted reasonably in an objective sense and in a subjective sense.

Now, I agree with you that almost invariably, if the Commissioner proves that… if a taxpayer proves that he did not act negligently, he could not have acted with willful negligence either.

But still, the statute does on its face give the Commissioner an option.

The taxpayer must prove both the absence of reasonable cause… both the presence of reasonable cause and the absence of willful neglect, and it is plainly up… the Commissioner is plainly able to assess the penalty, therefore, by proving that reasonable cause did not exist for the late filing.

Warren E. Burger:

Mr. Davies?

Thomas E. Davies:

Mr. Chief Justice, and may it please the Court:

In response to a question a few moments ago, Mr. Lauber in effect admitted that perhaps the statute wasn’t drafted very adequately.

He actually used the term funny.

Well, we couldn’t agree more, and I think that’s–

Warren E. Burger:

Well, do you have any difficulty understanding the statute?

Thomas E. Davies:

–Yes, sir, I have a great deal of difficulty understanding the statute, and I think as Judge Posner pointed out, the… it sets up two conditions which I believe are almost the opposite of one another.

Our contention is that by adding those additional words, that something was intended beyond mere negligence for reasonable cause before a penalty is invoked.

Warren E. Burger:

Does either the… Mr. Boyle or your firm claim that they locked at the statute and didn’t understand it, and that that’s accounted for the delay?

Thomas E. Davies:

No… for the delay in filing the return?

I think the answer to the reason for the delay was that there was a mistake, it was not posted on the calendar, and was simply forgotten.

There is no other explanation, sir.

It was a mistake.

Clearly there was no intent or any reason to try to buy an extra three months’ time to become embroiled in a case like this.

Warren E. Burger:

Do you think the case is any different if the executor, Boyle himself is the lawyer, was handling his own affairs and made the same mistake?

Thomas E. Davies:

Yes, I think it would be a big difference in that case.

I think you’re–

Warren E. Burger:

In what respect?

Thomas E. Davies:

–I think you’re looking at a situation where you have the average layman, he comes in, he hires an expert, a person he is relying on and trusting.

Warren E. Burger:

Well, doesn’t counsel and Mr. Boyle merge into one entity so far as this is concerned?

Thomas E. Davies:

I don’t think so, Your Honor, because I don’t think that’s what the statute directs its attention, and the cases heretofore have always said the standard involved is one placed on the taxpayer, and I think we are getting a little bit off the boat, so to speak, by focusing our attention on the attorney.

It may well be that there ought to be a law that says, okay, if you file a return late, or you cause it, then you pay the penalty.

Warren E. Burger:

Who?

Who do you mean by you?

Thomas E. Davies:

The attorney or the accountant?

That may be–

Warren E. Burger:

Don’t you think the malpractice cases take care of that?

Thomas E. Davies:

–They should.

In most cases, I believe they should.

Thurgood Marshall:

I don’t see how you say that we put the weight on the lawyer.

I don’t consider the lawyer in this case at all.

Thomas E. Davies:

Well, I don’t either, Your Honor.

Thurgood Marshall:

Well, then, I don’t understand your argument.

Thomas E. Davies:

Well–

Thurgood Marshall:

The man… what is the difference between that and filing the certiorari petition on time in this Court?

Thomas E. Davies:

–Well–

Thurgood Marshall:

What happens if you don’t do it?

Thomas E. Davies:

–You’re… I think it’s jurisdictional.

You lose out.

Thurgood Marshall:

Yes, but what happens to the lawyer?

He either… at least, he might lose a client, and beyond that he might lose a good deal more, is that not so?

Thomas E. Davies:

I think he’s at fault.

There is no question about that.

We are not–

Thurgood Marshall:

Well, isn’t that the same case here?

Because of the lawyer, the only… the IRS could not penalize the lawyer, right?

Thomas E. Davies:

–Under the existing law, that’s correct.

Thurgood Marshall:

Under any law.

Thomas E. Davies:

That is correct–

Thurgood Marshall:

So they have been done in.

So they have to collect from somebody.

So who do they collect from?

Thomas E. Davies:

–Well, in this particular case, and I would hope in most cases, the lawyer would admit his mistake, as we did, and paid it.

Thurgood Marshall:

The lawyer paid it?

Thomas E. Davies:

Yes, sir.

Thurgood Marshall:

Well, what, what… what are we doing with the case?

Thomas E. Davies:

Well, I think the question is, in looking–

Thurgood Marshall:

What are we doing with the case?

Thomas E. Davies:

–Well, when the case started out–

Thurgood Marshall:

Are you trying to get your money back?

Thomas E. Davies:

–Well, that would happen is–

Thurgood Marshall:

That would help, wouldn’t it?

Thomas E. Davies:

–If the Seventh Circuit was affirmed, but I would respectfully point it out… point out when this case started that if we had been in perhaps any other circuit, there probably would not have been a case.

However, in the Seventh Circuit, it seemed to us, under the Rohrabaugh case there was clear authority which at least up until this point has been agreed upon that this case did fall under that narrow exception.

Now, I think that… and trying to get back to what the Chief Justice’s question is, well, what is the difference, I think you have to also realize that we are talking about the average layman.

Now, let’s assume hypothetically that person comes into the attorney’s office… it is after the death, we will say, of a loved one… someone who has never handled anything before, or had very little.

Thomas E. Davies:

We’ve even had people that probably never even wrote a check; they are a 65 year old widow, suddenly they don’t… they don’t know what to do.

They come in, they see their attorney.

Now, I’m suggesting to you that it’s not unreasonable for that person to rely on their attorney to do something.

The facts in this particular case, I believe, suggest that Mr. Boyle did everything that the average person could reasonably be expected to do.

He kept–

Thurgood Marshall:

Speaking for your own firm–

Thomas E. Davies:

–Yes, sir.

Thurgood Marshall:

–If we affirm this judgment, can we assume that you’ll never make that mistake again?

Thomas E. Davies:

I certainly hope so, sir.

Thurgood Marshall:

Well, is there any other way we can do it?

Thomas E. Davies:

Pardon?

Thurgood Marshall:

Is there any other way we can do it other than affirming?

Thomas E. Davies:

Well, I believe not, not if the government’s position is accepted.

Warren E. Burger:

Well, there’s nothing in this record to bear on something that you suggested, and I feel bound to ask you, are you representing to the Court that your firm has reimbursed Mr. Boyle, that you have paid the penalty?

Thomas E. Davies:

The question was asked.

We have, yes, sir.

Warren E. Burger:

Well, then, is there possible mootness to this case?

Mr. Boyle has suffered no loss.

Thomas E. Davies:

I guess you could technically say that.

I am just answering the question honestly.

When the bill came, you know, it was our fault, we paid it.

There’s–

John Paul Stevens:

Well, what if, what if you win this case?

Are you going to get it back?

Thomas E. Davies:

–Yes, we would.

John Paul Stevens:

So the case isn’t moot then.

Assuming there is something riding on the outcome of the case.

Thomas E. Davies:

Yes, sir, I believe there is, and I believe there’s also the overall question that… of the per se rule, which I believe, and it is probably my understanding is why this case was granted by this Court.

John Paul Stevens:

Well, I know, but it still has… there still has to be a case with controversy.

Thomas E. Davies:

Yes.

John Paul Stevens:

Between your client and the government.

Thomas E. Davies:

Yes.

Well, there would also be the question of interest.

Warren E. Burger:

In other words, you are saying, conceding that your private arrangements with your client are irrelevant to the issues of this case.

Thomas E. Davies:

Yes, sir.

I think it’s necessary to look at the statute in question, and that is really the key, in my opinion, of how this should be decided.

Congress did not provide for an absolute penalty that could be invoked in all circumstances.

I would certainly agree that that is certainly their prerogative.

But I am suggesting to this Court by the insertion of the words reasonable cause and not due to willful neglect, suggests that Congress recognizes… recognized that it may in fact be inequitable or unfair under certain circumstances to unilaterally provide for an absolute penalty or absolute rule.

Now, that is certainly within their prerogative to do that, but I’m suggesting that they have not chosen to do that.

As Judge Posner indicated, that the addition of the words willful neglect would seem to modify the ordinary meaning of the word reasonable.

The only sense that we can infer that that means is that Congress, by using the words willful and neglect, intended that the penalty be imposed only in those circumstances where the person… the failure to file was due to more than mere inadvertence.

The government suggests there is a two-part test.

Well, as we raised in our brief… and I have yet to be able to figure out how it would happen… is how a person could pass the reasonable… pass the willful neglect portion of the test and otherwise fail the reasonable cause test.

I don’t think that can be done.

William H. Rehnquist:

Well, it is a two-part test that is phrased in the conjunction, I guess, because they use the word and.

The taxpayer, in order to avoid the penalty, has to show that the failure is, first, due to reasonable cause and not due to willful neglect.

Now, if he fails the first hurdle, if he can’t show that it is not due to reasonable cause, you never get to the willful neglect.

Thomas E. Davies:

That is correct, Your Honor.

William H. Rehnquist:

Well, then, I think that argument cuts in favor of the government, not you.

Do I misunderstand you?

Thomas E. Davies:

Well, I’m saying the additional words seem to me, because what they say is reasonable cause as an ordinary man standard, or shall we say, negligence, which normally does not connotate a willful action.

I’m saying those additional words were either put there for emphasis or for… to indicate that something beyond the so-called reasonable man standard would apply.

William H. Rehnquist:

You say that perhaps reasonable cause should be read as mere negligence, or not due to mere–

Thomas E. Davies:

I think more than mere negligence.

I think first you look at what the person did, whether that was reasonable, and secondly, whether those actions were willful, and why did he fail to file the return?

William H. Rehnquist:

–Well, what if a judge were to find in this case that the preparer’s actions were negligent but they were not due to willful neglect?

Now, do you think on those findings you ought to win?

Thomas E. Davies:

Yes.

I think under way the law is written, there was certainly no intentional or willful desire to avoid filing the return on time.

William H. Rehnquist:

But does the absence of willful neglect by itself prove that there was reasonable cause That’s a twisting of the language.

Thomas E. Davies:

Not necessarily.

I don’t think it would necessarily just because they didn’t say under traditional view willfully decide not to file it, they could have otherwise acted unreasonably.

Say, for instance, in this case, Mr. Boyle… and I think this is… there’s a difference in this case as to many of the others… he kept in constant contact with the attorney.

He called the office.

He said, you know, is there something I should be doing?

When’s the return going to be filed?

He was told don’t worry about it.

I think that’s a far different situation than the executors you have seen in some of the other cases who does not do anything and in fact abandons ship, so to speak, and takes no active part in the administration of the estate.

I would further say that I believe Congress intended something more than the reasonable man standard, because if you look at what does statute provide for, we are suggesting… and it seems to us it is a penalty.

Now, the government in their reply brief and in their argument didn’t really want to use that term, but they certainly did in their original brief, and it seems to us by any stretch of the imagination that if you file a return one day late and are assessed 5 percent interest, that that computes out to be a pretty harsh and pretty severe punishment.

Warren E. Burger:

But if you are one day late in filing a document in the courts, under court rules or statutes, you are out of court.

That’s pretty rough, isn’t it?

Thomas E. Davies:

That’s correct, sir, and I doubt–

Warren E. Burger:

Unless there’s some… unless it is demonstrable that the United States mails are responsible for it, as often happens.

Thomas E. Davies:

–Right.

I am not saying that there shouldn’t be certainty in many things.

However, I am suggesting under this statute Congress did not suggest that.

They could very easily write a statute that says, okay, you file it on time or pay a penalty, and be done with it.

William J. Brennan, Jr.:

Well, have you any suggestion how much willful neglect glosses reasonable cause?

Thomas E. Davies:

Well, I think you have to look not only at what they did up to the time that they learned whether the return was late, and then what did they do when they learned of it?

I think in a lot of these other cases the taxpayer said so what and waited nine months.

William J. Brennan, Jr.:

That doesn’t tell me what you think is the standard then.

Thomas E. Davies:

I think the standard would be probably, if you are putting it on a scale of negligence, gross negligence.

I think when you use the word willful, I think you are into gross negligence.

William J. Brennan, Jr.:

Or reckless disregard, something like that?

Thomas E. Davies:

Yes, I think, yes.

Thurgood Marshall:

How would three months figure on this?

It was three months in this case.

Thomas E. Davies:

Yes, three months and a day.

Thurgood Marshall:

Wouldn’t that be close to willful?

Thomas E. Davies:

Well, except for the fact that what the… what was the reason.

I think it’s a… again, looking at what the executor did, it’s easy now to say, well, sure, I guess he should have known the exact date, but looking at what the executor did–

Thurgood Marshall:

Well, the executor is the only one covered by the law.

Thomas E. Davies:

–Right.

Thurgood Marshall:

The government can’t reach anybody but the executor.

Thomas E. Davies:

That is correct, but I am saying in looking at the–

Thurgood Marshall:

The executor didn’t have to get a lawyer.

Thomas E. Davies:

–Right.

Thurgood Marshall:

But he did.

Thomas E. Davies:

That is correct.

Thurgood Marshall:

And it’s whose responsibility?

His, and nobody else’s, is that right?

Thomas E. Davies:

That is correct.

But I’m suggesting that looking at what the executor did, there’s nothing in the statute that says what the attorney should or shouldn’t do.

The standard as courts have looked at before said, now, what did the executor do.

I’m suggesting, if we all think about it, or think about Mrs. Rohrabaugh or, say, someone who for some unfortunate reason doesn’t have all their mental facilities or whatever, if they hire an attorney and they call them and they are told that everything is going to be taken care of, I don’t think that’s so unreasonable for that person to assume that it’s going to be taken care of.

John Paul Stevens:

Mr. Davies, can I ask you a question?

What does the government do with the problem that all lawyers are… I wish they were, but they’re not all as honorable as the members of your firm, and you do have the possibility, I suppose, of a dishonest taxpayer who had an accountant or a lawyer who is willing to say I forgot about it for two months and then… how can the government disprove that sort of thing?

Thomas E. Davies:

Well, I agree that’s probably a problem or a question of fact that has to be determined.

I can’t give you a good answer as to how easily that could be done, but questions of fact are determined in life and death cases and other cases.

I can’t say that–

John Paul Stevens:

Congress could settle that.

Thomas E. Davies:

–Well, I believe they could, but–

Byron R. White:

They could just change the statute a little.

If you are right about the present construction, your view of the statute, it could be changed.

Thomas E. Davies:

–That is correct–

Byron R. White:

To agree with the present government’s regulation.

Thomas E. Davies:

–I believe it could.

I believe there’s innumerably better ways to handle this situation, and I don’t think this court should have to sit here and try and figure out what they are.

Thomas E. Davies:

That’s not your job.

You’ve been stuck with this case.

I think you can look at it one of two ways.

Sure, you can make a decision and make this whole thing better, or I think what needs to be done is to say, well, that is what the statute says.

You didn’t write it.

If they want something clearer or something more absolute, all they have to do is change it.

Now, the second part, even assuming that my construction or our construction of this statute is all wrong, or that it is something you can’t accept… and there’s certainly arguments for not accepting it, but then, let’s look at the second part of it is whether or not the per se rule as advocated by the government should be adopted.

We suggest that that should not be because it is not in conformity with what the statute sets out to do.

That would in effect be an absolute rule which would mean in all cass… now, this is only an estate tax case, but presumably in all cases, then, that it would be, or reliance on counsel or another tax preparer would not be any defense.

Now, the government in their reply brief brought up the Willis case which was recently decided in the Fourth Circuit.

Now, there’s a situation where a taxpayer comes in, signs the return, leaves it with his accountant.

Is that unreasonable?

Let’s say that’s… that case was eighteen days before the deadline, leaves it with his preparer.

I don’t think it’s unreasonable for him to presume that it will be mailed.

Warren E. Burger:

What if he gives it to his chauffeur and says take this down and mail it or take it and deliver it by hand, and the chauffeur gets drunk and forgets all about it?

Thomas E. Davies:

Well, I think… I think that’s why the statute is written that says reasonable cause.

Warren E. Burger:

Well, is that reasonable cause in your view?

Test out your standard.

Thomas E. Davies:

Giving it to your chauffeur?

Warren E. Burger:

An employee, he’s agent of the taxpayer.

Thomas E. Davies:

I would say that as a practical matter, I think that’s done.

Would I personally–

Warren E. Burger:

Well, if you were the Internal Revenue, do you think Internal Revenue should impose a penalty then, or should they forget it?

Thomas E. Davies:

–Do I?

Not under the way the statute is written, no, I don’t, and that’s why I’m suggesting that they had an exception.

William J. Brennan, Jr.:

Did you say earlier, Mr. Davies, that the executor actually before the filing date had called to ask whether or not the return had been prepared and filed?

Thomas E. Davies:

The executor had called on numerous occasions wondering–

William J. Brennan, Jr.:

Before the filing date?

Thomas E. Davies:

–Yes, sir.

William J. Brennan, Jr.:

Wondering what?

William J. Brennan, Jr.:

Asking what?

Thomas E. Davies:

Wondering when the return would be due, or thinking, you know, I know we have to file a return because I was told that.

I mean, there’s no question, and I deeply resent the inferences of the government that there’s any dishonesty here, the attorney said… if he was going to make up a story, he could have made up a lot better one… the record says, well, sure, I told Mr. Boyle that there was a federal estate tax return due, and so all Mr. Boyle said, well, he didn’t know when it was, he knew there was one due, and that’s why he had his wife keep calling.

William J. Brennan, Jr.:

What do you mean by keep calling?

Thomas E. Davies:

Well, on several… the record does not say the exact number other than he called on numerous occasions saying–

William J. Brennan, Jr.:

And the subject was always when is the return going to be filed?

Thomas E. Davies:

–I can’t say that it was always that.

I think more than once.

I can’t say exactly.

I can say as late as April when they sold some farmland that they asked, and that there is no question about it, that they should have remembered at that time because the June filing date was coming on.

And they continued, and then finally in September they thought, well, gee, this sure seems like a long time, and then suddenly the light went on.

So it’s not like they just turned the file over to the attorney and walked away and said, well, let me know how it works out.

I think that is a big difference.

However, under the per se rule as advocated by the government, it wouldn’t make any difference what he did.

Mr. Boyle would be treated the same as other taxpayers who never checked up or never did anything.

Mr. Boyle or Mrs. Rohrabaugh, for that matter, what difference would it have made?

It seems to me there’s a clear difference between the fact that somebody knows, is made aware of the fact they made a mistake, they should file their return.

Now, in this case Mr. Boyle did that in a week.

Okay, now, granted that held the penalty down to 20 percent instead of 25, all he could have lost was another 5 percent.

However, he would be treated the same as somebody who is told, let’s say, in September this, that hey, your return is late.

He says, ah, I’m not going to worry about it.

Two years later, well, we’ll file it.

Now, there are several cases like that.

If you talk about incentives, I think under the… there’s a big difference between the two parties there.

I would further just like to touch on a couple of the policy and common sense arguments that the government says make this so clear.

They suggest, well, it would be easier to collect.

Sure it might be, but tell Congress that.

Don’t tell this Court that.

That’s not a decision that you have to make.

Or maybe we would have a better scheme.

Thomas E. Davies:

Well, this Court has pointed out before, let Congress come up with that scheme.

If in fact there is such a serious revenue drain because of this narrow little exception, don’t you think Congress would change the law, not ask this Court–

Byron R. White:

Well, don’t you have to convince us that the Treasury regulation is invalid, under the statute, that it is inconsistent with the statute?

Thomas E. Davies:

–As an alternative argument, yes.

Byron R. White:

Well, alternative.

Let’s suppose the… suppose the regulation is completely valid.

Thomas E. Davies:

Okay.

Byron R. White:

And that it means what it says.

Thomas E. Davies:

Okay.

Byron R. White:

Would you lose?

Thomas E. Davies:

Not necessarily.

Byron R. White:

Why not?

Thomas E. Davies:

I, what I… okay, what I’m saying is I don’t think it’s necessarily unreasonable for Mr. Boyle or Mrs. Widow or we could think of a lot of sad cases–

Byron R. White:

So you think he used reasonable care.

Thomas E. Davies:

–Yes, I think so.

I am–

Byron R. White:

Well, do you agree that it should be judged on an objective basis under the regulations?

Suppose the regulation applies.

Thomas E. Davies:

–Yes, I do believe it should be.

Byron R. White:

So it would be the objective test, and then you would just… you and the government would just disagree on how it is to be applied in this case.

Thomas E. Davies:

That’s one way to look at this case, yes, sir.

Byron R. White:

Well, that isn’t… wasn’t the approach of the Court of Appeals, was it?

Thomas E. Davies:

Well, I think it was on their holding.

They said that, the Seventh Circuit holding said, okay, we find these facts to be present, and therefore we find that in this case it was reasonable for Mr. Boyle to rely on his attorney.

Byron R. White:

So you think they applied the objective test.

Thomas E. Davies:

Yes, I do.

The main bone of contention, as I see it, was that Judge Posner thought that Mr. Boyle was more experienced than Mrs. Rohrabaugh.

Byron R. White:

But on one of your arguments, your primary argument, or the argument you made first, would require us to hold the regulation invalid.

Thomas E. Davies:

Yes.

Byron R. White:

Yes, okay.

Thomas E. Davies:

On that argument.

Warren E. Burger:

What amount of… what’s the rate of interest on the delinquent payment, not the penalty, the rate of interest.

Thomas E. Davies:

At this time it was 6 percent.

Now, I believe that’s raised to a floating rate now.

Warren E. Burger:

So the government pays about 11 percent to borrow money, and they are only charging, if you’re correct, they would only be charging 6 percent.

Thomas E. Davies:

At this time.

Now, I think that… I believe that’s foolish, Your Honor, and I think they’ve changed it, but that’s not our fault.

I believe there can be proper incentives by charging an appropriate rate of interest.

Warren E. Burger:

Well, didn’t… isn’t it possible that Congress put this penalty that you regard as so drastic in order to keep the interest at a more moderate rate?

Thomas E. Davies:

It’s possible.

I don’t know the legislative history on that.

I believe they have raised the 6 percent, like if you file your income tax return late or you don’t pay the money, I should say, you would pay 11 or 12 percent, say, and that’s adjustable.

At this particular time it was 6 percent.

Now, one other thing I would point out is that on the per se rule, what about the widow or the person who can’t collect from the attorney?

Does that person really get a fair shake, and did Congress really intend to penalize that person?

I suggest that Congress did not and they allowed a narrow exception which the courts have made in this particular case and I think in the Willis case.

I don’t think it’s that the Seventh Circuit is necessarily out there all alone.

Thank you.

Warren E. Burger:

Do you have anything further, counsel?

Albert G. Lauber, Jr.:

I have two points.

First, on the question of mootness, the case is definitely not moot.

What happened here is the estate paid the penalty and filed a suit for a refund, for $17,000, about.

If this Court affirms the decision below, the IRS must pay $17,000 to the estate.

If it reverses, the IRS pays nothing.

And the arrangements that the estate and the lawyer made among themselves on how they divvy up the money is simply not relevant to this Court’s jurisdiction.

Now, on the question of statutory construction, I should point out that since 1916 there have been literally thousands of cases construing the late filing addition to the tax decided by the federal courts.

No court has ever adopted or even suggested the interpretation that Respondent advocates here, i.e., that only willful neglect causes the penalty to be assessed.

They have uniformly addressed the question in terms of whether or not there was reasonable cause.

The regulation that implements what we think is the correct scheme of the statute has been in effect since 1918, and this Court’s cases have often acknowledged when you have as regulation, particularly a tax regulation, in effect that long, Congress is deemed to have approved it.

Byron R. White:

Well, do you, assuming that the regulation is valid, as you say, do you think the Court of Appeals did not proceed on an objective basis?

Albert G. Lauber, Jr.:

I think they did not because they focused on whether or not this particular executor actually knew himself the due date, and whether or not he had particular experience.

The question–

Byron R. White:

You don’t think they concluded that he acted reasonably?

Albert G. Lauber, Jr.:

–Well, they thought… they looked whether he acted reasonably given his particular past experience.

For us the question is whether or not a reasonable man would have remained ignorant of the filing date.

Byron R. White:

All right.

Assuming, assuming that you are right and that the Court of Appeals applied the wrong standard, shouldn’t we remand?

Albert G. Lauber, Jr.:

I think there’s no need for a remand because the Court of Appeals acknowledged that negligence was committed.

Byron R. White:

Well, it requires an assessment of the facts under a reasonable man standard which you say they didn’t apply.

Albert G. Lauber, Jr.:

Well, they acted like they applied it, but because they erroneously employed the reliance on counsel defense, which was not available as a matter of law, if the statute is correctly construed, that was what led them to their incorrect result, and that was a legal error, not a factual error.

Finally, I would like to point out that if the Court were to construe the statute as making the penalty applicable only where there is willful neglect, it would be an impossible enforcement burden on the government.

Thousands of returns are filed late every year, and if we had to prove on a case by case basis whether or not the taxpayer or his agent acted willfully, it would be a nightmare for the courts and for the IRS.

It’s much better from an enforcement standpoint as well as being correct under the statute.

Byron R. White:

In other words, a bright line.

Albert G. Lauber, Jr.:

A bright line test.

And what the Revenue Service has done in implementing the reasonable man standard is to define a number of categories of cases which per se will be reasonable cause, and as I mentioned to you before, the manual, the revenue manual, lists eight different categories of cases, for example, where there’s an unavoidable postal delay, where there is a death or serious illness of the taxpayer or a member of his family, where the taxpayer is unavoidably absent from the country, where the Service gives the taxpayer erroneous legal advice, where there’s a destruction or a casualty to the taxpayer and his property, all those situations amount to per se reasonable cause, and that let’s the government dispose of many of these cases without litigation.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.

The Honorable Court is now adjourned until Monday next at 10:00.