August 23,2011

The U.S. Court of Appeals for the First Circuit Aug. 19 upheld a Treasury regulation barring the Internal Revenue Service from granting an executor a second extension of time for filing an estate tax return unless he qualifies for one of the good cause exceptions laid out in the regulation (Dickow v. United States, 1st Cir., No. 10-2151, 8/19/11).

“We think the regulations are clear when read as a whole that no second extension was available to be granted on the facts of this case,” wrote Chief Judge Sandra Lea Lynch for the First Circuit. “[The estate’s executor] had already received the automatic extension, was not an executor who was abroad, and did not qualify for any of the categories for ‘good cause’ extensions.”

The decision affirms a ruling by the U.S. District Court for the District of Massachusetts, which found Internal Revenue Code Section 6081(a) is ambiguous as to whether IRS may grant more than one six-month extension. The district court said, however, that the implementing regulations, codified in Treasury Regulation Section 20.6081-1, made it clear that IRS lacked the authority to grant Dickow more than one six-month extension.

Lynch noted that, under the U.S. Supreme Court’s ruling in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), a court cannot disturb an IRS rule unless it is arbitrary or capricious in substance, or manifestly contrary to the statute.

“These regulations satisfy Chevron’s reasonableness requirement,” wrote Lynch. “The IRS’s limitation on extensions offers a sensible solution to the agency’s administrative needs and is consistent with the statutory text.”

Extension Rules Provide Clarity for Taxpayers

According to the First Circuit, IRS’s filing deadlines and extension rules are crucial to handling the millions of returns the service must process each year.

“The regulatory scheme as the IRS has promulgated it also provides clarity as to limits,” the court said. “It clearly sets forth rules based on identified categories of taxpayers. Thus, for example, the regulations allow further extensions beyond one six-month extension only to executors abroad who can show good cause.”

Lynch said the regulations are clear, when read as a whole, that no second extension was available to be granted on the facts of the case.

“The regulations rather pointedly do not say that the IRS has the discretion to accept or act upon applications for extensions based on any type of general ‘good cause’ claim other than the three types explicitly set forth in § 20.6081-1(c),” explained Lynch. “Further, the regulations refer repeatedly to Form 4768, which by its terms does not allow for the extensions sought here. Thus, in our view, Chevron deference requires that the IRS position prevail.”

Second Extension for Filing Return Sought

Margaret Dickow died in January 2003. Under Section 6075(a), the federal tax return for her estate was due in October 2003—nine months after her death. The executor of her estate, D. Charles Dickow, mailed IRS a Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes, in October 2003. He enclosed a check for $945,000 in payment of the estimated estate tax due and the filing deadline was automatically extended by six months.

In March 2004, Dickow submitted to IRS what he characterized as a second extension request—an altered standard Form 4768 in which he attempted to request an additional six-month extension. Specifically, he typed the words “REQUEST FOR SECOND EXTENSION” at the top of the first page. He did not check any of the boxes on the form that identified the recognized grounds for an additional extension. He also attached a statement which said he had not received an appraisal for a real estate asset that constituted a large portion of the estate.

IRS denied the extension of time to file, but granted an extension of time to pay. Dickow eventually mailed the estate’s federal tax return to IRS in September 2004. The return claimed a refund of $337,139 based on the estate’s overpayment of estimated taxes. IRS refunded the requested amount.

In September 2007, Dickow sent IRS an amended estate tax return claiming an additional refund of $237,813. IRS denied the refund request.