Estate of Herbert J. McClanahan, Deceased, Arleen McClanahan, Executrix, and Arleen McClanahan v. Commissioner of Internal Revenue, 95 T. C. 98 (1990)

Additions to tax under sections 6653(a) and 6661 apply to taxpayers who negligently fail to file returns on time or file after IRS contact, even if the taxpayer is in poor health.

Summary

Herbert McClanahan, a certified public accountant, failed to file his tax returns from 1977 to 1983 despite being aware of his obligation. After IRS contact in 1984, he filed the delinquent returns. The Tax Court upheld the IRS’s imposition of additions to tax under sections 6653(a) for negligence and 6661 for substantial understatements in 1982 and 1983. The court rejected McClanahan’s health as an excuse for non-filing, noting his continued professional activity. The decision also clarified that multiple penalties can be applied and upheld the 25% rate for section 6661 penalties assessed after October 21, 1986.

Facts

Herbert J. McClanahan, a certified public accountant, did not file his federal income tax returns for the years 1977 through 1983. Despite suffering from health issues, including heart problems and later cancer, McClanahan continued to operate his accounting and tax practice. His wife, Arleen McClanahan, became aware of the non-filing in 1978 but was repeatedly assured by her husband that he would handle it. In April 1984, after an IRS special agent contacted McClanahan, he filed the delinquent returns on June 1, 1984, and paid the due taxes and additions on July 23, 1984. McClanahan died in February 1986.

Procedural History

The IRS assessed additions to tax under sections 6651(a)(1), 6653(a), and 6661. The McClanahans filed a petition in the Tax Court contesting the additions under sections 6653(a) and 6661. The court heard the case and issued its decision on July 24, 1990, upholding the IRS’s determination.

Issue(s)

1. Whether petitioners are liable for additions to tax under section 6653(a) for negligence or intentional disregard of rules or regulations.
2. Whether petitioners are liable for additions to tax under section 6661 for substantial understatements of tax in 1982 and 1983, and if so, whether the additions should be computed using a 25-percent rate.

Holding

1. Yes, because the court found that McClanahan’s failure to file timely returns over seven years, despite his continued professional activity, constituted negligence.
2. Yes, because the court determined that section 6661 applies to delinquent returns filed after IRS contact, and the 25% rate applies to additions assessed after October 21, 1986.

Court’s Reasoning

The court applied the legal rule that negligence is the lack of due care or failure to act as a reasonable person would under the circumstances. It rejected McClanahan’s health as an excuse for non-filing, noting his continued professional activity and the quick preparation of delinquent returns after IRS contact. The court cited cases like Emmons v. Commissioner to support the imposition of section 6653(a) additions for negligence. For section 6661, the court interpreted the statute and regulations to include delinquent returns filed after IRS contact as part of the “audit lottery” that the law aimed to deter. The court also upheld the 25% rate for section 6661 additions assessed after October 21, 1986, based on the Omnibus Budget Reconciliation Act of 1986, rejecting due process challenges by citing cases like United States v. Darusmont.

Practical Implications

This decision emphasizes that taxpayers cannot escape tax penalties by citing health issues if they remain professionally active. It clarifies that multiple tax penalties can be imposed for the same conduct, reinforcing the IRS’s ability to enforce compliance. For practitioners, the case highlights the importance of timely filing, even in difficult circumstances, and the potential consequences of delinquent filing. The decision also impacts how attorneys should analyze cases involving late-filed returns and substantial understatements, considering the potential application of section 6661 penalties. Subsequent cases have cited Estate of McClanahan to support the imposition of multiple penalties and the application of section 6661 to late-filed returns.