Section of Taxation Publications
  VOL. 59
NO. 1
FALL 2005
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Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

The Narrowed Reasonable Cause Standard in Section 6651(a)(2):
Estate of Hartsell v. Commissioner

Mark Roche


In Estate of Hartsell v. Commissioner, the Tax Court rejected the taxpayer’s assertion of reasonable cause and affirmed the Commissioner’s addition of a late-payment penalty to the estate’s federal tax liability under section 6651(a)(2). The court’s decision narrows the parameters of the reasonable cause standard, with several important consequences. The narrowed standard (1) increases the burden on taxpayers facing difficult economic conditions while attempting to meet their federal tax liabilities, (2) increases the administrative burden placed upon estates’ executors, and (3) threatens to undermine congressionally provided tax credits, while ignoring the executor’s fiduciary duty to take advantage of such credits.

First, section 6651(a)(2) applies only in those cases in which the taxpayer’s failure to make the payment is due to willful neglect and not reasonable cause. Case law and the Treasury regulations provide that nonpayment is attributable to reasonable cause when such payment would lead to undue economic hardship, exemplified in the regulations by the sale of assets at sacrifice prices or in a depressed market. Nonetheless, in affirming the Commissioner’s assessment of penalties, the Hartsell court rejected the estate’s argument that a depressed real estate market and troubled national economy prior to and through the extended due date frustrated attempts to liquidate the estate’s assets. In doing so, the Tax Court raised the bar for taxpayers attempting to demonstrate that they will face financial difficulties in meeting their federal tax liabilities.

Second, by implicitly requiring the executor to personally guarantee any loans that were necessary to meet the estate’s federal tax liabilities, the Tax Court further increased the burden on the estate’s executor. This unprecedented requirement, which finds no basis in statute or case law, has important consequences. It makes the individual executor, and not the estate, personally liable. Moreover, it threatens with penalties an estate that has difficulty meeting its federal estate tax liabilities unless the executor agrees to incur personal liabilities.

Third, the Tax Court read into section 2011 a requirement that federal estate taxes be paid prior to any state inheritance taxes. However, section 2011 does not mandate such an interpretation; in fact, the plain meaning of the statute suggests precisely the opposite. Nonetheless, the court considered the estate’s preference for state taxes an important factor in determining that ordinary care and business prudence had not been employed. This holding threatens with penalties all estates that might otherwise follow the plain meaning of section 2011 in order to obtain the congressionally authorized federal tax credit. Moreover, in requiring priority payment of federal estate taxes, the court ignored the executor’s fiduciary duty to preserve the estate’s assets by capitalizing on the tax credit.

This Note argues that the court erred by construing too narrowly the meaning of undue economic hardship. Sacrifice prices are necessarily ambiguous in real estate because determining an appropriate baseline from which to compare the price is difficult and somewhat arbitrary. By evaluating the asking prices in the context of the then-current real estate market, the court ignored the possibility that the market itself was depressed and amenable only to sacrifice pricing. This Note does not argue that federal tax liabilities should be erased in times of national economic downturn. Rather, the test is one of reasonableness, which case law and the regulations suggest must be measured with regard to the overall market in which properties are to be sold. Failure to do so virtually assures the application of penalties in a case such as this. This Note goes on to argue that requiring executors to personally guarantee loans needed to meet an estate’s federal tax liabilities is poor policy that adds an unnecessary burden to the already complicated task of administering decedents’ estates and potentially conflicts with an executor’s role as fiduciary. This Note concludes by pointing out that the Tax Court’s interpretation of section 2011 largely negates the credit applied against federal taxes for the payment of state inheritance taxes and also ignores the executor’s fiduciary obligation to preserve the estate’s assets, especially in cases factually similar to Hartsell.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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