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Duly Noted

Attorney’s failure does not excuse estate’s penalty. News flash: Trusting your lawyer’s soothing words can cost a lot of money. A federal judge in Pennsylvania drove home that lesson once again by refusing to disturb penalties that the Internal Revenue Service imposed on an estate whose executor was reassured when the attorney said everything was under control. Unknown to the executor, Thomas Freeman, attorney Dennis Byrne suffered from “a litany of physical and mental ailments” that affected his work, according to the court. The estate tax return that was due in January 2004 was filed three years late, after the IRS began to press the issue. Quoting a 1985 Supreme Court decision, U.S. District Judge Timothy Savage ruled that the executor could not delegate his filing responsibility to the attorney or to anyone else. Byrne’s disability, Savage ruled, was immaterial. “Although it might explain why Byrne could not meet his obligations as the estate’s attorney, it does not excuse Freeman’s failure to file,” Savage wrote in upholding $31,000 in late filing penalties. Thomas Freeman, Executor, v. United States, Eastern District of Pennsylvania No. 10-7511.

Married or not, the mortgage interest deduction is equally limited. A trip to Tax Court was not therapeutic for celebrity psychiatrist Dr. Charles Sophy. Sophy and his domestic partner, Bruce Voss, sought to deduct the interest on the $2 million mortgage for their Beverly Hills residence, plus additional interest on a mortgage on a second home in Rancho Mirage, Calif. Taxpayers are limited to deducting interest on $1 million of home acquisition debt plus up to $100,000 of home equity debt. Sophy and Voss maintained that, as separate taxpayers, each of them was entitled to deduct interest on mortgages up to those limits. But the IRS announced in 2009 that it would apply the limit to each residence, not to each taxpayer, and it disallowed deductions on the men’s 2006 and 2007 tax returns, which were then being audited. Tax Court Judge Mary Ann Cohen sided with the IRS, ruling that the ambiguous statute should be interpreted as Congress intended, and that there was no evidence that Congress intended multiple taxpayers to be able to deduct interest on debt above the limit on a single residence. Charles J. Sophy and Bruce H. Voss v. Commissioner, 138 T.C. No. 8.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.