Legal Malpractice Claim for the Late Filing of the Estate Tax Return and Tax Penalty:

One of the legal malpractice claims involved the late filing of the Estate Tax Return for the Estate. The required Federal Estate Tax return (Form 706) was filed by the Anderson firm about one month late. Because of the large amount of taxes due, the late filing resulted in a penalty of approximately $500,000, which with interest, grew to about $600,000 by the time of settlement.

Even thought the legal malpractice seemed clear, the defense claimed that it wasn’t the lawyers who were responsible for the delay, but the estate’s accountants, who had failed to provide needed information to the lawyers. The defense also claimed plaintiffs had failed to mitigate damages by not filing for a refund from the IRS for the penalty paid.

Note: As a result of the bankruptcy of Defendant’s legal malpractice insurance carrier (Legion Insurance), this particular claim was handled by CAIGA, California’s quasi state agency, which under law cannot be held liable for any bad-faith (which can create problems in settling legal malpractice cases). CAIGA ’s responsibility was equal to the limits of the underlying insurance policy (which in this case was $500,000, with “wasting limits”, meaning the amount of coverage was reduced by the defense costs expended.

Defendants’ claim that Plaintiffs had failed to mitigate damages drove an interesting and cooperative compromise in which the Estate agreed to accept the then remaining policy limits of $375,000 as a guarantee, and agreed to allow CAIGA to seek a refund from the IRS of the nearly $600,000 penalty paid by the estate. Under the settlement, if CAIGA is successful, it will first recoup the $375,000 paid to the Estate, and the parties will share equally anything beyond $375,000. CAIGA will pay all attorneys fees in pursuing the refund claim.