Procedure Grab Bag: CCAs – Suspended/Extended SOLs and Fraud Penalty

My last post was devoted to a CCA, which inspired me to pull a handful of other CCAs to highlight from the last few months.  The first CCA discusses the suspension of the SOL when a petition is filed with the Tax Court before a deficiency notice is issued (apparently, the IRM is wrong on this point in at least one spot).  The second touches on whether failing to disclose prior years gifts on a current gift tax return extends the statute of limitations for assessment on a gift tax return that was timely filed (this is pretty interesting because you cannot calculate the tax due without that information).  And, finally, a CCA on the imposition of the fraud penalty in various filing situations involving amended returns.


CCA 201644020 – Suspension of SOL with Tax Court petition when no deficiency notice

We routinely call the statutory notice of deficiency the ticket to the Tax Court.  In general, when a taxpayer punches that ticket and heads for black robe review, the statute of limitations on assessment and collections is tolled during the pendency of the Tax Court case.  See Section 6503(a).  What happens when the petition is filed too soon, and the Court lacks jurisdiction?  Well, the IRM states that the SOL is not suspended.  IRM states, “If the petition filed by the taxpayer is dismissed for lack of jurisdiction because the Service did not issue a SND, the ASED is not suspended and the case must be returned to the originating function…”  But, Chief Counsel disagrees. Section 6503(a) states:

The running of the period of limitations provided in section 6501 or 6502…shall (after the mailing of a notice under section 6212(a)) be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by the levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter. (emph. added).

Chief Counsel believes the second parenthetical above extends the limitations period even when the Tax Court lacks jurisdiction because no notice of deficiency was issued.   The CCA further states, “Any indication in the IRM that the suspension does not apply if the Service did not mail a SND is incorrect.”  Time for an amendment to the IRM.  I think this is the correct result, but the Service likely had some reason for its position in the IRM, and might be worth reviewing if you are in a situation with the SOL might have run.

CCA 201643020

The issue in CCA 201643020 was whether the three year assessment period was extended due to improper disclosure…of prior gifts properly reported on prior returns.  In general, taxpayers making gifts must file a federal gift tax return, Form 709, by April 15th the year following the gift.  The Service, under Section 6501(a) has three years to assess tax after a proper return is filed.  If no return is filed, or there is not proper notification, the service may assess at any time under Section 6501(c)(9).

In the CCA, the Service sought guidance on whether a the statute of limitations was extended where in Year 31 a gift was made and reported on a timely filed gift tax return.  In previous years 1, years 6 through 9, and 15 prior gifts were reported on returns.  On the year 31 return, however, those prior gifts were not reported.  That information was necessary to calculate the correct amount of tax due.

Section 6501(c)(9) specifically states:

If any gift of property the value of which … is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b)), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item.

Chief Counsel concluded that this requires a two step analysis.  Step one is if the gift was reported on the return.  If not, step two requires a determination if the item was adequately disclosed.  Counsel indicated it is arguable that the regulations were silent on the omission of prior gifts, but that the statutory language was clear.  Here, the gift was disclosed on the return, and the statutory requirements were met.  The period was not extended.  I was surprised there was not some type of Beard discussion regarding providing sufficient information to properly calculate the tax due.

CCA 201640016

Earlier this year, the Service also released CCA 201640016, which is Chief Counsel Advice covering the treatment of fraud penalties in various circumstances surrounding taxpayers filing returns and amended returns with invalid original issue discount claims.  The conclusions are not surprising, but it is a good summary of how the fraud penalties can apply.

The taxpayer participated in an “Original Issue Discount (OID) scheme” for multiple tax years.  The position take for the tax years was frivolous.  For tax year 1, the Service processed the return and issued a refund.  For tax year 2, the Service did not process the return or issue a refund. For tax year 3, the return was processed but the refund frozen.  The taxpayer would not cooperate with the Service’s criminal investigation, and was indicted and found guilty of various criminal charges.  Spouse of taxpayer at some point filed amended returns seeking even greater refunds based on the OID scheme, but those were also frozen (the dates are not included, but the story in my mind is that spouse brazenly did this after the conviction).

The issues in the CCA were:

  1. Are the original returns valid returns?
  2. If valid, is the underpayment subject to the Section 6663 fraud penalty?
  3. Did the amended returns result in underpayments such that the penalty could apply, even though the Service did not pay the refunds claimed?

The conclusions were:

  1. It is likely a court would consider the returns valid, even with the frivolous position, but, as an alternative position, any notice issued by the Service should also treat the returns as invalid and determine the fraudulent failure to file penalty under Section 6651(f).
  2. To the extent the return is valid, the return for which a refund was issued will give rise to an underpayment potentially subject to the fraud penalty under Section 6663. The non-processed returns or the ones with frozen refunds will not give rise to underpayments and Section 6663 iis inapplicable.  CC recommended the assertion of the Section 6676 penalty for erroneous claims for refund or credit.
  3. The amended returns did not result in underpayments, so the Section 6663 fraud penalty is inapplicable, but, again, the Service could impose the Section 6676 penalty.

So, the takeaway, if a taxpayer fails to file a valid return, or there is no “underpayment” on a fraudulent return, the Service cannot use Section 6663.  See Mohamed v. Comm’r, TC Memo. 2013-255 (where no valid return filed, no fraud penalty can be imposed).  In the CCA, Counsel believed the return was valid, but acknowledged potential issues with that position.  Under the Beard test, a return is valid if:

 four requirements are met: (1) it must contain sufficient data to calculate tax liability; (2) it must purport to be a return; (3) it must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) it must be executed by the taxpayer under penalties of perjury. See Beard v. Comm’r,  82 T.C. 766 (1984). A return that is incorrect, or even fraudulent, may still be a valid return if “on its face [it] plausibly purports to be in compliance.” Badaracco v. Comm’r, 464 U.S. 386 (1984).

The only prong the CCA said was at issue was the third prong, that the return “must be an honest and reasonable attempt to satisfy the requirements of the tax law.”  As the taxpayer had been convicted of Filing False Claims with a Government Agency/Filing A False Income Tax Return, Aiding and Abetting, and Willful Attempt to Evade or Defeat the Payment of Tax, it is understandable why you would question if the returns were “an honest and reasonable attempt to satisfy the requirements of the tax law.”  Further, the Service had imposed the frivolous filing penalty under Section 6702, which only applies when the return information “on its face indicates that the self-assessment is substantially incorrect.”

The CCA notes, however, it is rare for courts to hold returns as invalid solely based on the third prong of Beard, but clearly there would be a valid argument for the taxpayers in this situation.  The CCA acknowledges that by stating “[t]o guard against the possibility that the returns are not valid, the Service should include the Section 6651(f) fraudulent failure to file penalty as an alternative position,” so the taxpayer could pick his poison.

As to the underpayment, Counsel highlighted that overstatements of withholding credits can give rise to an underpayment under the fraud penalty.  The definition was shown as a formula of Underpayment = W-(X+Y-Z).  W is the amount of tax due, X is the amount shown as due on the return, Y is amounts not shown but previously assessed, and Z is the amount of rebates made.  Where the refund was provided, the penalty could clearly apply.  In “frozen refund” situations, the Service has adopted the practice of treating that amount as a sum collected without assessment, which can cancel out the X and Y variables so no underpayment for the fraud penalty will exist.

But, as shown above, even if the fraud penalty may not apply, the Section 6651 penalty will likely apply if the return is invalid, or the frivolous position penalty under Section 6702 may apply.

Don’t File Your Collection Due Process Case Right Before the Statute of Limitations Expires

The case of United States v. Barbara Holmes provides an example of how a request for Collection Due Process (CDP) relief can extend the statute of limitations on collection and keep open the ability for the IRS to bring suit that might have otherwise expired.  Plaintiff’s attorney, who also happens to be her husband, may have made a reasonable decision to file the CDP request and the title of this post goes too far in suggesting that a taxpayer should never file a CDP request at the very end of the statute of limitations on collection; however, when the statute is short, careful thought about taking action, like making a CDP request or making an offer in compromise, must precede the request that will extend the statute of limitations on collection.


The facts here demonstrate the dysfunction of the IRS more than the estate and bear discussion in analyzing what happened.

Mrs. Holmes is the executrix of the Estate of Shirley Bernhardt. The estate tax return was filed on July 16, 1998 and nothing in the opinion indicates that the return was untimely.  The estate tax return reported a liability of $700,024.34 which was remitted with the return.  The IRS audited the return, sent a notice of deficiency and eventually settled the Tax Court case.  As a result of the Tax Court case, on July 16, 2004, the IRS assessed an additional $233,309.20 plus interest; however, the assessment was erroneous because it failed to properly apply the state estate tax credit.  The opinion does state how the mistake was corrected but I expect that the IRS reduced the assessment with a partial abatement.  The remaining balance on the account at the time the IRS brought suit probably exceeded $200,000.

Although the opinion does not discuss it, I expect that the IRS properly issued notice and demand and then sent other letters in the notice stream. The opinion does state that on December 27, 2004, the IRS placed the case in the queue for collection by a revenue officer.  The opinion in this case comes from the Federal District Court in Houston causing me to believe that the collection case would have been assigned to a revenue officer group somewhere in southern Texas.   That group must be mighty shy of revenue officers because the case sat in the queue for approximately nine years.  The opinion does not state whether any payments occurred during that period or why the liability remained outstanding but on August 19, 2013, the opinion states that the IRS filed notices of federal tax lien in connection with the Estate’s unpaid taxes.

The filing of the notice of federal tax lien triggers the requirement that the IRS send to the taxpayer a CDP notice pursuant to IRC 6320 giving the taxpayer the opportunity for a hearing with Appeals and the opportunity to go to Tax Court, if Appeals issues a notice of determination.  The IRS has a lien under IRC 6324 for unpaid estate taxes that exists with full force without the need for the filing of a notice of federal tax lien. The IRS does not file a notice of federal tax lien for estate taxes but the estate tax lien expires after 10 years.  The IRS has the ability to file the notice of federal tax lien on the assessment it made after winning the Tax Court case.  Because of the gap here between the end of the estate tax lien in 2007 ten years after the death of the decedent and the filing of the notice of federal tax lien in 2013, the IRS placed the collection of the debt at risk to other creditors.  The actions regarding the collection of this debt suggest a high level of dysfunction in the collection division.

The opinion then says that the IRS sent to the taxpayer on September 27, 2013 the final notice of intent to levy. This notice would give the estate separate CDP rights and trigger its own 30-day period for filing a CDP request.  On October 5, 2013, the taxpayer sent to the IRS, by certified mail, a request for a CDP hearing.  That request clearly came within 30 days after the mailing of the levy notice and should have triggered a CDP hearing.  Assuming that nothing else had extended the statute of limitations on collection, the request for the CDP hearing also came during the 10th year after the assessment, at a time when there were about eight months left on the statute of limitations for collection.

When you get that close to the end of the statute of limitations on collection, you must carefully evaluate what you think will happen during the next eight months in order to decide if making the CDP request is in your best interest or if you think that letting the statute continue to march toward the end of the time period will bring the best result. There is no right answer because you do not know what the IRS will do during that eight months but you should have a very clear idea of what you expect to gain by bringing the CDP case if you go that route.

I do not know what benefit the taxpayer thought she might obtain by bringing the CDP case. She could not contest the underlying liability because the liability resulted from a Tax Court decision.  The one benefit I see to a CDP case in these circumstances is the ability to make an offer in compromise that you have the opportunity to have the Tax Court review if you think the IRS rejected it inappropriately.  I have written before that I think the IRS should not process offers in compromise from decedent’s estates for the same reasons it refuses to process offers from bankruptcy estates because a regime exists for contesting the non-payment of those types of liabilities.  Even though the IRS has not adopted my suggestion, getting an offer through on unpaid estate taxes can prove very difficult because of the personal liability of the executor and the existence of the like lien on the transferred property.

For some reason, Mrs. Holmes thought that brining a CDP case would prove beneficial; however, the IRS frustrated her attempt to obtain a CDP hearing. At the time of her request, the government was in the throes of one of the many government shut downs.  When the government shuts down, mail stacks up.  When mail stacks up, short cuts can occur in processing the mail when the disgruntled employees return from their paid time off.  For whatever reason, the CDP request was lost and this is where the case gets interesting.

The lost CDP request caused the general momentum on the case the IRS collection division was finally beginning to build to come to a standstill. The opinion does not say what happened between October 5, 2013 and May 2, 2014, just 10 weeks before the statute of limitations is set to expire if nothing suspends it.  On that day, counsel for the estate sent a letter to the IRS including a copy of the original CDP request from October 5, 2013.  Apparently, the May 2 letter did not convince the IRS that a timely CDP request was made by the estate because on June 2, 2014, counsel for the estate sent another letter to the IRS again arguing that the CDP occurred timely; however, this time he withdraws the CDP hearing request and instead asks for an equivalent hearing.

The estate sends a third letter on July 8 and on July 11, 2014, just five days before the statute of limitations would run on the 10-year period following assessment, the IRS sends the estate a letter saying it accepted the timely request for a CDP hearing. How nice.

The opinion does not say what happened as a result of the IRS accepting the CDP hearing request, but the parties must not have reached an agreement during the CDP process or this case would not exist. On March 10, 2015, the IRS filed suit against Mrs. Holmes individually, and in her capacity as executrix of the estate, and it filed suit against Mr. Holmes individually.  The estate argued that the suit was filed out of time.  The IRS argued that the estate’s timely request for a CDP hearing suspended the statute of limitations on collection and made the suit timely.

The Court found that the estate was estopped from making the argument that the misplacement of the CDP request by the IRS prevented the IRS from proving that the statute of limitations was suspended by that request. The Court ruled that the estate had a duty of consistency.  It had argued with the IRS and written to it several times that it had timely filed the CDP request and it could not argue that a timely CDP request did not exist.

“The elements of the duty of consistency are (1) a representation or report by the taxpayer; (2) on which the Commissioner has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.” Citing to Herrington v. Commissioner.

Because of its determination regarding the duty of consistency, the Court granted summary judgment with respect to the estate; however, the Court refused to grant summary judgment against Mr. and Mrs. Holmes in their individual capacities because of missteps the IRS had made with respect to the assessment. The estate may not have any funds remaining.  So, getting summary judgment against the estate provides a first step for the IRS to collect the unpaid estate tax liability but it may need to win the case against the individual defendants in order to collect the liability.  This could give further opportunity to report on the case.

No matter what the outcome, the filing of the CDP request during the final year of the statute of limitations on collection kept open the time frame for the IRS to bring this suit. Maybe the IRS would have brought the suit within the un-extended time frame.  We will never know.  The decision of the taxpayers to request the CDP hearing may have been the correct decision, but it is one that should occur only with a careful weighing of the perceived benefits against the granting to the government of additional time and the bringing to the government’s attention a case it has allowed to languish for almost 10 years.

Tax Court (Again) Sticks to Its Guns in Finnegan and Chooses Not to Revisit the Issue of Whether a Tax Return Preparer’s Fraud Indefinitely Extends the Statute of Limitations

Last week the Tax Court denied a motion to reconsider its decision in Finnegan v Commissioner. Earlier this year we discussed Finnegan in Tax Court Sticks to Its Guns and Holds Fraud of Preparer Can Indefinitely Extend Taxpayer’s SOL on Assessment. Finnegan is another of the handful of Tax Court cases that have held that the fraud of a tax return preparer can lead to an indefinite statute of limitations on assessment for the taxpayer. Whether a third party’s fraud can extend the statute of limitations is a hotly debated issue, both from a legal and policy perspective.

In this post, I will highlight why the Tax Court rejected the motion to reconsider its earlier decision.


Last week’s order situated the issue:

At trial, petitioners could not remember or understand many of the entries on their returns, and instead contended that, without the return preparer’s testimony, respondent failed to prove that the entries were fraudulently made. The Court found that petitioners’ return preparer had in fact made fraudulent entries on petitioners’ returns with the intent to evade tax, and, relying on Allen v. Commissioner, 128 T.C. 37 (2007), held that the preparer’s fraud extended the statute of limitations.

As I discussed in my original post the taxpayers in Finnegan somewhat surprisingly did not argue that the 2007 Allen decision was wrongly decided. Recall that last year the majority opinion in the Court of Appeals for the Federal Circuit in the BASR Partnership case explicitly rejected the Tax Court’s approach in Allen. That opinion came out after the trial in Finnegan but almost a year before the Tax Court issued its opinion.

Instead the Finnegans focused their energies on whether there was a sufficient connection between the preparer’s fraud and the specific returns that the IRS subsequently examined. Even under Allen, it is not enough for the IRS to show that the preparer was crooked; IRS had the burden to show that the preparer’s fraud was connected to the specific returns at issue. For the most part, IRS prevailed on that in the original Finnegan decision, and the IRS was able to assess tax that would otherwise have been barred under a three-year statute of limitation.

After the loss, however, the taxpayers had a change of heart, and argued that the Tax Court’s Allen decision was wrong. In addition, the American College of Tax Counsel filed a motion for leave to file an amicus brief to assist the taxpayers (for more on the amicus process generally see Carl Smith’s discussion here). The order discusses the motion and memorandum filed in support of the motion:

In their Motion and Memo, petitioners contend, for the first time, that Allen was incorrectly decided. On July 29, 2015, the US Court of Appeals for the Federal Circuit issued BASR P’ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015), in which the majority opinion of a three-judge panel criticized Allen and held that section 6501(c)(1) applies only when it is the taxpayer who commits fraud. Petitioners contend that BASR P’ship provides a “reason to justify relief” from our opinion because it is a “Court of Appeals [decision] that affects the decided issues “and shows that Allen constitutes an error of law.” T.C. Rule 1 (b); Fed. R. Civ. P. 60(b); Ritter v. Smith, 811 F.2d 1398, 1401 (11th Cir. 1987).

Key to the argument is the BASR Partnership case. Guest poster Robin Greenhouse discussed BASR Partnership in Whose Intent to Evade Tax Is It? The order discusses BASR and, as the original opinion stated, emphasizes that a federal circuit opinion is not binding precedent on the Tax Court. The order goes on to distinguish BASR on the facts, minimize its application and at the same time remind the litigants how difficult the standard is to get a judge to reconsider an earlier opinion, especially when there was a chance to raise the argument earlier (for more on requesting reconsiderations, see Keith’s Motion for Reconsideration).

As to the factual distinction, the order notes that in BASR the fraud was not of a return preparer but it involved a partnership and an advisor, and the special SOL applicable in TEFRA proceedings, an important consideration in the BASR concurring opinion. Moreover, the order notes that there were no allegations in BASR that either the return preparer or the taxpayer knew of the fraud and that there was a dissenting and concurring opinion, suggesting that there was “no consensus even among the three judge panel that Allen was incorrectly decided.”

As to the reconsideration process, the order states that it “is an extraordinary remedy and is not a substitute for an appeal.” The order notes that the litigants failed to raise the argument that Allen was wrongly decided until after the Tax Court issued its opinion and only did so for the first time in its reconsideration motion:

Additionally, it would be improper to grant the Motion on procedural grounds. A motion for reconsideration is not the proper mechanism by which to raise new legal theories. Robin Haft Trust, et al. v. Commissioner, 62 T.C. 145. Petitioners, who were represented at trial, failed to challenge Allen despite having multiple opportunities to do so. Although the appeal of BASR P’ship had not been decided at the time of trial and briefing, the Court of Federal Claims decision in BASR P’ship, 113 Fed. Cl. 181 (2013), had been. Yet it was respondent, not petitioners, who noted the case in his brief. The Model Rules of Professional Conduct did not prohibit petitioners from challenging Allen at that time, because the argument could have been made in good faith. It was also respondent who alerted the Court when the decision of the Federal Circuit on appeal was issued. Although an additional 11 months passed before this Court issued its opinion in the instant case, petitioners still failed to challenge Allen at that time.

Parting Thoughts

In light of the above, the Tax Court rejected the motions for reconsideration and the ACTC’s motion for leave to file an amicus brief. It seemed as if the taxpayers in Finnegan may have missed an opportunity to get a fresh look at the Tax Court’s controversial Allen decision. If they appeal and raise the issue in their appeal it is possible that the 11th Circuit (where an appeal would lie) would not allow them to raise the new argument. Generally, appeals courts do not take kindly to a new argument raised for the first time on appeal, though appellate courts have considerable discretion to allow arguments (a brief though somewhat dated primer on the topic from Aaron Bayer  in the National Law Journal gives some rules of thumb on this).

Even if Finnegan cannot raise the issue on appeal, there is little doubt that other courts will be weighing in on this issue. As we have discussed before, there are plenty of taxpayers who have had returns prepared by crooked preparers. As years and interest pile on, for unsophisticated taxpayers an unlimited SOL and IRS pursuit could mean substantial liabilities. That an attempted amicus, the American College of Tax Counsel, joined this scrum suggests a recognition of the importance of this issue to tax administration (Disclosure: Keith and I are fellows of the ACTC but had no role in motion for leave to file an amicus or the motion for reconsideration).

A final thought. For those who want some more on this topic, I discussed the merits more robustly and provided links to some helpful sources after the Court of Federal Claims decided BASR in Court of Federal Claims Holds that Agent’s Fraud Does Not Extend Statute of Limitations.


Tax Court Sticks to Its Guns and Holds Fraud of Preparer Can Indefinitely Extend Taxpayer’s SOL on Assessment

When a taxpayer commits fraud it is black letter law that the statute of limitations (SOL) on assessment remains open indefinitely. In the last decade or so IRS has taken the fraud issue one step further, essentially arguing that a third party’s fraudulent conduct that is connected to the taxpayer’s tax return can also indefinitely extend the taxpayer’s SOL. IRS has used this argument both in the context of sophisticated taxpayers engaging in advisor-created mind-numbingly complex tax shelters and in simple cases where preparers are goosing Schedule C deductions.

IRS has cracked down on crooked preparers, and in doing so it often pulls those preparers’ returns. Because fraud is difficult to both detect and prove (and at times the preparers do not sign the returns they prepare), it takes a long time for IRS to track down the crooked preparers’ tax returns. The upshot is that absent the indefinite SOL when IRS does track down the returns IRS is out of luck. On the other hand, as SOLs are meant to provide some finality an indefinite SOL can provide the tools for a crippling assessment with years of interest on top of civil penalties.

As we have previously discussed, the courts are split on whether a third party’s conduct can extend the taxpayer’s SOL. For example, in 2007 the Tax Court in Allen v Commissioner held that the third party’s fraud extends the taxpayer’s SOL; in 2015, a divided opinion the Court of Appeals for the Federal Circuit in BASR v Commissioner rejected the Tax Court’s Allen approach. Guest poster Robin Greenhouse discussed BASR in PT here; I discussed the lower court’s BASR opinion here.

This very issue presented itself in last week’s Tax Court case Finnegan v Commissioner. In this post I discuss that case and offer some observations.

read more…

The Finnegan Facts

In Finnegan v Commissioner the taxpayers were a plumber and an employee of a community college who owned a rental property in Daytona, Florida they purchased in 1988 for $60,000. After their longtime preparer moved, they hired a new preparer, Duane Howell, who gave the following advice intending to allow the Finengans the opportunity to shelter the income from the rental property:

Mr. Howell advised petitioners that they should form a partnership to report their rental activity. Mr. Howell incorrectly explained that forming the partnership would allow petitioners to contribute moneys they received from the condo rentals to a Keogh/self-employment retirement plan account. With Mr. Howell’s help, petitioners formed a partnership named “Jomarjen”, which appears in every Schedule E, Supplemental Income and Loss, of petitioners’ Forms 1040, U.S. Individual Income Tax Return, for the years in issue.

Petitioners did not draft a partnership agreement for Jomarjen, and the filing address for the partnership return changed from year to year. Other than creating Jomarjen, petitioners did not change anything concerning the operation of their rental investment. Condo Rentals of Daytona continued to manage the renting of the condo and made payments of the rental revenues to petitioner Joan Finnegan, issuing her Forms 1099-MISC, Miscellaneous Income, rather than to Jomarjen. If, for any reason, petitioners communicated directly with their tenants, they did so individually, and not as Jomarjen. Petitioners never transferred title of the condo to Jomarjen. Petitioners never wrote checks to Jomarjen and Jomarjen never wrote checks to petitioners. Petitioners did not have a separate office for their condo rental activity.

The Tax Court described the scheme further:

[T]he Finnegan’s ] Forms 1040, Schedules E for tax years 1997, 1998, 1999, 2000, and 2001 show Gannan Co. in addition to Jomarjen. Gannan Co.’s partnership returns report petitioners as the sole partnership owners. At trial petitioners testified that they did not know what Gannan Co. was, that they learned the name only after the examination of their returns, and that it does not exist. Petitioners also testified that after following Mr. Howell’s advice, their tax returns became very thick and they received larger refunds than in years past.

While Howell did not testify in the Finnegan trial, there was testimony from one of Howell’s associates and an IRS Special agent. In addition, the IRS was also able to get into evidence an affidavit from Howell and Howell’s testimony in a prior criminal trial of another of Howell’s associates. The evidence showed that Howell was preparing 750 or so returns per year with a pattern of conduct that included false partnerships and falsified income to allow Keogh contributions. In addition, he did not sign the returns as preparer, instead using of fake entity names to mask his identity.

The Finnegans’ returns fit the pattern on Howell’s clients. IRS after extending significant resources on Howell’s prosecution examined the Finnegans’ 1994-2001 returns. IRS stipulated that but for Allen v Comm’r, the SOL on assessment had expired.

The SOL Remains Open

In Finnegan, the Tax Court reaffirmed its commitment to Allen, stating  the following at note 6:

We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on account of BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited BASR P’ship and do not contend we should revisit Allen. Thus, Allen is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.

Jack Townsend in his Federal Tax Crimes blog discusses the Finnegan case here and observes that the case highlights the importance of forum choices, with the Court of Federal Claims offering the best option for taxpayers (though Flora requires full payment for that forum). As an aside, Jack has been all over this issue, and in my view has persuasively made the case why the Tax Court approach in Allen is wrong (see here), as has Bryan Camp, in a 2008 Tax Notes article here.

Some Observations

I find it interesting that Finnegan did not cite to City Wide in its note 6 discussion of why it was not revisiting Allen. It suggests perhaps that the Tax Court took a cautious view of the Second Circuit’s opinion’s reach. In City Wide Transit, the Second Circuit seemed to bless the view that a third party’s fraud can extend the sol, though as Jack Townsend has discussed, the precedential effect of City Wide is suspect due to taxpayer concessions on the issue.

Given Finnegan’s  concession on Allen as discussed in note 6 above, it is not clear to me that this case will be the vehicle for situating a more defined circuit split on the issue. In Finnegan, as note 6 states, the taxpayers did not argue that the Tax Court was wrong in Allen (analogous perhaps to the taxpayer concession in City Wide) but focused its SOL argument on the issue as to whether the IRS was able to sufficiently connect the preparer’s fraud to the taxpayer’s return in question.

The focus in Finnegan thus was on a secondary though important issue: just because a third party engages in some fraudulent activity does not lead to an automatic poisoning of the return. A case in point in Eriksen v Commissioner, which I discussed in my BASR post a couple of years ago:

An example of a different this issue coming up in less sophisticated matters is  Eriksen v Commissioner, a memorandum Tax Court decision from 2012, which involved low dollar phony Schedule C expenses claimed by employees of the Oakland County Sheriff Department. The taxpayers in Eriksen used preparers who plead guilty to aiding and assisting in the preparation of a false federal income tax returns in violation of Section 7206(2). In Eriksen, the Tax Court applied Allen to find that a preparer’s fraud could extend the statute, but held the IRS had not met its burden to show that that the preparer’s actions in the particular returns at issue amounted to fraud rather than negligence. In other words, a preparer’s fraud on some returns was insufficient to taint other returns, even if those other returns had errors of the type that were implicated in the criminal case against the preparers.

In distinguishing Eriksen the Tax Court in Finnegan dug a bit deeper. In fact, Eriksen involved six taxpayers whose returns were prepared by convicted preparer and the Tax Court found for the taxpayer in five of the six taxpayers. The IRS was successful, however, in arguing that the statute was extended for one of the taxpayers in that case in part because the IRS was able to prove at trial that the errors on the sixth return were of the type that were of the type that were the subject of the crime and the sixth taxpayer herself testified that she did not incur the expenses on the return.

The taxpayer in Finnegan hung his hat on Eriksen, but the last week’s opinion finds that the facts in Finnegan were more like the unlucky sixth Eriksen taxpayer than the first five:

Petitioners contend that Eriksen stands for the proposition that, to establish fraud, the Commissioner must prove a “direct link” between the commission of fraud and a taxpayer’s return. Petitioners strongly imply that the only way to establish such a direct link is through the preparer’s testimony. In Eriksen, the Commissioner established the existence of fraud by matching the incorrect information on the taxpayer’s return to the preparer’s modus operandi. In other words, even taking petitioners’ contention into account, there are ways of providing an evidentiary link that do not involve a preparer’s specific testimony as to a particular taxpayer.

Petitioners also contend that their circumstances are similar to those of the first five Eriksen taxpayers because, without a connection or direct link between Mr. Howell’s wrongdoing and petitioners or their partnerships, respondent’s evidence rises only to the level of “a suspicion of fraud”. We do not agree. Respondent has already shown that petitioners’ returns include significant errors, namely, Jomarjen’s gross income above and beyond the revenues collected by Condo Rentals of Daytona and the Gannan Co. partnership’s entries on petitioners’ returns. Respondent provided additional testimony that identified specific figures in petitioners’ returns, e.g., $4,896, which were frequent fabrications of Howell’s. Additionally, the preparer in Eriksen testified in his plea allocution that not all returns he prepared were fraudulent. Id. at *4. Mr. Howell testified that every return he prepared included at least some fraudulent entries, and because of these false entries, was “dirty”.

Finnegan now sits in the pantheon of cases that should give taxpayers caution when hiring a return preparer. When something is too good to be true, the preparer’s shenanigans can come back to haunt a taxpayer years after the fact. With the passage of time small tax savings can multiply to sizeable deficiencies due to interest and penalties. No doubt other courts will be weighing in on the IRS’s attempts to reach taxpayers who benefitted from preparer misconduct, and I would not be surprised if this issue eventually is before the Supreme Court.

Update: An earlier version of this post indicated that this case was appealable to the Second Circuit. While the taxpayers lived in NY at the time the returns at issue were filed, in 2003 they moved to Florida, where they resided at the time they filed the petition in this case. Absent stipulation, this case is appealable to the 11th Circuit. 


Adams v. Comm’r: How Not to File an Appeal from the Tax Court

Carl Smith discusses the challenges that pro se taxpayers faced in trying to timely file an appeal of a Tax Court case. Les

On May 20, 2016, through an unpublished order in Adams v Commissioner, the Fourth Circuit dismissed for lack of jurisdiction an untimely appeal from a Tax Court deficiency case. Adams presents a veritable law school exam question of how not to file a timely appeal. The pro se taxpayers in the case tried multiple ways to file a timely appeal, but to no avail. This case provides a convenient review of what you can and cannot do to file a timely appeal from the Tax Court. But, in this post, I also raise the question whether the Fourth Circuit was correct in dismissing the untimely appeal from the Tax Court for lack of jurisdiction; I think the dismissal should have been on the merits, though there was little practical difference in this case either way.


Adams Facts

Substantively, the Adams case was not likely to prevail on the merits, anyway. The Adamses had omitted from their 2010 income tax return part of the qualified plan distributions that the husband took after he was discharged from his Defense Department job and could not find replacement work. So, the IRS sent the Adamses a notice of deficiency seeking income tax on the underreported distributions, as well as a § 72(t) 10% penalty for early withdrawal and a 20% accuracy-related penalty on the deficiency. In response, the Adamses timely filed a pro se Tax Court petition.

On August 17, 2015, the Tax Court issued its opinion at T.C. Memo. 2015-162, holding that it could not exempt the taxpayers from taxation on the distributions under some undefined equitable exception that the taxpayers sought on the ground that the husband’s discharge was discriminatory. At trial, the Adamses were afforded an opportunity, at least, to substantiate any medical expenses that might have reduced the 10% penalty, but the taxpayers did not do so, contending that the receipts were too voluminous to produce and too expensive to photocopy. So, the court sustained the § 72(t) penalty in full. The court also found a substantial understatement of tax as to which there was no reasonable cause and good faith, so it sustained the accuracy-related penalty in full.

On August 26, 2015, the Tax Court entered its decision consistent with the opinion.

On September 2, 2015, the taxpayers tried to electronically file in the Tax Court a notice of appeal, but since there is no tab on the court’s electronic filing system for a notice of appeal, they filed the notice of appeal under the “memorandum” tab.

On September 4, 2015, the Tax Court issued an order striking the attempted filing and pointing out to the taxpayers that a notice of appeal is one of the documents that must be filed with the Tax Court on paper, not electronically. The court’s order also noted that, under Tax Court Rules 161 and 162, respectively, unless otherwise permitted by the court, a motion for reconsideration of an opinion had to be filed within 30 days of the service of the opinion, and a motion to vacate a decision had to be filed within 30 days of the entry of the decision.

On September 16, 2015, the taxpayers filed a timely motion for reconsideration of the opinion under Rule 161 – again arguing for an equitable exception to taxation of the distributions. In an order dated September 29, 2015, but served on September 30, 2015, the Tax Court denied the motion.

On October 12, 2015, the taxpayers filed a motion for a new trial that was stamped denied on October 16, 2015.

On November 23, 2015, the taxpayers again tried to file a notice of appeal electronically in the Tax Court under the memorandum tab. On November 24, 2015, the Tax Court issued an order striking the attempted filing and again pointing out to the taxpayers that a notice of appeal is one of the documents that must be filed with the Tax Court on paper.

On November 24, 2015, December 11, 2015, and December 19, 2015, the taxpayers again electronically filed various papers under the memorandum tab. On January 5, 2016, the Tax Court issued an order striking the attempted filings and again pointing out to the taxpayers that a notice of appeal is one of the documents that must be filed with the Tax Court on paper.

According to a DOJ filing on November 30, 2015, the taxpayer attempted to file a paper notice of appeal with the Fourth Circuit, but no case was set up. An appeals court is the wrong court in which to file a notice of appeal from the Tax Court. The notice of appeal must be filed with the Tax Court.

On January 12, 2016, the taxpayer finally filed with the Tax Court a paper notice of appeal to the Fourth Circuit. As a result of this filing, the Fourth Circuit established a docket for the appeal, Docket No. 16-1043.

DOJ Arguments

In the Fourth Circuit, the DOJ argued that the appeal should be dismissed for lack of jurisdiction as untimely for several reasons:

First, the normal rule is that an appeal is timely filed if it is filed on paper with the Tax Court within 90 days of entry of the decision. § 7483, FRAP Rule 13(a)(1)(A); Tax Court Rule 190(a). Ninety days from the entry of decision was November 24, 2015, yet the notice of appeal was filed with the Tax Court on paper only on January 12, 2016. Therefore, absent something that extended the period, the filing was untimely.

Second, the timely filing of a motion to vacate under Tax Court Rule 162 could have extended the time to appeal. Under FRAP Rule 13(a)(1)(B), the 90-day time to appeal would commence anew on the date an order was entered by the Tax Court denying such motion. However, the taxpayers never filed such a motion to vacate the decision.

Third, there is a bit of disagreement among the Circuit courts as to whether the filing of a timely motion to reconsider an opinion under Tax Court Rule 161 can serve to extend the time period to appeal. FRAP Rule 13(a)(1)(B) does not expressly provide for tolling in that situation. The Ninth Circuit in Nordvik v. Commissioner, 67 F.3d 1489, 1493 (9th Cir. 1995), has held that a timely Tax Court Rule 161 motion tolls the appeal period. The Tenth Circuit reached the opposite conclusion in Mitchell v. Commissioner, 283 Fed. Appx. 641, 644 (10th Cir. 2008), observing that it “has never given tolling effect in a tax appeal to a motion for reconsideration, which is not mentioned in Rule 13.” In Spencer Med. Assocs. v. Commissioner, 155 F.3d 268, 269-271 (4th Cir. 1998), the Fourth Circuit declined to address the issue whether a timely Tax Court Rule 161 motion for reconsideration tolls the appeal period, since the motion for reconsideration there was untimely and thus would not have tolled the appeal period in any event.

The DOJ argued in Adams that the better view was that a motion for reconsideration does not extend the time to appeal from the Tax Court. However, even though the motion in this case was timely filed, it was denied on September 29, 2015. Ninety days after that date was December 28, 2015. Yet the appeal was only properly filed on January 12, 2016, so the notice of appeal would have been late, even if the motion for reconsideration’s denial restarted a 90-day appeal period.

Fourth, FRAP Rule 4(d) states: “If a notice of appeal in either a civil or a criminal case is mistakenly filed in the court of appeals, the clerk of that court must note on the notice the date when it was received and send it to the district clerk. The notice is then considered filed in the district court on the date so noted.” However, the mistaken filing in the Fourth Circuit by the taxpayers here on November 30, 2015, was not with respect to an appeal from a district court. So, FRAP Rule 4(d) did not apply, and there was no comparable rule for appeals from the Tax Court. In any case, even if one could file a notice of appeal from a Tax Court decision in a Court of Appeal under a rule similar to FRAP Rule 4(d), the November 30, 2015 filing was 6 days late – i.e., 6 days beyond the 90-day period starting from the date of the Tax Court decision herein (August 26, 2015).

Finally, the DOJ argued that the 90-day period in section 7483 in which to file an appeal from the Tax Court is jurisdictional. Therefore, it cannot be extended for equitable reasons – i.e., it cannot be equitably tolled, even if the taxpayers could prove the necessary facts for tolling. Timely filing an appeal in the wrong forum is often a ground for equitable tolling of nonjurisdictional filing periods. See Mannella v. Commissioner, 631 F.3d 115, 125 (3d Cir. 2011). The DOJ did not want the taxpayer to be able to argue that timely filing the notice of appeal in the Tax Court by the wrong method (electronically) could be excused under equitable tolling.

Fourth Circuit’s Ruling

The Fourth Circuit, in an unpublished opinion, did not discuss each of the arguments that the DOJ raised. Instead, it wrote merely:

A notice of appeal from a decision of the tax court must be filed within ninety days after the decision is entered. 26 U.S.C. section 7483 (2012); Spenser Med. Assocs. v. Comm’r, 155 F.3d 268, 269 (4th Cir. 1998). The timely filing of a notice of appeal is a jurisdictional requirement. Bowles v. Russell, 551 U.S. 205, 213-14 (2007).

The tax court’s order was entered on the docket on August 26, 2015. The notice of appeal was filed on January 12, 2016. Because taxpayers failed to file a timely notice of appeal, and because this jurisdictional appeal period is not subject to equitable tolling, see Bowles, 551 U.S. at 214, we dismiss the appeal.


On these facts, the court clearly made the right decision to dismiss the appeal, but I question whether the appeal should have been dismissed for lack of jurisdiction. I believe that it should have been dismissed on the merits. This wouldn’t make a material difference in this case, but it could have in a different case where, say, a taxpayer filed a timely notice of appeal in the Circuit court (the wrong place) and so wanted to argue for equitable tolling.

In my opinion, the 90-day time period in § 7483 to file an appeal from the Tax Court is not jurisdictional and is subject to equitable tolling under the right facts under the current Supreme Court case law on jurisdiction and equitable tolling that Keith and I have repeatedly cited in PT posts in recent years. See, e.g., my post on Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015)

As you know from prior posts here, here, and here, Keith and I are in the midst of litigating test cases in the Tax Court and the Ninth Circuit in which we argue that the time periods in which to file Tax Court petitions in Collection Due Process cases under § 6330(d)(1) and in stand-alone innocent spouse cases under § 6015(e)(1)(A) are not jurisdictional and are subject to equitable tolling under recent, non-tax Supreme Court case law. We are seeking to overturn existing Tax Court precedent, which has not considered the recent Supreme Court case law. Under that case law, such as Musacchio v. United States, 136 S. Ct. 709 (2016); United States v. Wong, 135 S. Ct. 1625 (2015); Sebelius v. Auburn Regional Med. Cntr., 133 S. Ct. 817 (2013); and Henderson v. Shinseki, 562 U.S. 428 (2011), time periods to file in court are no longer considered jurisdictional unless Congress has clearly stated a preference that the time period be jurisdictional. The Court has noted, under the current rule, “the rarity of jurisdictional time limits”; Wong, supra, at 1632; and stated, “This Court has often explained that Congress’s separation of a filing deadline from a jurisdictional grant indicates that the time bar is not jurisdictional.” Id. at 1633. The only exception to this rule is that, so as not to overturn the expectations of Congress, for stare decisis reasons, the Supreme Court will ignore its current case law if there exists a string of Supreme Court authority on the exact statutory time period going back 100 years or more holding the time period jurisdictional.

The current Supreme Court jurisdictional rules show that the 90-day period under § 7483 to file an appeal from the Tax Court is not jurisdictional. Congress has not clearly stated in § 7483 that the period is jurisdictional. For example, there is no provision in § 7483 that speaks to the jurisdiction of the appeals courts. Indeed, the jurisdictional grant to Circuit courts to hear appeals is elsewhere, at § 7482(a)(1), and contains no references to a time period in which to file.

Then, what of the Fourth Circuit’s citation of Bowles v. Russell, 551 U.S. 205 (2007), in support of its Adams holding that the time in which to file an appeal from the Tax Court is jurisdictional? In Bowles, the question was whether the 30- and 60-day periods under 28 U.S.C. § 2107(a) and (b) in which to file appeals from the district courts in civil cases were jurisdictional. 28 U.S.C. § 2107(c) allows the district court to extend the time to file an appeal for up to 14 days in certain circumstances. In the case, a district court accidentally issued an order extending the time to file an appeal by 17 days, and the appellant relied on that order to his detriment. Only because the Court has for over 100 year had held the § 2107 appeal period jurisdictional did the Court stick with that holding. Since I can locate no Supreme Court opinion holding that the § 7483 period in which to file appeals from the Tax Court is jurisdictional, there is no stare decisis exception available to the current case law that generally makes filing deadlines nonjurisdictional.

The § 7483 time period is also likely subject to equitable tolling, since it is more akin to the simple 1-year period under 28 U.S.C. § 2244(d) to file for death penalty habeas review in district court that was held subject to equitable tolling in Holland v. Florida, 560 U.S. 631 (2010), than it is like the complex, multi-exception time periods under § 6511 to file tax refund claims that was held not subject to equitable tolling in United States v. Brockamp, 519 U.S. 347 (1997).

Precedential case law from various Circuits, including the Fourth Circuit, that has held the Tax Court appeals period to be jurisdictional generally predates and always lacks discussion of current Supreme Court case law on jurisdiction and equitable tolling. Such case law as Spencer Med. Assocs. v. Commissioner, 155 F.3d 268, 269 (4th Cir. 1998); Okon v. Commissioner, 26 F.3d 1025 (10th Cir. 1994), and Davies v. Commissioner, 715 F.2d 435 (9th Cir. 1983), is ripe for overruling.


Seventh Circuit Affirms Tax Court Allowing Court to Fix Erroneous SOL Waiver

What happens if the IRS makes a mistake when drafting a waiver of the SOL on assessment and puts the wrong taxable year in the waiver? In Kunkel v Commissioner the Seventh Circuit took up the issue, with the taxpayer arguing that the IRS’s mistake resulted in a blown statute of limitation. This week the Seventh Circuit affirmed the Tax Court (original TC opinion here, modified on unrelated issue at TC Memo 2015-37) and held that courts have the power to reform the waiver and to correct the IRS’s mistake if a preponderance of the evidence shows that the true intent differed from the language in the agreement. The opinion is interesting as there are not many cases where the courts step in and fix a mistake in a waiver form.

I will discuss the case and the court’s holding below.


The case arose due to an IRS audit for the years 2008, 2009 and 2010 for Integra Engineering and its principal owners, Craig and Kim Kunkel. The tax at issue for all three years was about $456,600 from the Kunkels and $322,800 from Integra. In addition, IRS included an accuracy-related 20% accuracy-related penalty.

IRS asked for extensions on all the years. The taxpayers eventually conceded the 2009 and 2010 years, but they claimed the IRS blew the statute of limitations on assessment for 2008 for both the business and individual returns.

On what basis did the taxpayers argue that the 2008 statute was blown? IRS had sent across waivers on Form 872-A for both the individuals and Integra. The taxpayers’ rep signed the 872-A waivers, and though they agreed that the rep had the authority to sign the waivers they argued that the language on the waivers was directed to the 2011 tax year and not the 2008 year, resulting in the IRS failing to assess the 2008 taxes within the three-year assessment period.

Normally IRS is careful about its language in the 872-A. Not with the Kunkels. The IRS and the taxpayers’ rep at exam signed a Form 872-A that contained nonsense dates for the tax year being extended:

The amount of any Federal Income tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended February 15, 2012 may be assessed at any time on or before December 31, 2012.” The date “February 15, 2012” had been typed into a blank for Integra (and April 15, 2012, for the Kunkels). But February 15, 2012, and April 15, 2012, did not designate the “period ended” for any tax year; they designated the end of the limitations periods for 2008 taxes. Whoever filled in the blanks at the IRS had typed the wrong year (2012 instead of 2009) and missed the fact that Integra’s 2008 tax year ended on November 30, 2008, which was the appropriate “period ended” for the purpose of this form. The date a return is filed affects the statute of limitations but not the “period ended.”

Although neither party introduced testimony as to what the parties to the Form 872 actually intended, the Tax Court concluded that there was a mutual mistake of facts and that it had the power to reform the Form 872 to reflect the parties’ true intent, as manifested by “clear and convincing evidence.”

The Tax Court  agreed that courts can use the equitable power of reformation to modify the 872-A to reflect the parties’ true intent (referring to some older cases holding that the Tax Court though a court of limited jurisdiction can exercise those powers, an issue we discuss in SaltzBook Chapter 5). The Seventh Circuit likewise agreed and was “confident that 2012 was the wrong year because no one thought that the IRS was agreeing to a reduction in the time it had to assess taxes for 2011. The point of this exercise had been to allow the IRS more time to decide what to do for the 2008 tax year.” (emphasis added)

In finding for the IRS, the Seventh Circuit’s analysis differed somewhat from the Tax Court, which leaned heavily on Buchine v Commissioner, another case where the facts where arguably stronger for the IRS (e.g., there was a cover letter in Buchine with the correct year) and where the court used its reformation powers to correct what it believed was a clear mutual mistake of fact. The Kunkels on appeal argued that courts could reach a result different from the language in the waiver only if “only if clear and convincing evidence shows the taxpayer’s true intent.” That was the standard that the Tax Court applied in finding for the IRS below. Using that standard, the Kunkels argued that “since neither Taxpayers nor the IRS offered evidence from the persons who filled in the blanks and signed the forms, it is impossible to meet that standard.”

The Seventh Circuit disagreed with the taxpayer (and Tax Court’s) view of the standard, noting that the appropriate standard is based on a preponderance of the evidence:

None of these opinions [cited by the taxpayer] evinces awareness of the Supreme Court’s decisions holding that, in civil litigation over money, the appropriate standard is the preponderance of the evi- dence. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 387–90 (1983); Grogan v. Garner, 498 U.S. 279, 286 (1991); Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1758 (2014). Preponderance of the evidence therefore is the right standard for reforming a waiver of a statute of limitations in a tax case.

Moreover, without discussing whether the 872-A is a contract (the Tax Court has held that it is not a contract but a unilateral waiver of a defense) the Seventh Circuit held that the matter turns on principles of federal contract law, with federal contract law relying on an objective test and not the subjective intent of the parties:

This means that the parties’ intents matter only to the extent that they are expressed to each other. When considering parol evidence a court looks to documents, and sometimes to oral exchanges, but never considers either side’s private thoughts and hopes.

Framed that way, the court had an easy time reaching its conclusion:

The Tax Court thought reform of the waivers appropriate because only the 2008 tax year had periods of limitations expiring in spring 2012. The forms could not have served any purpose other than extending the time to file assessments for 2008—and you can’t beat something with nothing…

The best way to understand what happened is the way the Tax Court did: A typist misread the file, entering the dates on which limitations periods would expire rather than the dates on which the tax years ended, and then everyone else missed that error. We see no clear error or abuse of discretion in that conclusion.

The opinion discounts the taxpayer view of the events with the brief on appeal speculating that the practitioner at exam in signing the 872-A “thought that he was playing a practical joke on the IRS by signing without alerting it to the scrivener’s error.” The court took a dim view of that explanation:

This seems unlikely; the adverse effect on Bastian’s [the CPA/attorney rep at exam] professional reputation could have been substantial. If the IRS came to conclude that Bastian had tried to hoodwink it, he might find his credentials as a tax representative pulled.

Some Parting Thoughts

The Seventh Circuit noted that it was “conscious of the irony in allowing the IRS to collect a 20% penalty for the errors in the Kunkels’ 2008 return, when the IRS has made an error of its own. But the Kunkels have not asked us to compare the degrees of fault or to set aside the penalty, if the assessment was timely.”

Kunkel shows us that not all errors are created equal. While the IRS mistake was a scrivener’s error the mistake for which the taxpayer was being penalized was a knowing decision that was different in kind.  If a taxpayer makes a scrivener’s error, the IRS does not usually hit the person with a tax penalty. Moreover, Kunkel shows that while it is generally true that the IRS takes the risk of defects in documents upon which it relies as waivers courts can step in and use their equitable powers to reach a conclusion that the parties likely intended even when the language states differently.








Summary Opinions Catch Up Part II

Second part of the catch up.  These materials are largely from February.  One more installment coming shortly.  We may be renaming SumOp.  Although I loved the name (thanks Prof. Grewal), this keeps getting linked as a summary of all Tax Court summary opinions.  Feel free to suggest names, although it may just fall under the Grab Bag title from now on.  And, if you work at a law firm that is taxed as a C-corporation, check out the Brinks, Gibson discussion below.  Might be a little scary.


  • Most of you probably heard that the Form 8971 was issued for basis reporting in estates.  Form can be found here and instructions here.  First set will (probably, although it has been extended a couple times already) be due June 30th.  Pretty good summary can be found here.  Lots of complaints so far.
  • The Fourth Circuit had a recent Chapter 7 priority case in Stubbs & Perdue, PA v. Angell (In re Anderson).  In Stubbs (great name), S&P were lawyers who represented Mr. Anderson.  Initially, the case was a Chapter 11 case, and S&P racked up $200k in legal fees.  Priority, but unsecured.  There was also over $1MM in secured tax debt.  The bankruptcy converted to a Chapter 7, and S&P were tossed in with the unsecured debtors, which they took exception with.  The Court looked to the current version of section 724(b)(2) of the bankruptcy code.  That section allows certain unsecured creditors to “step into the shoes” of secured creditors, and recover before other creditors.  Due to perceived abuses, that section had been amended in 2010 to limit the expenses that were given super priority, including Chapter 11 administrative expenses when the case was converted to a Chapter 7 case.  The amended provision was in place when the conversion occurred, and the Fourth Circuit relied on that version of the law, disallowing the legal fees super priority.  The law firm argued the prior version of the statute should apply, as it was the applicable statute when the originally filing occurred, but the Fourth did not agree.  Why does this really matter? It is the federal tax liability supported by the federal tax lien that gets subordinated to pay these priority claims.  So, the fight in this insolvent estate boiled down to whether the lawyers, who may have waited too long to convert the case to Chapter 7, or the IRS get paid (of course, the decision to convert is a client decision which puts the lawyer’s ability to get their fees at the mercy of the rationality of the client’s decision. A bad place to be) (thanks to Keith for giving me a quick primer on this subject).
  • The Tax Court in Brinks, Gilson & Lione, PC v. Commissioner has probably caused quite a bit of concern for quite a few law firms – or should (which reminds me, I have something to discuss with the Gawthrop management committee).  McGuire Woods has a good write up, and some insight into planning around the issue, which is found here.  The facts are that the firm would provide partners with a salary, and then at year end it would take all the profits and provide year-end bonuses to the partners, who would treat the amounts as W-2 wages.  This would wipe out the profits, so the c-corporation law firm would have no tax due (sounds familiar to a lot of you in private practice, doesn’t it?).  This firm had close to 300 non-lawyer employees who generated profits, and the IRS said that treating the bonus amount as w-2 income on to the partners on what those other folks generated was improper.  The corporation should have paid tax, and then dividends should have been issued to the partners, who would also then pay tax.  Yikes!  That is interesting enough, but the Court also found that the firm lacked substantial authority for its positions and there was no reasonable cause under Section 6662(d)(2)(B), so substantial penalties were also due on the corporate income tax due (the regulations do not allow for an “everyone else is doing it” defense).
  • Sometimes you go into court just knowing you are going to look like an @s$ for one reason or another.  I may have felt that way walking in to argue Estate of Stuller for the government before the Seventh Circuit.  Not because I would have been wrong, but, based on the opinion, the taxpayer was having a pretty bad year.  In Stuller, the Court held that the penalties for failure to timely file returns were proper when a restaurant business owner (who was a widow) missed the filing deadline.  In the year in question, the husband died in a tragic fire, which also injured the widow.  In addition, a key employee was embezzling from her businesses and she had difficulty tracking down aspects of the probate proceedings.  The Court found all required info could have been found in her records, and she did not exercise ordinary business care and prudence to fulfill the requirements of the reasonable cause exception (it probably didn’t help that she was taking questionable deductions related to her “horse” business that lost like $1.5MM in the preceding years).
  • We have covered Rand pretty extensively here on the blog, including the reversal of it by section 209 of the PATH Act and the Chief Counsel advice that followed, which can be found here.    In February, additional guidance was released stating there are no longer any situations where the Section 6676 penalty is subject to deficiency procedures, which was the same conclusion our (guest) blogger, Carlton Smith, came to in his post discussing the Kahanyshyn case.  Carl, however, reflected upon this more, and concluded there may, in fact, be a situation where the deficiency procedures might apply to a Section 6676 penalty.  I’m somewhat quoting Carl (via email) here.  All intelligent comments are Carl’s, while any errors are assuredly mine:

If you recall from prior posts, in PMTA 2012-016…the IRS changed its position and held that where it had frozen the refund of a refundable credit, there was no “underpayment” for purposes of section 6664(a) because the freezing of the refund should be considered as “an amount so shown [on the tax return] previously assessed (or collection without assessment)” under section 6664(a)(1)(B). So, there can be no assessment of a section 6662 or 6663 penalty in that circumstance.

However, section 6676′s penalty on excessive refund claims can apply even if the refund is never paid. Accordingly, within the PMTA, the IRS states (I think correctly) that where it freezes a refund of a disallowed refundable tax credit, it can assert a section 6676 penalty instead.

The PATH Act did two significant things to section 6676: It removed the previous exception to applying the penalty with respect to EITC claims. It changed the defense to the penalty from the troublesome proof of “reasonable basis” (an objective test) to the easier “reasonable cause” (a subjective one).

So, we may see section 6676 assessments in the future where refundable credits were improperly claimed, but the refund was frozen.…If a taxpayer improperly claimed, say, an EITC, but the refund was frozen, the IRS would later issue a notice of deficiency to permanently disallow the EITC.  The IRS could also assess a section 6676 penalty (assuming no reasonable cause), since it is the claiming of an improper refund that triggers the section 6676 penalty, not its payment.

It is still an open question whether or not the section 6676 penalty on disallowed frozen refundable credit claims will be asserted by the deficiency procedures or the straight-to-assessment procedures usually involved in the assessable penalties part of the Code.

  • In United States v. Smith, the District Court for the Western District of Washington reviewed a community spouse’s argument that her portion of the community property house could not be used to satisfy her husband’s tax debt from his fraud.  I found this write up of the case from a law firm out west, Miles Stockbridge.  The Court upheld the foreclosure, finding the wife did not show that she was entitled to the exception of collecting against community property under Section 66(c), nor did she show that the debt was not a community property debt by clear and convincing evidence, as required under Washington law.
  • Nothing too novel in US v. Wallis, from the District Court of the Western District of Virginia in February of 2016, but a good review of suspension provisions to collection statute.  In Wallis, the Service  took collection actions after the ten year period found under Section 6502 for penalties under Section 6722.  The Court found collection was not prohibited, as the statute was tolled due to the taxpayer’s bankruptcy and OIC/CDP hearings.  Sorry, couldn’t find a free version.
  • The folks over at The Simple Dollar have asked that we provide you with links to some of their content.  This post is about the best tax software for nonprofessionals to use for doing their own taxes.  This site is geared to the general public, but has some basic finance and tax info.  These are usually in the form of listicles, which are completely click bait, but are hard to hate.





Recent Case Highlights How Taxpayer Can Refresh the Statute of Limitations for Tax Evasion Even By Speaking (and Lying) to IRS

On Procedurally Taxing, we do not often dip our toes directly in criminal tax matters. Yet the civil and criminal are often closely related; see, for example Keith’s excellent post last week on collateral estoppel in a civil case following a criminal prosecution.

US v Galloway, a district court opinion out of the eastern district in California, caught my attention. It highlights a key difference in civil statute of limitations cases as compared to criminal cases. While there is no SOL on assessment for a fraudulent return there is a SOL for prosecuting tax crimes.

Galloway involves the statute of limitations for criminal tax evasion under Section 7201. Section 6531 provides a general 3 year statute of limitations for many tax crimes, though as Chapter 12.05[9] in Thomson Reuters SaltzBook IRS Practice and Procedure discusses, that general rule is “swamped” by the 6-year exception for many tax crimes, including evasion. Our colleague at the Federal Tax Crimes blog, Jack Townsend, is the principal author for the rewritten chapter on tax crimes, and in Chapter 12.05[9] he discusses the start date for statute of limitations as including events beyond the filing of the return:

By the filing, all the elements of tax evasion exist. Does that mean that tax evasion attempted by filing that return cannot be charged after six-years from the date of filing? No. As we shall see, the taxpayer can do some subsequent affirmative act to further the original attempted evasion via the return.

The Galloway case provides a further example of the “as we shall see” variety.


From the opinion:

Defendant Michael Galloway was charged on May 29, 2014, by way of grand jury indictment, with four counts of tax evasion in violation of 26 U.S.C. § 7201. (Doc. No. 1.) The four counts involve the tax years 2003 through 2006 with the defendant having filed the returns in question on October 24, 2005, November 7, 2005, November 6, 2006 and August 18, 2008. (Id.) With respect to each of the counts the Indictment specifically alleges affirmative acts of tax evasion including by “on or about February 23, 2010, making false statements to IRS Special Agents and a Tax Compliance Officer to conceal the defendant’s income during” each of the tax years in question.

Galloway argued that the SOL on prosecution commenced from the return filing date. The government disagreed, noting that Galloway’s alleged false statements to the IRS “were made within six years of the return of the indictment in this case on May 29, 2014.”

More on the government’s view:

According to the government, the statute of limitations for a tax evasion prosecution commences at the time of the defendant’s last affirmative act of evasion and an act of evasion is any conduct which serves the purpose of evasion and the likely effect of which is to mislead or conceal.

The district court agreed with the government, referring extensively to a 2013 8th Circuit case, US v Perry, 714 F3d 570 (8th Cir. 2013) which detailed a taxpayer’s evasive communication with the IRS as pegging the start date for the SOL.

Parting Thoughts

So the government survived the taxpayer’s motion to dismiss. That does not mean that the SOL issue goes away. At trial, government will have the burden to prove beyond a reasonable doubt that Galloway’s statements to the IRS agents constituted an affirmative act of evasion. A statement in and of itself to the IRS is not the trigger for the refresh; as Jack discusses in the Saltz/Book chapter, the inquiry at trial will likely be whether Galloway in his discussions with the IRS was not truthful (including being evasive or providing half truths) with the intent to hide the original return’s evasion. The moral of the story is that taxpayers who may have crossed the wrong side of the law should be very careful when asked to discuss their past actions. If they answer in a way that is false, evasive or incomplete they can find themselves extending the date for prosecution.