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.

Summary Opinions — Catch Up Part 1

Playing a little catch up here, and covering some items from the beginning of the year.  I got a little held up working on a new chapter for SaltzBook, and a supplement update for the same.  Both are now behind us, and below is a summary of a few key tax procedure items that we didn’t otherwise cover in January.  Another edition of SumOp will follow shortly with some other items from February and March.

  • In CCA 201603031, Counsel suggests various procedures for the future IRS policy and calculations for the penalty for intentional failure to file electronically.  The advice acknowledges there is no current guidance…I wrote this will staring at my paper 1040 sitting right next to my computer.  Seems silly to do it in pencil, and then fill it into the computer so I can file electronically.
  • This item is actually from March.  Agostino and Associates published its March newsletter.  As our readers know, I am a huge fan of this monthly publication.  Great content on reducing discharge of indebtedness income and taxation.  Also an interesting looking item on representing real estate investors, which I haven’t had a chance to read yet, but I suspect is very good.
  • The IRS has issued a memo regarding its decision to apply the church audit restrictions found under Section 7611 (relating to exemption and UBI issues) to employment tax issues with churches also.
  • Panama Papers are all the rage, but I know most of you are much more interested in Iggy Azalea’s cheating problems (tax and beau).  Her Laker fiancé was recorded by his teammate bragging about stepping out and she had a sizable tax lien slapped against her for failure to pay.  She has threatened to separate said significant other from reproductive parts of his body, but it appears she has approached the tax debt with a slightly more level head, agreeing to an installment agreement.
  • I’m a rebel, clearly without a cause.  I often wear mismatched socks, rarely take vitamins, and always exceed the speed limit by about 6 MPH.  But, professionally, much of my life is about helping people follow the rules.  In Gemperle v. Comm’r, the taxpayers followed the difficult part of the conservation easement rules, and obtained a valid appraisal of the value, but failed to follow the simple rule of including it with his return.  Section 170(h)(4)(B)(iii) is fairly clear in stating the qualified appraisal of the qualified property interest must be included with the return for the year in question.  And, the taxpayers failed to bring the appraiser to the hearing as a witness, allowing the IRS to argue that the taxpayer could not put the appraisal into evidence because there was no ability to cross examine.  In the end, the deduction was disallowed, and the gross valuation misstatement penalty was imposed under Section 6662(h) of 40%.  The Section 6662(a) penalty also applied, but cannot be stacked on top of the 40% penalty pursuant to Reg. 1.6662-2(c).  The Court found that there was no reasonable cause because the taxpayer failed to include the appraisal on the return, so, although relying on an expert, the failure to include the same showed to the Court a lack of good faith.  Yikes! Know the rules and follow them. It is understandable that someone could get tripped up in this area, as other areas, such as gift tax returns, have different rules, where a summary is sufficient (but perhaps not recommended).
  • The Shockleys are fighting hard against the transferee liability from their corporation.  Last year we discussed their case relating to the two prong state and federal tests  required for transferee liability under Section 6901.  In January, the Shockleys had another loss, this time with the Tax Court concluding they were still liable even though the notice of transferee liability was incorrectly titled and had other flaws.  Overall, the Court found that it met and exceed the notice requirements and the taxpayer was not harmed.
  • The Tax Court, in Endeavor Partners Fund, LLC v. Commissioner, rejected a partnership’s motion for injunction to prevent the IRS from taking administrative action against its tax partner.  The partnership argued that allowing the IRS to investigate the tax matters partner for items related to the Tax Court case (where he was not a party) would “interfere with [the Tax] Court’s jurisdiction” because the Service could be making decisions on matters the Court was considering.  The Court was not troubled by this claim, and held it lacked jurisdiction over the matters raised against the tax matters partner, and, further, the partnership’s request did not fall within an exception to the Anti-Injunction Act.
  • Wow, a financial disability case where the taxpayer didn’t lose (yet).  Check out this 2013 post by Keith (one of our first), dealing with the IRS’s win streak with financial disability claims.  Under Section 6511(h), a taxpayer can possibly toll the statute of limitations on refunds with a showing of financial disability.  From the case, “the law defines “financially disabled” as when an “individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment … which has lasted or can be expected to last for a continuous period of not less than 12 months,” and provides that “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.””  I’ve had some success with these cases in the past, but I also had my ducks in a row, and compelling facts.  So, not something the IRS would want to argue before a judge.  The Service gets to pick and choose what goes up, which is why it wins.  In LeJeune v. United States, the District Court for the District of Minnesota did not grant the government’s motion for summary judgement, and directed further briefing and hearing on whether the taxpayer’s met their administrative requirements.
  • Another initial taxpayer victory, which could result in an eventual loss, but this time dealing with TFRP under Section 6672.  In Hudak v. United States, the District Court for the District of Maryland dismissed the IRS’s motion for summary Judgement, finding that a jury could determine that a CFO (here Mr. Mules) was not a responsible person with the ability to pay.  The CFO admitted he knew the company wasn’t complying with its employment tax obligations, and knew other creditors were being paid.  He alleged, however, that he lacked the ability (as CFO) to make the required payments…seems like an uphill battle.  He could win though, as the contention is that the owner/CEO/President (Mr. Hudak) made those decisions, had that authority, and misled the CFO to believe the payments were made.  Neither side will likely be able to put much past the Court in this matter, as Judge Marvin Garbis is presiding (he who authored various books on tax, including Cases and Materials on Tax Procedure and Tax Fraud and Federal Tax Litigation).


Series of Errors With Installment Agreement and Collection Actions Leads to Taxpayer Victory on Collection Statute of Limitation

With CDP, taxpayers have a limited avenue to make the IRS face consequences for errors it makes in the assessment and collection process. In RRA 98 Congress amended Section 6502(a) and limited the circumstances when taxpayers can extend the 10-year statute of limitations (SOL) on collections. Grauer v Commissioner illustrates how taxpayers can walk away from an agreed and assessed liability when the IRS is sloppy and fails to demonstrate that a taxpayer has validly extended the statute of limitations on collections in light of Section 6502(a).

The mistakes led in Grauer to the taxpayer escaping from a 2000 assessment of over $57,000 in taxes, penalties and interest. Because this case is so fact-specific, below I repeat many of the opinion’s findings, with some paraphrasing and omitted references to the record.



  1. On April 6, 2000, petitioner Grauer filed his 1998 Federal income tax return. He reported $103,495 of taxable income, a $40,637 tax liability, and a $38,577 balance due.
  2. IRS, on May 8, 2000, assessed a $57,698 tax liability against petitioner.
  3. IRS’s account transcript relating to 1998 indicates that on July 13, 2001, it received a signed return receipt relating to a notice of intent to levy.
  4. On October 2, 2001, the parties executed Form 900, Tax Collection Waiver, on which the 10-year period of limitation for collection was extended until “May 8, 20015” (emphasis added).
  5. IRS’s account transcript relating to 1998 further indicates that on October 3, 2001, petitioner Grauer entered into an installment agreement;
  6. On February 20, 2006, the installment agreement was terminated;
  7. From 2006 to 2012 respondent issued petitioner balance due notices; and
  8. IRS, on February 11, 2013, issued petitioner a notice of intent to levy relating to 1998.

The Key Mistakes in the Case

IRS transcript shows an earlier CDP notice from a notice of intent to levy though IRS says transcript is wrong

The opinion notes that in 2001 the transcript indicated Grauer received a notice of intent to levy. Why is that important? The right to a CDP hearing  only attaches to the first notice of intent to levy. IRS told the court that its transcript on that point was wrong. The court agreed, or at least in the absence of direct evidence to the contrary, felt that the issue was unclear enough to allow the case to proceed (that is a jurisdictional issue that the IRS could not waive):

[N]o direct evidence of such a notice was produced by either party…we agree with respondent that his account transcript is inaccurate and that we have jurisdiction

Grauer claimed he did not enter into an installment agreement; this time IRS said transcript was right

Grauer said he did not enter into an installment agreement. The IRS said that he did, this time using the transcript to back its assertion. This was a key point, as in amending 6502(a) Congress limited situations to when taxpayers can extend the SOL on collection only in cases of installment agreements or levy releases after the 10-year period expires. The court here concluded that in making his affirmative defense Grauer made a prima facie case that the 2013 notice of intent to levy was issued beyond the 10-year period from assessment. At that point the IRS had the burden of producing an exception to the 10-year period, and that is where the IRS came up short because it failed to produce the installment agreement itself:

Respondent produced a waiver relating to 1998, on which the parties extended the 10-year period of limitation for collection. He did not, however, produce an installment agreement that was entered into in connection with the waiver. See sec. 6502(a)(2)(A). In fact, respondent’s only evidence that such an agreement exists is an account transcript that he concedes is inaccurate and an indecipherable and unconvincingly explained collection of numerical codes. Accordingly, we find that an installment agreement was not agreed to in connection with the waiver, and the 10-year period of limitation for collection has expired. (emphasis added).

Parting Thoughts

While the IRS was able to serve up an extension (albeit sloppily drafted with an end date in 20015), the absence of the installment agreement itself in conjunction with IRS both disavowing and relying on transcripts was what gave the taxpayer the win. While some of the IRS abuses of the late 20th century that led to RRA 98 were more theater than substance, there were many problems surrounding the IRS practice of squeezing extensions out of taxpayers entering into installment agreements. Moreover, since then, there appears to be less than careful practice when it comes to documenting entering or terminating those agreements. To that end, Keith has a good discussion of installment agreements, including the history that led to 6502(a) and often times informality at IRS when it comes to them in a post discussing the Antioco case a couple of years ago. If Grauer is representative of IRS practice, practitioners who work with taxpayers beyond the normal 10-year period on collection should be careful to put the IRS to the test to establish that it has dotted its I’s and crossed its T’s, especially when it comes to extensions surrounding installment agreements.

What about the importance of the court not allowing the IRS to rely on the transcripts? Normally, the IRS transcript serves as a business record.  That is critical because the event here occurred almost two decades ago and the IRS will have great difficulty keeping paper documents of the transaction for that long.

Because the other aspects of this business record contained errors, the transcript here did not receive the deference that the Tax Court and other courts normally give to the IRS transcript as a business record.  From the IRS’s perspective, it is problematic if it cannot rely on transcripts in court.  Maybe this is an isolated incident but the IRS should treat this as a wake up call.  The IRS must maintain high quality in its transcripts or it will start losing cases like this in a wholesale manner.


Procedure Grab Bag

Or an interesting limitations case and a limiting interest TAM.

The last SumOp got a little lengthy, so I pulled out two items to trim it down.  The first I also thought deserved slightly more explanation, as the facts were complicated and the IRS somewhat reversed course on a position.  The second case deals with an untimely refund in a quirky situation.

  • The first tax procedure item is TAM 201548019, which highlights one way that  overpayment and underpayment interest can be complicated.  The issues and conclusion were as follows:


I. Under Section 6611, does interest accrue on a general adjustment overassessment when the Service has simultaneously determined that there is an increase in tax due to adjustments to carrybacks from subsequent years, where the net effect of these increases and decreases is an overassessment?

II. If interest is allowed pursuant to Section 6611 on the general adjustment overassessment, to what date does such interest accrual run?


I & II. Yes. Overpayment interest is allowable on the portion of the overpayment used to satisfy the underpayment from the date of said overpayment to the due date of the loss year return.

The applicable facts are that taxpayer filed a return for tax year 1, and timely paid the tax due.  In a subsequent year the taxpayer filed a tentative refund based on a net operating loss carry back from a future year 2.  The Service issued a refund based on the claim.  Later, on audit, the NOL was largely disallowed from year 2, causing a potentially increased assessment for year 1, which was less than the original refund amount.  The IRS also adjusted the original return for tax year 1 for other reasons, resulting in an original net overassessment and refund even after the reduced NOL.


The taxpayer took the position that interest was due on the full overpayment amount until the tentative refund was issued based on the NOL (no interest was paid when the refund was generated by the NOL).  The IRS rejected this position somewhat.  It was willing to pay interest on the full amount, but not until the erroneous refund date.  The TAM states the IRS position is that interest on the total overpayment amount from year 1 runs until the due date of the loss year return, when the incorrect credit was generated and deemed applied.  The TAM states this is because Section 6611(b) only allows interest on an overpayment when there is a refund or an amount is credited.   Here, the Service determined the amount of refund in question was not “refunded” following the audit, and was instead applied against an outstanding underpayment from the erroneous refund generated by the incorrect NOL carryback.  The date the NOL was generated, the credit date, is the date used by the Service, instead of the actual refund date arising from the incorrect NOL carryback.  The TAM points out that neither refund nor credit are defined in the statute, and walks through the Service’s analysis of why the payment here is a credit.  The Service also stated that its prior similar TAM (201123029) was not binding and that the analysis was incorrect; specifically that an overpayment that was not in fact refunded could be considered refunded.   It will be interesting to see if something percolates through the courts with this fact pattern.

  • The second item is a tax procedure case out of the Middle District of Florida.  US v. Bates is as interesting as crippled valet, John Bates, but with tax procedure and not scheming servants. The taxpayer was a pilot who worked for an airline that went bankrupt.  Pursuant to the bankruptcy, the airline ceased paying retirement payments.  Prior to the order ceasing the retirement payments, the airline had prepaid FICA taxes on a portion of the amount that was going to be paid to the taxpayer, but the underlying income was never paid.    The taxpayer sought a refund of the withheld taxes, which was granted by Appeals.  The Service later sought to recoup what it deemed an erroneous refund, as it believed the refund request was outside the statute of limitations.

The payment was made in January of 2004.  Mr. Bates filed his refund claim on January 28, 2008.  He was denied, and went to Appeals.  While that was occurring, in May of 2009, another pilot filed suit in the Federal Claims Court seeking a refund of the FICA taxes, and claiming to represent himself and other pilots, including Bates (he was not a lawyer).  The Court tossed the claim for all plaintiffs except Kooperman, because he couldn’t represent others before the court.  In April of 2010, Appeals ok’d the entire refund to Bates.  In May of 2010, the Court order was vacated, and all claims were stayed to allow the non-Kooperman plaintiffs to get a lawyer instead of a pilot.  Bates, having a refund, did not pursue the claim.   In January 2011, the Service requested the refund back, stating the refund was erroneous because it was untimely, but also because Bates was a plaintiff at the time in the Kooperman case.  The United States in June of 2012 then sought to remove Bates from the Kooperman case because he had already received the refund.  Sticking it to him on both ends. That motion was opposed by Bates and is still pending.

Both parties agreed the refund was made, and the erroneous refund claim was timely, so the only question was whether the refund was erroneous.  Bates (having lawyered up) argued the request was timely, he was not a plaintiff, and even if he was, the government can’t recoup a refund issued by Appeals in settlement of an issue.  On the last issue, the Court relied on Johnson v. United States, 54 Fed. Cl. 187 (Fed. Cl. 2002), which held Appeals cannot issue refunds on untimely claims.

As to the timing, both parties agreed that the original refund request was outside of the stated time period in Section 6511(a).  Bates argued, however, that there was no basis for a refund until after the bankruptcy court held that Bates would not receive retirement payments under the plan.  Apparently, Bates did not have sufficient statutory grounds for this position, as the court stated it was essentially an argument for equitable tolling.   I really should have pulled the briefs, as I would assume there would be some Code or Bankruptcy Code argument to be made that the statute was suspended until all facts were available (even if it was a losing one).

The Court apparently has not been following Carl Smith’s various strong posts on equitable tolling.  The Court held that the results were unusual for Bates and harsh, but that it lacked authority to apply equitable tolling and cited to Vintilla v. United States, 931 F.2d 1444 (11th Cir. 1991).  The Court also noted it lacked the authority to grant interest abatement on the erroneous refund, as the taxpayer requested, even though Appeals had mistakenly issued the refund, and that authority was vested with the Department of Treasury, which can only be reviewed by the Tax Court. See Section 6404(h).