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.