Petition for Review of a Decision of the United States Tax
Court Agency No. 8637-13
TJOFLAT, and WILLIAM PRYOR, Circuit Judges, and MURPHY,
TJOFLAT, CIRCUIT JUDGE:
of us do, John and Joan Finnegan ("Taxpayers")
hired someone to prepare their tax returns. For eight years,
Taxpayers' return preparer included bogus claims on their
returns. Taxpayers apparently were oblivious to this. The
return preparer was indicted for his fraudulent behavior and
pled guilty. Eventually, the IRS came calling: to recover the
money it was due all along, the IRS issued a notice of
deficiency to Taxpayers for those eight years.
challenged the notice of deficiency in the Tax Court. They
argued that the IRS waited too long to collect. Generally,
the IRS must make assessments within three years after a tax
return is filed. But there's an exception, and the
three-year window is suspended, "[i]n the case of a
false or fraudulent return with the intent to evade
tax." (We call this the fraud exception.)
Taxpayers argued that the fraud exception did not apply
because the IRS could not meet its evidentiary burden and
show that their returns were in fact fraudulent. Taxpayers
admitted that their return preparer created fraudulent
returns for his other clients, but, Taxpayers said, the IRS
could not prove that the return preparer falsely or
fraudulently prepared their returns. Crucially,
Taxpayers conceded-time and time again-that if the Tax Court
did find that their returns were fraudulent, the exception to
the three-year window would be triggered.
case proceeded to trial before the Tax Court. At trial, the
IRS presented prior testimony that the return preparer gave
when he testified against one of his former business
associates. In this testimony, the return preparer
said every tax return he prepared during the relevant time
period included some fraudulent entries. Additionally, the
IRS presented affidavit testimony from the return preparer.
In the affidavit, he swore that he knowingly prepared false
tax returns for Taxpayers during the relevant time period.
Court ruled in favor of the IRS-it found that the return
preparer had prepared Taxpayers' returns falsely or
fraudulently with the intent to evade tax. Thus, the Court
found, the fraud exception was triggered, and the IRS's
notice of deficiency was timely. Taxpayers filed a motion for
reconsideration. Having lost on the merits of their defense,
they pivoted-or did a 180, really. In the motion, Taxpayers
argued-for the first time-that the fraud exception was not
triggered because they, the Taxpayers, had not falsely or
fraudulently prepared their returns with intent to evade tax.
That is, they claimed that fraud by a tax preparer (and not a
taxpayer) did not trigger the fraud exception. The Tax Court
held that Taxpayers waited too long to raise this legal
argument and rejected it.
appeal, Taxpayers raise the same eleventh-hour argument and
say that fraud by the tax preparer does not trigger the fraud
exception. They also argue that the Tax Court erred by
admitting the return preparer's former testimony and
affidavit. We reject these arguments and affirm.
divide our discussion into three parts. First, we set out the
facts and procedural history. Next, we consider the arguments
on appeal. Finally, we conclude.
informant tipped off the IRS about Taxpayers' return
preparer. In turn, the IRS launched an investigation, and
here's what the investigation turned up: the return
preparer and his associates prepared around 750 to 800
fraudulent returns every year for 11 years. These fraudulent
returns had several common features. For example, the returns
showed large refunds and partnership losses. The large
partnership losses flowed through to the individual returns,
and there were deductions for contributions to retirement
plans. The bogus returns also noted payments between
partnerships and their partners. The addresses for the
partnerships changed; as a result, the partnership returns
were filed with different IRS Centers, which lowered the
chances of detection. Finally, many of the same dollar
amounts repeated themselves and appeared on several of the
returns fit the mold. Taxpayers owned a rental property, and
their return preparer advised them to run their rental income
through a partnership. Taxpayers formed a partnership but
never transferred ownership of the rental property to the
partnership. In fact, they didn't even enter into a
partnership agreement. The Taxpayers never wrote checks to
the partnership; nor did the partnership write checks to
them. Yet their partnership returns showed a capital
contribution from one Taxpayer.
partnership returns also showed large losses. One year, the
loss was caused in part by a guaranteed payment to the
partners. Expenses also played a role in the loss, and at
least two of the claimed expenses used the repeating dollar
amounts that were common across many of the bogus returns. In
turn, Taxpayers' individual returns claimed these losses.
Eventually, they began claiming losses from a second
partnership: one they had never heard of until the IRS got
involved. The addresses of both partnerships changed over the
years. And- unsurprisingly-Taxpayers' refunds increased
return preparer was indicted and pled guilty to conspiring to
defraud the United States and to interfering with the
administration of the internal revenue laws. The return
preparer then testified against one of his former business
associates. During the testimony, the return preparer said
that "[e]ach and every one" of the returns he
prepared during the relevant time "contain[ed] some
fraudulent entries." Taxpayers were not part of the
grand jury investigation into the return preparer and his
associates. Nor were Taxpayers' returns used to support
the indictments against the return preparer and his
five years after the dust settled in the criminal
proceedings, the IRS came calling: it issued a notice of
deficiency to Taxpayers for the eight years that Taxpayers
submitted fraudulent returns. The IRS also tacked on a 20%
accuracy-related penalty for each year based on
challenged the notice of deficiency and filed a petition in
the Tax Court. In the petition, Taxpayers claimed the IRS had
missed the three-year collection window and thus was too
late. The IRS answered and alleged that the fraud exception
to the three-year window applied because the return preparer
had fraudulently prepared Taxpayers' returns with intent
to evade tax.
relied on the Tax Court's decision in Allen v.
Commissioner, 128 T.C. 37 (2007), to support its reading
of the fraud exception. In Allen, the Tax Court held
that the fraud exception is triggered, and the three-year
window suspended, by the return preparer's fraudulent
intent. 128 T.C. at 37. The petitioner argued that the fraud
exception was triggered only by the taxpayer's fraudulent
intent, and the Court expressly rejected that argument.
Id. at 39-40. It explained, "The statute keys
the extension to the fraudulent nature of the return, not to
the identity of the perpetrator of the fraud," and the
Court declined to read "of the taxpayers" into the
statute. Id. at 40.
didn't hide the Allen ball, either; it cited
Allen again and again. During informal discovery,
the IRS responded to a discovery request and explained that
it was not barred by the statute of limitations, and it cited
Allen as authority for that statement. During
pretrial motion practice, the IRS cited Allen five
more times. It cited Allen again in its pretrial
memorandum and in both briefs that it filed after the trial.
defense, at least before the Tax Court handed down its
decision, was this: the IRS didn't have enough evidence
to show that Taxpayers' fraudster return preparer had
falsely or fraudulently prepared their returns. Thus,
according to Taxpayers, because there was no showing of
fraud, the fraud exception was not triggered. Indeed, this is
the argument they made in their opening brief, under the
heading "because Respondent failed to prove fraud by
clear and convincing evidence, the period of limitations
within which to assess additional taxes is time barred."
And to support their argument, Taxpayers relied on
Eriksen v. Commissioner, 104 T.C.M. (CCH) 46, 2012
WL 2865875 (2012). As here, the IRS in Eriksen
argued that the fraud exception was triggered based on the
fraudulent intent of the petitioners' return preparers.
2012 WL 2865875, at *1. And as here, the issue before the Tax
Court in Eriksen was "whether [the IRS] ha[d]
clearly and convincingly proven that any of petitioners'
returns w[ere] false or fraudulent." Id. The
Court in Eriksen found that the IRS met its burden
for some petitioners but not for others. Id. So,
Taxpayers relied on Eriksen and argued that the case
against them was most like the case against the petitioners
for which the IRS came up short in proving fraud. Doing so,
Taxpayers never challenged Allen as an appropriate
hook for triggering the fraud exception.
the Tax Court issued its decision, Taxpayers never challenged
Allen or its logic at all. They stipulated before
[t]he only issue in dispute is whether [Taxpayers']
individual income tax returns and partnership tax returns for
the years at issue were false and fraudulent and prepared
with the intent to defeat or evade tax. . . . If the answer
is [yes], then the asserted deficiencies and accuracy-related
penalties will not be challenged by [Taxpayers].
during their opening statement at trial, Taxpayers said this:
So any fraud that may be proved by [the return preparer] . .
. it's attributed to the [Taxpayers] personally, and
they're [the IRS] alleging that it's a fraudulent
return. And under Allen v. Commissioner, therefore,
it would be proper for this Court to find fraud because . . .
of the preparer's activities.
But we don't have any evidence that was related by [the
IRS] to the effect that [the] [fraudulent] activity also
concerned [Taxpayers], as well as [the return preparer's]
other numerous clients.
resolving any doubt about Taxpayers' position on the
Allen case, the Tax Court asked Taxpayers-point
blank-whether they contested it:
THE COURT: There is no objection as to the statute of
limitations in this case; is that correct?
[TAXPAYERS]: Yes, there is.
THE COURT: There is. And what's the basis for the
[TAXPAYERS]: The tax years are 1994 through 2001. So under
[§] 6501(a), that's beyond the three-year statute of
limitations. [The IRS] alleges that under 6501(c), if
there's clear and convincing evidence of fraudulent
intent or filing with intent to evade, ...