With tax litigation, it is often best to raise every argument possible. But what if the law seems clear on an issue and then, during the course of the tax dispute, another court issues an opinion making the law less clear? If this isn’t discovered or realized soon enough, should the taxpayer be precluded from raising the issue? The court addresses this in Finnegan v. Commissioner, No. 17-10676 (11th Cir. 2019).
Facts & Procedural History
The case involves a tax preparer who filed fraudulent tax returns. The IRS caught up with the tax preparer and then, years later, corrected the taxpayer’s return. The IRS did so based on the tax return preparer having committed fraud in preparing the tax return.
At the time the case was before the U.S. Tax Court, the law seemed clear that fraud by the tax return preparer was imputed to the taxpayer and sufficient to hold open the statute of limitations for the IRS to assess tax for the taxpayer. Given this law, the taxpayers attorneys decided not to challenge the law. Rather, they challenged whether the IRS could meet its burden to establish fraud in the first place.
The IRS presented testimonial evidence from the tax return preparer that every return they prepared included fraudulent items. This led the U.S. Tax Court to conclude that fraud had occurred.
On appeal, the taxpayer sought to challenge the legal question as to whether fraud by a tax preparer is imputed to the taxpayer.
Raising an Issue for the First Time on Appeal
The taxpayer advanced several arguments for why he should be able to raise the issue for the first time on appeal. This included the timing of the other court case that brought the law into question, that the question was a legal question that impacts other taxpayers, etc.
These arguments are in line with the limited exception that allows the court to consider issues for the first time on appeal. The appeals court notes the exception includes the following:
- when the issue “involves a pure question of law” and “refusal to consider it would result in a miscarriage of justice,
- when “the appellant raises an objection to an order which he had no opportunity to raise at the [lower] court level,”
- when “the interest of substantial justice is at stake,”
- when “proper resolution is beyond any doubt,” and
- when the “issue presents significant questions of general impact or of great public concern.”
If the court feels that these factors are satisfied, it may allow the taxpayer to raise the issue for the first time on appeal.
Missed Opportunity to Contest
The court did not accept the taxpayer’s arguments. It found that none of the factors cited above were met.
The opinion itself focused on the fact that the taxpayer had an opportunity to contest the legal issue and he expressly chose not to do so. This was apparently included in the taxpayer’s pleadings.
The court also focused on the prejudice to the IRS, which had built its case on the idea that fraud by a tax return preparer is imputed to the taxpayer.
While this case did not involve a refund claim, this same issue often arises in tax refund litigation. With tax refunds, the taxpayer is generally limited to the claim stated in the administrative refund claim. Taxpayers cannot vary the claim later in court when suing to recoup the refund. The courts apply the variance doctrine to preclude this result.
This brings us back to the general rule for taxpayers. Taxpayers are typically well advised to raise every legal argument possible and let the court address them, as you never know what legal theory will carry the day when it comes to tax litigation.