John Finnegan v. Commissioner of Internal Revenue, 926 F.3d 1261

Background

John and Joan Finnegan hired a tax return preparer who, over eight years, prepared returns containing repeated bogus items (partnership losses, repeated dollar amounts, changing partnership addresses) consistent with a larger fraud scheme.
The preparer was indicted and pled guilty; he later testified in a separate criminal trial that every return he prepared in the relevant period contained some fraudulent entries and signed an affidavit admitting he prepared false returns for the Finnegans.
The IRS issued a notice of deficiency to the Finnegans for eight years and assessed accuracy-related penalties; the Finnegans petitioned the Tax Court, arguing the three-year limitations period under 26 U.S.C. §6501(a) barred assessment.
IRS invoked the fraud exception to the limitations period (26 U.S.C. §6501(c)(1)), relying on Tax Court precedent (Allen) that preparer fraud triggers the exception, and offered the preparer’s prior testimony and affidavit after the preparer proved unavailable.
The Tax Court admitted the preparer’s out-of-court statements under the statement-against-interest exception and found the Finnegans’ returns were false/fraudulent with intent to evade tax; the Finnegans’ motion for reconsideration—arguing Allen should be overruled—was denied as waived.
On appeal, the Eleventh Circuit affirmed: (1) the Finnegans waived their challenge to Allen by conceding it below and raising the argument only after judgment, and (2) the Tax Court did not abuse its discretion admitting the preparer’s prior statements under Rule 804(b)(3).

Issues

Issue	Finnegan's Argument	Commissioner/IRS Argument	Held
Whether the §6501(c)(1) fraud exception is triggered by fraud of a return preparer rather than only by taxpayer fraud	The fraud exception applies only if the taxpayer acted with intent to evade tax; preparer fraud alone cannot trigger the exception	Allen is controlling: the statute extends by reason of a false or fraudulent return, not by the identity of the perpetrator; preparer fraud suffices	Waiver: Finnegans waived this argument by affirmatively conceding Allen below and raising the issue only in a post-judgment motion; court declined to consider it on appeal
Admissibility of the preparer’s prior testimony and affidavit (hearsay)	The prior statements were inadmissible hearsay and untrustworthy because they were made during cooperation/guilty-plea context	Statements were admissible under the statement-against-interest exception (Declarant unavailable; statements exposed him to liability; corroborating circumstances exist)	No abuse of discretion: statements qualified as statements against interest and were corroborated by other evidence (modus operandi, witness testimony)
Motion for reconsideration based on a subsequent Federal Circuit decision (BASR)	Relief under Tax Court Rule 161 / Fed. R. Civ. P. 60(b)(6) was warranted because BASR changed the law and the Tax Court’s adoption of Allen tainted proceedings	The Finnegans waived the Allen challenge and provided no adequate reason for delay; BASR is not controlling and does not justify Rule 60 relief	Denied: Tax Court properly rejected the untimely new legal theory as waived; no extraordinary circumstances to grant relief

Key Cases Cited

BASR P’ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015) (Federal Circuit decision holding fraud exception triggered only by taxpayer intent)
L.V. Castle Inv. Grp., Inc. v. Comm’r, 465 F.3d 1243 (11th Cir. 2006) (standard of review for Tax Court decisions)
Aldana v. Del Monte Fresh Produce N.A., Inc., 741 F.3d 1349 (11th Cir. 2014) (motions under Rules 59/60 cannot be used to raise arguments that could have been raised earlier)
Eghnayem v. Bos. Sci. Corp., 873 F.3d 1304 (11th Cir. 2017) (abuse-of-discretion standard for evidentiary rulings)
United States v. Scopo, 861 F.2d 339 (2d Cir. 1988) (allocution or guilty plea is a statement against penal interest)