Imprisonment does not constitute reasonable cause

The reasonable-cause defense was denied even though the attorney of a jailed taxpayer had assured the taxpayer the returns were filed and taxes were paid.
By Laura Lee Mannino, CPA, J.D., LL.M.

The Fifth Circuit affirmed a district court's decision holding that an incarcerated taxpayer did not satisfy the reasonable-cause exception to penalties for failing to timely file a return and pay taxes because those duties cannot be delegated. Imprisonment did not render the taxpayer incapable of complying with his filing requirements.

Facts: Jeffery Allen Lindsay was incarcerated from April 2013 to June 2015. Soon after his imprisonment began, he executed a universal power of attorney (POA) naming Keith Bertelson as his attorney-in-fact. Lindsay instructed Bertelson to file his tax returns and pay his taxes, and Bertelson reported back to Lindsay that he was handling Lindsay's tax obligations. Contrary to his assurances, Bertelson did not file any tax returns and did not pay any taxes or estimated quarterly taxes on Lindsay's behalf. Instead, Bertelson was embezzling hundreds of thousands of dollars from Lindsay.

When Lindsay learned of the theft in April 2014, he revoked the POA. He also sued Bertelson for embezzlement and was awarded $705,415 in damages and $1 million in punitive damages. Lindsay's tax returns for 2012 through 2015, however, remained unfiled, and the related liabilities were unpaid while he remained incarcerated. After his release from prison, he filed the delinquent returns and paid all amounts due, including interest and $425,308 in penalties.

In 2018, Lindsay sought a refund of the penalties he paid relating to the years he was imprisoned. The IRS denied his request, and he filed suit in federal district court in Texas. The court held for the government, and Lindsay appealed to the Fifth Circuit.

Issues: Sec. 6651(a)(1) imposes a penalty for a failure to file any required return. Sec. 6651(a)(2) imposes a separate penalty for the failure to pay any amount due on a required return. Sec. 6654(a) imposes another penalty for a failure to pay estimated quarterly taxes. All three penalties can be avoided if the taxpayer can show that the failure is due to reasonable cause and not due to willful neglect. Regs. Sec. 301.6651-1(c)(1) indicates that a failure to file or pay is considered to be for reasonable cause where the taxpayer has exercised ordinary business care and prudence but was unable to file the return or pay the tax.

In Boyle, 469 U.S. 241 (1985), rev'g 710 F.2d 1251 (7th Cir. 1983), the Supreme Court stated that hiring an attorney to assist with filing taxes satisfies the first part of reasonable cause, to exercise ordinary business care and prudence. It does not, however, satisfy the entire reasonable-cause requirement. "Congress intended to place upon the taxpayer an obligation to ascertain the statutory deadline and then to meet that deadline, except in a very narrow range of situations," Chief Justice Warren Burger wrote for the majority. "That the attorney, as [the taxpayer's] agent, was expected to attend to the matter does not relieve the principal of his duty to meet the deadline" (Boyle, 469 U.S. at 249-50). Further, the Tax Court held in George, T.C. Memo. 2019-128, that incarceration does not constitute reasonable cause for failure to file a return.

Lindsay argued that Boyle did not apply because he was incapable of complying with the filing deadlines due to his incarceration. In his concurring opinion to Boyle, which was joined by three other justices, Justice William Brennan stated that "there is a substantial argument that the 'ordinary business care and prudence' standard is applicable only to the 'ordinary person' — namely, one who is physically and mentally capable of knowing, remembering, and complying with a filing deadline" (Boyle, 469 U.S. at 253). Lindsay also cited Brown, 630 F. Supp. 57 (M.D. Tenn. 1985), in which a district court relied on Brennan's language in holding that the reasonable-cause defense was satisfied where an elderly taxpayer's attorney became ill shortly before the due date for filing a return, and the taxpayer was incapable of meeting the standard of ordinary business care and prudence due to his age, health, and lack of experience.

Holding: The Fifth Circuit held that Lindsay was in fact capable of complying with the filing deadlines even though he was incarcerated. Since he was able to employ a CPA and conduct other business while in prison, he was capable of exercising ordinary business care and prudence to ensure his filing responsibilities were satisfied. Because Lindsay was capable of meeting the criteria, the Fifth Circuit had no need to address whether Brown and Brennan's concurring opinion in Boyle permit the reasonable-cause standard to be satisfied where a taxpayer is incapable of complying with filing deadlines.

  • Lindsay, No. 20-50994 (5th Cir. 7/9/21), aff'g No. P:19:CV-065 (W.D. Tex. 9/30/20)


— By Laura Lee Mannino, CPA, J.D., LL.M., associate professor of taxation, St. John's University, Queens, N.Y.


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