Lack of Records as Reasonable Cause for Late Filing.

• Author: Stein, Ronald A.

Does the lack of records necessary to complete a tax return ever excuse late filing? A recent decision of the Court of Federal Claims (LFAM Corp. (Ct. Fed. Claims 1999)) seems to suggest not, but the issue is hardly free from doubt.

LFAM filed its 1993 corporate income tax return two months late. The corporation asserted that it was unable to file by the statutory due date because (among other things) it had not yet received a Schedule K-1 from a particular partnership and was therefore unaware of its share of flow through income. That share turned out to be nearly $400,000, resulting in a tax liability in excess of $15,000. After paying the tax and a late filing penalty, LFAM sued for a refund.

The Court of Federal Claims rejected LFAM's contention that the missing Schedule K-1 constituted reasonable cause, Relying on Boyle, 469 US 241 (1985), the court held that the corporation had a categorical duty to file by the statutory deadline. The court reasoned that, just as Boyle prevented a taxpayer from avoiding a penalty by delegating filing responsibility to a third party, a taxpayer cannot escape the penalty merely because it "passively" waited for a third party to provide information, even if material to the return.

Critique

The Court of Federal Claims is not the first to reject the "lack of records" defense for a late income tax return. On several occasions, the Tax Court has done the same. It has taken the position that the taxpayer should have sought a filing extension (e.g., Feldman, TC Memo 1993-17; Fluet, TC Memo 1986-555; Hackett, TC Memo 1970-17) or should have filed by the due date and, if necessary, amended later (Randall, TC Memo 1997-351). Both rationales are problematic.

The "extension" rationale begs the question of whether, without material tax information, a taxpayer can even make a bona fide and reasonable estimate of his liability required for a valid extension (Crocker, 92 TC 899 (1989)). This aside, nothing in Sec. 6651 (a) indicates that reasonable cause for late filing can exist only after the nine-month period in which filing may be extended, or in Regs. Sec. 301.6651-1 (a) (1), which states only that reasonable cause for delay exists when the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to file the return within the prescribed time.

The "file now, amend later" rationale, as noted, also raises concerns. Sec. 7206(1) specifically makes it a felony for a taxpayer to willfully...