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:
Lindsay was incarcerated from April 2013 to June 2015. In May 2013, he executed a Universal Power of Attorney (“POA”) appointing Keith Bertelson as his attorney in fact. According to the terms of the POA, Bertelson had complete control of Lindsay’s bank accounts and retained full authority to manage his affairs. While incarcerated, Lindsay directed Bertelson to file his tax returns and pay his taxes. Although Bertelson assured Lindsay that he was filing his returns and paying his taxes, he was actually embezzling hundreds of thousands of dollars from him. Lindsay’s tax returns for 2012 through 2015 were not timely filed, nor were his taxes or estimated quarterly taxes timely paid. While still incarcerated, Lindsay discovered Bertelson’s malfeasance and revoked the POA in April 2014. Lindsay then sued Bertelson for embezzlement and after a jury trial in 2015, he was awarded $705,414.61 in actual damages and $1 million in punitive damages. Once Lindsay was released from prison, he eventually filed all delinquent tax returns and paid the taxes owed (plus interest) and $425,307.98 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.
In his complaint, Lindsay argued that his failure to file his tax returns and pay his taxes was due to reasonable cause and not willful neglect. He alleged that his incarceration qualified as a “disability” and that, considering his unusual circumstances, penalizing him for late filing and payments would go against equity and good conscience. He demanded a jury trial and sought a refund of the penalties that he paid.
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. Lindsay failed to act with such care and failed to demonstrate reasonable cause.
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