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As we discussed above, the ongoing litigation between Mr.
Dunne, Mr. Marcus, and FRC was not determinative of the issue of
when Mr. Dunne ceased to be a beneficial owner of FRC and the
related income tax consequences. While we agree that Mr. Dunne’s
shareholder status was a confusing issue, we are not persuaded
that this litigation prevented petitioners from filing their
returns on time.
Contrary to petitioners’ arguments, being involved in
litigation does not excuse them from filing their Federal income
tax returns on time. The cases they cite do not support their
argument because petitioners would have been required to file
income tax returns even if they had been awarded nothing under
the arbitration and subsequent litigation, and petitioners were
not suffering from incapacitating illnesses or otherwise disabled
from filing a return during any relevant time. See Commissioner
v. Walker, 326 F.2d 261 (9th Cir. 1964), affg. in part and revg.
in part 37 T.C. 962 (1962); Adams v. Commissioner, T.C. Memo.
1990-478; Harris v. Commissioner, T.C. Memo. 1969-49.
Petitioners’ argument that they did not have all of the
necessary records to file their 1997 return because they did not
receive Mr. Dunne’s Schedule K-1 in time is also unpersuasive.
Petitioners correctly point out that the Internal Revenue Manual
(IRM) states that the inability to obtain records may constitute
reasonable cause. 6 Administration, Internal Revenue Manual
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