Doe v. KPMG, LLP

In December 2000, John Doe I and John Doe II (plaintiffs) purchased short option strategy (SOS) tax shelters from KPMG, LLP (defendant). In 2001, the Internal Revenue Service (IRS) issued 25 summonses to KPMG requesting the names of SOS purchasers and other related information. In December 2002, the United States District Court for the District of Columbia ordered KPMG to comply with nine of the summonses. In August 2003, contrary to KPMG’s prior representations to the IRS, KPMG informed the IRS and the Does that the Does’ 2000 SOS purchases were responsive to an IRS summons. The Does sued KPMG in federal court in Texas, seeking declaratory and injunctive relief barring KPMG from revealing their identities to the IRS. To alleviate its concern that 26 U.S.C. § 6501’s three-year statute of limitations for the assessment and collection of additional tax would expire before the resolution of the Doe-KPMG litigation, the IRS asked the Does to consent to extend the limitations period. When the Does declined, the IRS intervened in the Texas litigation. The district court ordered the parties to take all necessary steps to prevent the limitations period from expiring, but the Does refused to do so. After rejecting the IRS’s request to hold the Does in contempt, the district court ordered that the statute of limitations be equitably tolled pursuant to 26 U.S.C. § 6503(a)(1) and other equitable principles. The Does appealed. The IRS argued that (1) 26 U.S.C. § 7402(a) impliedly authorized equitable tolling, (2) the tax code should be broadly read in the IRS’s favor, (3) statutes diminishing sovereign immunity should be read in the sovereign’s favor, and (4) the Does did not have clean hands.