Regulations take precedence over common law mailbox rule

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Ninth Circuit, breaking with its own precedent, held that Regs. Sec. 301.7502-1(e)(2) provides the exclusive rules regarding the means of proving delivery of an original or amended tax return, so the taxpayer could not prove an amended return was timely delivered based on the common law mailbox rule.

Background

Howard and Karen Baldwin had a net operating loss of $2.5 million from their movie production business in 2007. The couple filed an amended return for 2005, carrying back the 2007 loss to that year and claiming a refund of $167,000.

Under the statute of limitation for refunds, to obtain the refund, the Baldwins were required to file the amended return for 2005 by Oct. 15, 2011. They claimed that they sent the return long before the deadline, in June 2011. The IRS, however, did not receive that return or any other return from them mailed with a postmark on or before the deadline. The IRS did receive an amended return from the Baldwins in 2013, but it was not postmarked before the deadline. Thus, the IRS denied the couple's refund claim as untimely.

The Baldwins then filed a refund suit in district court. The Baldwins argued that the return was filed timely under the common law mailbox rule and provided evidence in the form of testimony from their employees who had allegedly mailed the return. The IRS argued that under Regs. Sec. 301.7502-1(e), which provides Treasury's exclusive rules for determining whether a return or document has been timely filed, the return had not been filed in time.

The district court found that Regs. Sec. 301.7502-1(e) supplemented, rather than supplanted, the common law mailbox rule. Accepting the testimony of the Baldwins' employees, the court found that the Baldwins had timely filed the amended return under the common law mailbox rule, so the court had jurisdiction to determine if the Baldwins were entitled to a refund.

After a bench trial, the district court held in the couple's favor, awarding them a refund of $167,000 and litigation costs of $25,000. The IRS appealed the district court's decision to the Ninth Circuit, again arguing that Regs. Sec. 301.7502-1(e) barred application of the common law mailbox rule and that, under the regulations, the Baldwins had not filed their amended return timely.

Timely delivery: The law and its history

Before 1954, documents were timely filed only if they were physically delivered to the IRS by the applicable deadline. This rule could lead to harsh results due to no fault of taxpayers, so some courts responded by applying the less-stringent common law mailbox rule. Under this rule, proof of proper mailing, including by testimonial or circumstantial evidence, gives rise to a rebuttable presumption that the document was physically delivered to the IRS in the time such a mailing would ordinarily take to arrive.

In 1954, Congress took action on the subject by enacting Sec. 7502. Sec. 7502(a)(1) provides that if a document is actually received by the IRS after the applicable deadline, it will nonetheless be deemed to have been delivered on the date that the document is postmarked if the document is postmarked on or before the deadline. If the document is never delivered at all (for example, because it gets lost in the mail), the exception by its terms does not apply. In addition, Sec. 7502(c)(1) provides a presumption that a document sent by registered mail (rather than regular mail) was delivered even if the IRS claims it did not receive it, so long as the taxpayer produces the registration as proof.

Over the years following the enactment of Sec. 7502, appellate courts took two positions regarding its effect on the common law mailbox rule. Some courts held that Sec. 7502 supplies the exclusive exceptions to the physical-delivery rule, thereby displacing the common law mailbox rule altogether. Other courts, including the Ninth Circuit, interpreted the statute as providing a safe harbor, not as limiting taxpayers' ability to resort to alternative exceptions to the physical-delivery rule.

Noting that this split caused similarly situated taxpayers to be treated differently based on where they lived, the Service sought to resolve this inequity by amending Regs. Sec. 301.7502-1(e). The amended regulation interprets Sec. 7502 as creating the exclusive exceptions to the physical-delivery rule. The regulation makes clear that, unless a taxpayer has direct proof that a document was actually delivered to the IRS, Sec. 7502 provides the exclusive means to prove delivery, and recourse to the common law mailbox rule is no longer available.

The Ninth Circuit's decision

The Ninth Circuit found that Regs. Sec. 301.7502-1(e)(2) is a valid regulation and is the exclusive means for determining whether a return has been timely filed, so the court applied it to the Baldwins' case. Because timely filing is a mandatory requirement for maintaining a tax refund suit, and under the regulation the Baldwins had not filed their 2005 amended return timely, the court reversed the district court's decision and instructed it to dismiss the case.

To determine whether Regs. Sec. 301.7502-1(e)(2) is valid, the court employed the two-step analysis under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In step one of this analysis, a court determines if Congress has directly spoken to the precise question at issue. If it has, Congress's resolution of the issue controls and the agency is not free to adopt an interpretation at odds with the statute's plain language. If the statute is silent or ambiguous on the question at hand, the court moves to step two, in which it determines whether the agency's interpretation is based on a permissible construction of the statute.

In step one of its Chevron analysis, the Ninth Circuit concluded that Sec. 7502 is silent as to whether the statute displaces the common law mailbox rule, failing to address whether a taxpayer who sends a document by regular mail can rely on the common law mailbox rule to establish a presumption of delivery when the IRS claims it has not received the document. While the statute provides a presumption of delivery when a taxpayer sends a document by registered mail, and it authorizes the creation of similar rules for certified mail, electronic filing, and private delivery services, "as to documents sent by regular mail, the statute is conspicuously silent" (slip op. at 11).

Moving to the second test — whether the regulation is based on a permissible construction of the statute — the Ninth Circuit stated that the circuit split on the issue showed that Congress's intent in enacting Sec. 7502 could reasonably be construed as being to supplement the then-existing common law mailbox rule or to supplant it altogether. The court found that the IRS's choice was reasonable in light of the principle expressed by the Supreme Court that "where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent" (slip op. at 12, quoting Hillman v. ­Maretta, 569 U.S. 483, 496 (2013) (alteration omitted)).

The Baldwins contended that it was unreasonable to construe Sec. 7502 as having supplanted the common law mailbox rule, based on the principle of statutory construction that the common law should not be deemed repealed unless the language of the statute in question clearly and explicitly states this purpose. The Ninth Circuit, while granting the validity of this argument based on a principle of statutory interpretation, found it to be irrelevant, because "[a]s is true in this case, an agency's construction can be reasonable even if another, equally permissible construction of the statute could also be upheld" (slip op. at 12).

The Baldwins also contended that Sec. 7502 and Regs. Sec. 301.7502-1(e)(2) apply only when a tax document was sent before, but received after, the applicable due date. In their view, these provisions do not apply when, as here, a tax document was never received at all. The Ninth Circuit found they were mistaken, because Sec. 7502(c)(1)(A) also addresses situations in which the IRS claims not to have received a tax document at all. This subsection provides that, for documents sent by registered mail, the registration will be treated as "prima facie evidence that the [document] was delivered." Thus, the Baldwins were wrong in claiming that Sec. 7502 and Regs. Sec. 301.7502-1(e)(2) did not apply to their situation.

Finally, the Baldwins maintained that Regs. Sec. 301.7502-1(e)(2) does not apply in their case because it was promulgated in August 2011, two months after they claimed to have mailed their amended 2005 return. However, as the court observed, Regs. Sec. 301.7502-1(g)(4) expressly provides that Regs. Sec. 301.7502-1(e)(2) retroactively applies to all documents mailed after Sept. 21, 2004. Because this retroactivity provision complies with Sec. 7805(b), which allows the IRS to make regulations apply retroactively as far back as the date of their proposal, the court rejected this argument.

Reflections

As the Ninth Circuit states in its opinion, both the IRS's interpretation of Sec. 7502 in the regulations and the Baldwins' interpretation of the statute were reasonable. However, it properly gives the nod to the IRS based on a Chevron analysis, which currently is the Supreme Court's endorsed method for determining whether a regulation is a valid interpretation of a statute. However, it appears that a majority of current Supreme Court justices now generally oppose the use of the Chevron analysis, and its days as the test for regulatory validity may well be numbered.

While the IRS's interpretation of Sec. 7502 in the regulations is favorable to the IRS, based on the plain language of Sec. 7502, it is reasonable to read the statute as expressing Congress's intent to provide one easily applied, objective standard. As the Second Circuit stated in Deutsch, 599 F.2d 44 (2d Cir. 1979), a case involving the application of Sec. 7502 to a taxpayer's Tax Court petition that the court never received, "[b]oth administrative convenience and the likelihood that a petition never received was never sent" support limiting proof of mailing to some type of ­objective evidence.

Baldwin, 921 F.3d 836 (9th Cir. 2019)   

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