The Ninth Circuit held that for purposes of the limitation period for adjustments of partnership losses under former Sec. 6229(a), a delinquent partnership return has been "filed" when an IRS official authorized to obtain and receive delinquent returns informs a partnership that a tax return is missing and requests that tax return, the partnership provides the tax return in the manner requested, and the IRS official receives the tax return.
Background
Seaview Trading LLC is classified as a partnership for federal tax purposes. In 2001, Robert Kotick was Seaview's majority partner, owning over 99% of the company. For 2001, Seaview prepared a Form 1065, U.S. Return of Partnership Income, that reported a $35.5 million loss from a tax-shelter transaction.
Seaview believed it filed this return in July 2002, having mailed it to the proper IRS service center in Ogden, Utah. The IRS, however, had no record of receiving Seaview's 2001 return. Although Seaview had a certified mail receipt for the return's mailing, it conceded that it could not prove that the IRS received its 2001 return in 2002.
In March 2004, the IRS opened an audit of Robert Kotick for 2001 and 2002. During the audit, Kotick gave the IRS an unsigned copy of Seaview's 2001 Form 1065. Because partnership returns are required to be audited separately, the IRS did not audit Seaview as part of its audit of Kotick.
In July 2005, an IRS revenue agent sent Seaview a letter that notified the LLC that the IRS had not received its 2001 federal partnership income tax return. The IRS, in an attachment to the letter, asked Seaview if it had filed a return and, if so, what type of return was filed and when and at which service center Seaview filed it. It also requested that the LLC provide all retained copies of the return, as well as copies of receipts and other proof of mailing for the return. In September 2005, Seaview's accountant faxed the IRS revenue agent a signed copy of Seaview's 2001 Form 1065 return, along with a certified mail receipt for its mailing.
In October, the IRS sent Seaview a letter telling the LLC that it had been selected for audit. Again, the IRS asked for a copy of the 2001 return. It further asked for any amendments to the return and documents related to certain entries on Seaview's return.
As part of its examination of the LLC, the IRS interviewed Seaview's accountant in January 2006 and interviewed Kotick in June 2007. During both interviews, the IRS acknowledged it had received Seaview's signed 2001 tax return and introduced the Form 1065 as an exhibit for both interviews. In July 2007, Seaview's counsel mailed another signed copy of the 2001 tax return to an IRS attorney at the attorney's request.
In October 2010, the IRS issued Seaview a Final Partnership Administrative Adjustment (FPAA) for the 2001 tax year. In that notice, the IRS stated that "[p]er Internal Revenue Service records, no tax return was filed by [Seaview] for 2001," but said, "[d]uring the examination," the partnership provided "a copy of a 2001 tax return which taxpayer claimed to have filed." The Service determined that "none of the income/loss/expense amounts" shown on Seaview's 2001 unfiled tax return were allowable. Thus, the IRS adjusted the 2001 reported loss from over $35 million to zero.
Seaview challenged the IRS's adjustment in Tax Court. The LLC, having provided an IRS revenue agent a copy of the 2001 return in 2005, moved for summary judgment, asserting that the return had been filed in 2005 and, consequently, the 2010 tax adjustment was time-barred under the three-year statute of limitation.
The Tax Court denied the motion. The court held that Seaview did not "file" the tax return by faxing a copy to the IRS revenue agent or by mailing a copy to the IRS counsel. It further held that the copies of the 2001 return Seaview sent the IRS in 2005 and 2007 were not returns because neither Seaview's accountant nor its attorney intended to file a return when they sent the copies. Accordingly, the copies were not a return under the tests in Beard, 82 T.C. 766 (1984), because they did not purport to be a return. Seaview appealed the Tax Court's denial of summary judgment to the Ninth Circuit.
The Ninth Circuit's decision
The Ninth Circuit held that the IRS's notice of FPAA in 2010 was untimely, determining that Seaview's 2001 tax return was filed in 2005, when the IRS agent requested the missing return, Seaview delivered it, and the IRS acknowledged receipt during the auditing process in connection with the FPAA. The court found that while a timely return must be sent to a service center to be filed under the regulations, delinquent returns are not subject to the regulations and, based on the IRS's informal guidance and practices, a delinquent return could be filed with an IRS official authorized to receive it.
Under former Sec. 6229(a), for a partnership subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) audit procedures, the IRS could only make adjustments to the partnership's income for a tax year within three years after the later of the date the partnership return for the tax year was filed or the last day for filing the return for the tax year. Although the Code does not provide a definition of the term "filed," Sec. 6230(i) states that a partnership return "shall be filed or made at such time, in such manner, and at such place as may be prescribed in regulations."
Regs. Sec. 1.6031(a)-1(e) provides the time, manner, and place for filing a partnership return, stating that the place for filing a partnership return is the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form, and that the form must be filed on or before the 15th day of the fourth month following the close of the partnership's tax year.
Seaview conceded that it could not show that it timely filed its 2001 partnership return because it could not prove the IRS ever received the return it claimed to have sent to the Ogden, Utah, service center. But the court found that this was not the question before it; rather, it was whether Seaview had filed a delinquent return by delivering the return, as instructed by the IRS agent, in 2005.
In the Ninth Circuit's view, Regs. Sec. 1.6031(a)-1(e) did not appear to govern how a delinquent return should be filed, as the regulation's text does not state that the time and place requirements applied to untimely returns and thus does not expressly establish how taxpayers file a delinquent return. In addition, a taxpayer could not comply with the regulation for a delinquent return because it specified when a return must be filed. So, the court found that at most, the regulation was silent on the issue.
Moreover, the court pointed out that no regulation prohibits filing an untimely return with an IRS official and that, in at least two circumstances, the law allows taxpayers to hand-carry a return to an IRS office. Consequently, the court found that even for a timely return, an IRS service center was not the only place a partnership can file its returns.
Because the Code and the regulations did not specify how a delinquent return is "filed," the Ninth Circuit reasoned that the required procedure should follow the ordinary meaning of the term. The court found that the Supreme Court held in Lombardo, 241 U.S. 73 (1916), a nontax case, that a document is filed when it is delivered to the proper official and that this definition of "filed" had been adopted by the Tax Court in Hotel Equities Corp., 65 T.C. 528 (1975). The court also noted that in Hanson, 2 F.3d 942 (9th Cir. 1993), it had held that a return has been filed if it was delivered to and received by the IRS, regardless of whether the IRS ever processes the return. Thus, under the ordinary meaning of "filed," the court concluded that a delinquent partnership return is "filed" under former Sec. 6229(a) when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return.
The Ninth Circuit then considered what effect the IRS's internal guidance with respect to filing a delinquent return had on the question of whether a delinquent return must be filed with a service center. The court described a number of situations in which internal guidance of the IRS requires or encourages an IRS agent to request a taxpayer to file a return with the IRS agent rather than mailing the return to a service center. While admitting that IRS internal guidance does not have the force of law and does not confer rights on a taxpayer, the court concluded that the guidance confirmed its determination that no regulation governs when a delinquent return has been "filed" and that it should be considered to be "filed" under the ordinary meaning of that term.
The IRS argued that delinquent returns delivered to IRS officials cannot be considered "filed" because of case law requiring "meticulous compliance by the taxpayer with all named conditions" to secure the benefit of the statute of limitation(Lucas v. Pilliod Lumber, 281 U.S. 245, 249 (1930)). Seaview's return, the IRS contended, did not meet this standard because it was not sent to a service center, as required by Regs. Sec. 1.6031(a)-1(e). However, the Ninth Circuit brushed this argument aside, finding that since Regs. Sec. 1.6031(a)-1(e) did not apply to delinquent returns, Seaview had met the meticulous-compliance standard because it had filed the return under the ordinary meaning of "filed."
With regard to whether the copies of the returns sent in 2005 qualified as returns under the Beard tests, the Ninth Circuit disagreed with the Tax Court that the document did not purport to be a return. The court first found that the Tax Court had erred in basing its decision on Seaview's intent in delivering the return copies to the IRS. Citing Badaracco, 464 U.S. 386 (1984), the court stated that the inquiry of whether a document was a return was an objective inquiry rather than a subjective inquiry of the filer's intent.
In making the objectivedeter-mination, the Ninth Circuit looked at the context of the exchange in 2005, in which the IRS agent asked for Seaview's 2001 return, and, in response, Seaview faxed copies of its 2001 Form 1065. Based on this context, the court found that the copies of the Form 1065 delivered to the IRS agent "unambiguously" purported to be a return. Furthermore, it noted that the IRS treated the copies of the Form 1065 as such. Finding that the other three Beard tests were met, the court concluded that the copies of Seaview's return sent to the IRS agent in 2005 were a return.
Reflections
According to a dissent, because Seaview admitted that it could not prove that its return ever reached the Ogden service center, it was undisputed that Seaview had failed to file its return, either on time or late, to the correct location in the regulations. Thus, under the plain text of the Code and the regulations, as well as applicable precedent, the dissent concluded that Seaview never filed its 2001 partnership return and the limitation period for the IRS to adjust the return had not expired.
What exactly did the dissent find wrong with the majority's reasoning? In short, everything. In its conclusion to its opinion, the dissent stated that "[t]he majority misconstrues the statutes and regulations, improperly fashions its own delinquent-return filing regime, is wrongly predicated on nonbinding internal IRS guidance, incorrectly applies a form of implicit equitable estoppel, misreads the record, and — contrary to basic rules of our jurisprudence — disregards Supreme Court, out-of-circuit, and Tax Court authority" (slip op. at 77).
Seaview Trading, LLC, No. 20-72416 (9th Cir. 5/11/22)
