Ninth Circuit again addresses return filing

The Ninth Circuit, sitting en banc, held that faxing a return to an IRS revenue agent or mailing it to an IRS attorney does not qualify as filing the return under the return filing requirements of Regs. Sec. 1.6031(a)-1(e).

Background

Seaview Trading LLC was classified as a partnership for federal tax purposes. 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 by 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 July 2005, an IRS revenue agent sent Seaview a letter notifying 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 what 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 the certified mail receipt.

In October 2005, 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 its majority partner in June 2007. During both interviews, the IRS acknowledged it had received Seaview’s faxed 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 reflected on [Seaview’s] 2001 unfiled tax return [were] allowable.”

Thus, the IRS adjusted the 2001 reported loss from over $35 million to $0. 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 return it 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 copies of the 2001 return in 2005 and 2007. 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.

A three-judge panel of the Ninth Circuit, with one judge dissenting, reversed the Tax Court and 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 Regs. Sec. 1.6031(a)-1(e), delinquent returns were not subject to the regulation, and, based on the IRS’s informal guidance and practices, a delinquent return could be filed with an IRS official authorized to receive it.

The IRS disagreed with the Ninth Circuit’s interpretation of the rules regarding the time and place for filing partnership returns, and it petitioned the Ninth Circuit for a rehearing of the case en banc. The Ninth Circuit granted the IRS’s request and vacated the three-judge panel’s decision.

The court’s decision, sitting en banc

The Ninth Circuit, sitting en banc, held that because Seaview did not meticulously comply with the placefor- filing requirement in Regs. Sec. 1.6031(a)-1(e), it was not entitled to claim the benefit of the three-year limitation period. Rather, having never properly filed its return, Seaview was instead subject to Sec. 6229(c)(3) as it existed at the time, which allowed taxes attributable to partnership items to be assessed “at any time.”

Under the then-existing version of Regs. Sec. 1.6031(a)-1(e), “[t]he return of a partnership must be filed with the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form,” and “[t]he return of a partnership must be filed on or before the fifteenth day of the fourth month following the close of the taxable year of the partnership.” The instructions to the 2001 Form 1065 designated the place for filing for Seaview, a partnership with its principal place of business in California, as the Ogden, Utah, IRS service center.

The en banc court explained that Seaview did not meticulously comply with the place-for-filing requirement because neither the IRS revenue agent nor the IRS attorney to whom Seaview sent copies of its 2001 return qualified as a designated place for filing. Although under case law a return filed with the wrong place that is forwarded to the designated place for filing will be treated as filed when it is received at that designated place, at no point was Seaview’s return for 2001 ever forwarded to the designated place for filing at the Ogden service center, so that rule did not apply.

With regard to Seaview’s argument that Regs. Sec. 1.6031(a)-1(e) did not apply to late-filed returns, the en banc court found that the regulation makes no distinction between returns that are filed on time and those that are filed late, and its place-for-filing requirement contains no carve-out for delinquent returns. Although the court observed that Regs. Sec. 1.6031(a)- 1(e) provided requirements for both the place for filing and the time for filing returns, it further observed that those requirements appear in separate provisions and stated that “nothing in the text of the regulation indicates that compliance with the place-for-filing requirement is conditioned upon compliance with the time-for-filing requirement, such that filing at the designated place somehow becomes optional whenever a taxpayer files its return late.”

Seaview also argued that its position that the 2005 fax and the 2007 mailing qualified as “filings” of its return was supported by the IRS’s historical interpretation and practice, as evidenced by three agency documents: Chief Counsel Advice 199933039; the 2005 Internal Revenue Manual (IRM); and IRS Policy Statement 5-133, Delinquent Returns — Enforcement of Filing Requirements (Aug. 4, 2006). The court held that Seaview had misinterpreted each of these documents as being inconsistent with the Code and regulations and noted that, under Ninth Circuit precedent, the IRM “does not have the force of law and does not confer rights on taxpayers.”

Finally, Seaview argued its position was supported by Dingman, T.C. Memo. 2011-116, but the court found that its reliance on the case was misplaced. In that case, during an IRS criminal investigation against him, the taxpayer, Martin R. Dingman, delivered to IRS investigators original returns for years for which he had failed to file, along with payments of corresponding tax liabilities, which the IRS posted to Dingman’s tax accounts. The Tax Court held that the IRS’s assessment was untimely because Dingman had “filed” his returns, starting the running of the statute of limitation, on the date the checks were credited to Dingman’s accounts.

The en banc Ninth Circuit explained that the Tax Court did not, however, hold that Dingman’s returns were “filed” when he delivered them to the IRS investigators. Although the Tax Court rejected the IRS’s argument that Dingman had failed to “meticulously comply” with all named conditions, it did so because, in the wake of an agencywide reorganization, the regulations in question directed taxpayers to file their returns in outdated places with nonexistent recipients. This was in contrast, the en banc court stated, to Seaview, which simply failed to comply with the requirements of Regs. Sec. 1.6031(a)- 1(e), which offered effective guidance regarding the place for filing its return. In addition, unlike in Dingman, Seaview’s returns were never received at the correct location and processed.

Reflections

The holding that Regs. Sec. 1.6031(a)-1(e) applied to all returns was a foregone conclusion once the Ninth Circuit granted a rehearing of the case en banc. The earlier holding in the case by the Ninth Circuit three-judge panel that Regs. Sec. 1.6031(a)-1(e) applied only to timely filed returns and not to delinquent returns had been criticized in a sharp dissent that accused the panel’s majority of misconstruing the law, improperly relying on nonbinding IRS guidance, incorrectly applying “implicit equitable estoppel,” misreading the record, and disregarding prior case law. The en banc court agreed with the earlier dissent’s basic reasoning: Seaview had failed to file its return to the proper location specified in the regulations, and therefore it had never filed its return for statute-of-limitation purposes.

Seaview Trading, LLC, No. 20-72416 (9th Cir. 2023)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.