Petition timely filed as regulations held invalid

Finding that Sec. 7508A(d) provides for an unambiguously self-executing postponement period for the filing of a petition with the Tax Court for a redetermination of a deficiency, the court held Regs. Secs. 301.7508A-1(g)(1) and (2) invalid. Thus, the taxpayers’ petition was filed timely, and the court had jurisdiction over their case.

Background

The IRS issued Mohamed Abdo and Fardowsa Farah (the Abdos) a notice of deficiency dated Dec. 2, 2019. The notice specified that Monday, March 2, 2020, (which was not a legal holiday in the District of Columbia) was the last day to petition the Tax Court in response to the notice. The Abdos mailed a petition to the court on March 17, 2020.

However, between March 19 and July 9, 2020, the Tax Court did not receive mail because of its closure in response to the COVID-19 pandemic. On July 10, 2020, the court’s clerk received the Abdos’ petition and filed it.

On March 13, 2020, President Donald Trump declared a nationwide emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. Sections 5121–5207, as a result of the COVID-19 pandemic (Nationwide Emergency Declaration). The president also approved major disaster declarations for each of the 50 states pursuant to Section 401 of the Stafford Act. On March 31, 2020, the administrator of the Federal Emergency Management Agency signed a declaration that declared Ohio a major disaster area. As with the other state disaster declarations, the Ohio disaster declaration identified the pandemic conditions warranting the declaration as “beginning on January 20, 2020, and continuing.”

Sec. 7508A(a) generally gives the IRS the discretion to postpone certain Tax-related deadlines for up to one year for those taxpayers it determines to be affected by a federally declared disaster.

The IRS issued a series of notices in which the stated purpose was to provide relief under Sec. 7508A(a) pursuant to the Nationwide Emergency Declaration. Included in this series was Notice 2020-23, issued on April 11, 2020, which, among other specified deadline extensions, extended the deadline for filing a Tax Court petition to July 15, 2020, for those taxpayers who had a petition due to be filed on or after April 1, 2020, and before July 15, 2020. Notice 2020-23 specified, however, that it did not provide relief for the period for filing a petition if that period expired before April 1, 2020.

On Sept. 2, 2020, the IRS filed a motion to dismiss the Abdos’ case on the grounds that they did not file their petition within the 90-day period provided under Sec. 6213(a) or Sec. 7502. Sec. 7502 generally allows a timely mailed petition to be treated as timely filed.

The Abdos filed an objection to the IRS’s motion, arguing that Sec. 7508A(d), which was effective for disasters declared on or after Dec. 20, 2019, operated in conjunction with the Ohio disaster declaration to extend the deadline to file their Tax Court petition.

On Jan. 13, 2021, the IRS proposed regulations under Sec. 7508A(d) (REG-115057-20). On Feb. 12, 2021, the IRS filed a reply to the Abdos’ objection, claiming that Sec. 7508A(d) did not apply in their case. On June 11, 2021, the IRS issued final regulations under Sec. 7508A(d) (T.D. 9950). The final regulations were made effective with respect to disasters declared on or after Dec. 21, 2019.

On Aug. 29, 2023, the Tax Court ordered the parties to address the applicability of the final regulations to this case and the deference, if any, to be given to them. The IRS contended in its brief that the final regulations apply to this case; that they are entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984); and that the Abdos did not timely file their Tax Court petition.

The Abdos agreed with the IRS that Chevron provides the proper framework for the Tax Court to review the regulations and that the deadline to file their petition was not extended under the regulations. They argued, however, that their petition was timely filed under all reasonable constructions of Sec. 7508A(d) and that Regs. Secs. 301. 7508A-1(g)(1) and (2) are invalid.

Chevron deference

According to the Supreme Court’s opinion in Chevron, when analyzing a regulation (which the Court called “the agency’s construction of the statute which it administers”), a court asks two questions. First the court must determine whether Congress has directly spoken to the precise question at issue. To determine this, the court considers the “plain” and “literal” language of the statute, the specific context in which the language is used, and the broader context of the statute as a whole, employing the traditional tools of statutory construction, including the canons of construction. If the intent of Congress is clear, that is the end of the matter; the court and the agency must give effect to the unambiguously expressed intent of Congress.

If the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute. If the agency made a reasonable policy choice and its interpretation is not “arbitrary, capricious, or manifestly contrary to the statute,” then the court must defer to the agency’s interpretation, whether or not that interpretation is the best possible interpretation of the statute.

The Tax Court’s decision

The Tax Court denied the IRS’s motion to dismiss the Abdos’ case for lack of jurisdiction. It held that Sec. 7508A(d) provides for an unambiguously self-executing postponement period for the filing of a petition with the court for a redetermination of a deficiency, and, consequently, Regs. Secs. 301. 7508A-1(g)(1) and (2) are invalid. It therefore held that the Abdos’ petition was filed timely and that it had jurisdiction over their case.

The parties’ positions

The IRS argued that the Tax Court lacked jurisdiction in the case because the Abdos, having filed their petition on March 17, 2020, had not filed it timely under Secs. 6213(a) and 7502. The Abdos countered that Sec. 7508A(d) entitled them to an automatic, mandatory postponement of time to file until March 21, 2020, and thus their petition was timely. The controversy centered on the proper interpretation of Sec. 7508A(d) and whether Regs. Secs. 301. 7508A-1(g)(1) and (2) are valid.

As the Tax Court explained, Sec. 7508A(d)(1) provides that, in the case of any “qualified taxpayer,” the period beginning on the earliest incident date specified in the declaration to which the relevant disaster area relates and ending on the date that is 60 days after the latest incident date so specified “shall Be disregarded in the same manner as a period specified under [Sec. 7508A(a)].” Sec. 7508A(d)(2)(A) defines a “qualified taxpayer” to include an individual whose principal residence is located in a disaster area. Sec. 7508A(d)(3), by cross-reference, defines a disaster area as an area determined by the president to warrant federal assistance under the Stafford Act.

The Abdos claimed that, as Ohio residents at all relevant times in the case, they were qualified taxpayers. The couple argued that Congress clearly intended Sec. 7508A(d) to operate in a mandatory and automatic manner and, therefore, the IRS’s contrary interpretation of Sec. 7508A(d) in the regulations is invalid under the Chevron test.

Specifically, the Abdos contended that Sec. 7508A(d) provides a mandatory extension of the deadlines and the IRS has no discretion to change that. According to the court, they argued that Sec. 7508A(d)(1) provides an unambiguously self-executing postponement period that, by virtue of its language — “shall be disregarded in the same manner as a period specified under [Sec. 7508A(a)]” — covers the acts referred to by Sec. 7508A(a). This latter subsection refers to “any of the acts described in paragraph (1) of section 7508(a)” (which include, at Sec. 7508(a)(1)(C), filing a Tax Court petition for redetermination of a deficiency). Sec. 7508(a)(1) generally postpones the time for performing certain tax-related acts, including the filing of a petition with the court for a redetermination of a deficiency, for U. S. armed forces members serving in a combat zone. The Abdos therefore concluded that they were entitled to an automatic, mandatory 60-day postponement period from Jan. 20, 2020, the earliest incident date specified in the Ohio disaster declaration, to March 21, 2020, to file their petition.

In reaching this conclusion, the Abdos interpreted Sec. 7508A(d) to provide for “a mandatory postponement period for taxpayers affected by federally declared disasters, separate from but complementing the discretionary postponement provision in section 7508A(a).” And, because Regs. Secs. 301. 7508A-1(g)(1) and (2) limit the acts subject to the mandatory postponement period of Sec. 7508A(d) to “the acts determined to be postponed by the [IRS’s] exercise of authority under section 7508A(a) or (b),” the Abdos construed the regulations as “nullify[ing] subsection (d) , in its entirety, and convert[ing] a mandatory provision to a permissive provision.” Contending that the regulations thereby conflict with the statutory scheme and its legislative purpose, the Abdos argued that the regulations are invalid under the Chevron standard.

The IRS argued that the language pointed to by the Abdos does not clearly provide a self-executing postponement period for the acts referred to by Sec. 7508A(a) but that the statute is instead silent and ambiguous as to the acts to which the mandatory postponement period applies. In the IRS’s view, the statute does not address what specific time-sensitive acts are postponed pursuant to Sec. 7508A(d) and does not directly address federally declared disasters without an incident date under Sec. 7508A. Accordingly, the regulations, which resolve these ambiguities, are necessary.

The IRS further contended that the regulations provide a permissible and reasonable construction of the statute that builds upon the “statutory nexus between the time-sensitive acts in [Secs.] 7508A(a) and (d).” Consequently, the Service concluded that the regulations are entitled to Chevron deference.

The IRS noted that it did not use its discretion under Sec. 7508A(a) in response to the Ohio disaster declaration to postpone the time for the Abdos to file a petition with the Tax Court. Instead, the IRS relied on the Nationwide Emergency Declaration to issue Notice 2020-23. Because the IRS relied on the Nationwide Emergency Declaration rather than the Ohio disaster declaration to extend certain time frames under Sec. 7508A(a), the IRS argued, the Ohio disaster declaration did not trigger Sec. 7508A(d). In the IRS’s view, the regulations implement its reading of Sec. 7508A(d) and dictate that the Ohio disaster declaration did not extend the time for the couple to file their petition.

The Tax Court’s Chevron analysis

The Tax Court concluded that, in the context of a federal disaster declaration containing an incident date, Sec. 7508A(d) is not reasonably susceptible of different interpretations with respect to whether a qualified taxpayer is automatically entitled to a mandatory extension to file a petition with the Tax Court and that the natural reading of Sec. 7508A(d) is that a qualified taxpayer is entitled to a mandatory extension.

The Tax Court based this conclusion on the mandatory nature of Sec. 7508A(d). As demonstrated in a chart the Abdos provided, comparing the language used in Sec. 7508A(d) to The language used in Sec. 7508A(a), the court found that the mandatory language of Sec. 7508A(d) is in stark contrast to the discretionary language of Sec. 7508A(a).

As the Tax Court observed, under the discretionary language of Sec. 7508A(a), the IRS may specify (1) whether a period is disregarded; (2) how long a period is disregarded; (3) for whom a period is disregarded; and (4) for what purposes a period is disregarded. The mandatory language of Sec. 7508A(d), however, does not provide the IRS with discretion regarding any of these four aspects of the extension. Instead, it provides that, for a defined person, a defined period “shall be disregarded” in a defined manner. Based on the plain and literal language of the statute, the court found that Congress clearly intended to provide for a postponement period that is mandatory.

Having determined that Sec. 7508A(d) creates a mandatory postponement period, the Tax Court next considered whether the statute requires that this period automatically extend the date for filing a Tax Court petition by at least 60 days. The IRS argued that the statute is silent and hence ambiguous on this point. The Abdos contended that Sec. 7508A(d)(1) provides an unambiguously self-executing postponement period that, by virtue of the requirement that the period “shall be disregarded in the same manner as a period specified under [Sec. 7508A(a)],” incorporates all of the acts referred to in Sec. 7508A(a), including the deadline to file a petition with the Tax Court.

The Abdos conceded that on a first reading, the “in the same manner” language of Sec. 7508A(d)(1) could be construed as ambiguous, referring either to the specific time-sensitive acts that may be postponed by operation of Sec. 7508A(a) or to the process by which the IRS grants a postponement under that subsection. However, the couple argued that full consideration of the statute makes clear that the IRS’s interpretation conflicts with both the plain wording and the mandatory and specific nature of Sec. 7508A(d).

The Tax Court acknowledged that, in other statutory contexts, the phrase “in the same manner” has been construed as meaning “to use the same ‘methodology and procedures’ ” and that the phrase has also been interpreted as ambiguous.

Nonetheless, the court reasoned: Upon conducting the required consideration of the plain and literal language of section 7508A(d), the specific context in which the language is used, and the broader context of the statute as a whole, however, we conclude that the “in the same manner” language of this statute is not “reasonably susceptible” of being interpreted to refer to the process or procedure by which the [IRS] grants a postponement under subsection (a) or of demonstrating any ambiguity; instead, it provides for an unambiguously self-executing postponement period that incorporates all of the acts referenced by section 7508A(a).

When the Abdos filed their Tax Court petition, Sec. 7508A(d)(1) provided that, in the case of any “qualified taxpayer,” the period beginning on the earliest incident date specified in the declaration to which the relevant disaster area relates and ending on the date that is 60 days after the latest incident date so specified “shall be disregarded in the same manner as a period specified under [Sec. 7508A(a)].” The Tax Court, as discussed above, interpreted this language to provide for a mandatory, automatic postponement of the filing of a Tax Court petition in response to a notice of deficiency.

As the Abdos lived in Ohio at all relevant times during the case, they therefore were qualified taxpayers entitled to an automatic 60-day postponement period starting from Jan. 20, 2020, the earliest incident date specified in the Ohio disaster declaration, to at least March 20, 2020, to file their petition. As the Abdos’ petition was mailed on March 17, 2020, it was filed timely; thus the Tax Court had jurisdiction over the Abdos’ case. Accordingly, the Tax Court denied the IRS’s motion to dismiss.

Reflections

The Chevron two-step framework for analyzing regulations has always been controversial, and, at the time of this writing, its continued viability is under review by the Supreme Court in Relentless, Inc. v. Department of Commerce, 144 S. Ct. 325 (2023) (cert. Granted). In a concurring opinion to the Tax Court’s decision, the concurring judges argued, however, that the Tax Court could have reached the same conclusion it did in the majority opinion “without our heavy reliance on Chevron.”

Abdo, 162 T.C. No. 7 (2024)

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.