‘Garden variety’ mistake does not give rise to equitable tolling

Equitable tolling can apply to a petition challenging an IRS employment status determination under Sec. 7436. However, it does not apply where a petition was one day late because the taxpayer’s attorney did not mail the petition to the Tax Court using a qualified private delivery service, so that the timely mailed, timely filed rule in Sec. 7502(a) did not apply.

Background

Belagio Fine Jewelry Inc. did not file quarterly employment tax returns during 2016 and 2017. Following its audit of Belagio, the IRS issued a notice of employment tax determination under Sec. 7436, in which it determined that Belagio had an employee during the periods at issue and that the company was liable for deficiencies in employment tax and various penalties. The notice stated that the last day to file a petition with the Tax Court challenging the IRS’s determinations in the notice was Nov. 22, 2021.

Belagio’s attorney’s staff mailed a petition for redetermination of employment status via FedEx Express Saver on Nov. 18, 2021, which arrived at the court on Nov. 23, 2021. Unfortunately for Belagio, FedEx Express Saver is not a “designated private delivery service,” and thus taxpayers using it cannot avail themselves of the timely mailed, timely filed rule in Sec. 7502. Consequently, Belagio’s petition was filed one day after the expiration of the Sec. 7436(b)(2) 90–day deadline and was untimely.

Accordingly, the IRS in March 2022 filed a motion to dismiss for lack of jurisdiction in the case because Belagio’s petition was filed after the 90–day deadline. The Tax Court held, though, that the deadline was a nonjurisdictional claim–processing rule and denied the Service’s motion (Belagio Fine Jewelry, Inc., 162 T.C. 243 (2024)). However, the court reserved judgment on whether the Sec. 7346 deadline is subject to equitable tolling until the issue was raised in an appropriate motion.

In August 2024, the IRS filed a motion to dismiss for failure to state a claim upon which relief can be granted, in which it argued that the 90–day deadline is not subject to equitable tolling and, in the alternative, under Belagio’s facts, that equitable tolling was not warranted. Belagio objected to the motion, arguing that the IRS sought to relitigate whether the company’s case could be dismissed for failure to timely file.

The law

To ensure employers comply with their employment tax obligations, the IRS may audit an employer’s tax return to determine (1) the employment status of individuals performing services for it; (2) the availability of Section 530 relief (Section 530 of the Revenue Act of 1978, P.L. 95–600, provides a safe harbor that, if met, prevents the IRS from retroactively reclassifying “independent contractors” as employees); and (3) the amount of employment tax due.

Sec. 7436(a) grants the Tax Court jurisdiction to review such determinations made because of these examinations. However, under Sec. 7436(b)(2), the employer must file the petition with the Tax Court within 90 days of the IRS’s sending the notice of determination if the notice is sent by certified or registered mail.

The Tax Court’s decision

The Tax Court held that the Sec. 7436(b)(2) 90–day deadline is subject to equitable tolling. The court, however, further held that the circumstances surrounding Belagio’s late–filed petition did not warrant equitable tolling.

As the Tax Court explained, equitable tolling “effectively extends an otherwise discrete limitations period set by Congress.” Nonjurisdictional deadlines are presumptively subject to equitable tolling, but this presumption can be rebutted if equitable tolling is not consistent with the text of the statute or the statutory scheme.

The Supreme Court in Brockamp, 519 U.S. 347 (1997), held that the period to file a refund lawsuit under Sec. 6511 was not subject to equitable tolling. The Court found that the presumption in favor of equitable tolling had been rebutted, reasoning that Sec. 6511 set forth the time limit in “unusually emphatic form” and in a “highly detailed technical manner, that, linguistically speaking, cannot easily be read as containing implicit exceptions” (id. at 350). It also observed that the statute reiterated the deadline multiple times in both procedural and substantive terms, and these substantive terms affected the taxpayers’ refund amounts according to their compliance with the deadline. In addition, it found that the statute included six highly detailed exceptions based on the underlying subject matter that did not include equitable tolling. Finally, the Court found that permitting equitable tolling of the deadline would create “serious administrative problems” because of the over 90 million refunds Treasury processes each year (id. at 352).

In contrast, in Boechler, P.C., 142 S. Ct. 1493 (2022), the Supreme Court held that the deadline to petition the Tax Court for review of a Collection Due Process (CDP) case in Sec. 6330 was subject to equitable tolling. The Court reasoned that nothing in the text of Sec. 6330 expressly prohibited equitable tolling, and the short 30–day deadline was directed to the taxpayer rather than the court. It also found that the deadline is in a Code section that is “unusually protective of taxpayers,” and the litigation is often initiated by pro se litigants. Further, Sec. 6330 has only one enumerated exception, related to suspending the time to file a petition in the event of bankruptcy. This one exception, unlike the six exceptions in Brockamp, did not prevent the Court from reading into the statutory scheme an additional exception for equitable tolling. Finally, the Court concluded that equitable tolling would not add a significant administrative burden because of the low number of petitions filed with the Tax Court annually under Sec. 6330.

The Tax Court then compared the characteristics of the deadline in Sec. 7436(b)(2) with those that were the subject of Brockamp and Boechler, P.C. As for the Sec. 7436(b)(2) deadline, the court saw nothing in its text to rebut the presumption that equitable tolling applies. Sec. 7436 does not expressly prohibit equitable tolling. Nor did its wording strike the court as “unusually emphatic,” “highly detailed,” or “technical.” Although Sec. 7436 uses the emphatic wording “no proceeding may be initiated,” that did not strike the court as unusually emphatic. Thus, the Tax Court found the Sec. 7436(b)(2) 90–day deadline is purely a procedural limitation on filing a Tax Court petition and not tied to a taxpayer’s substantive rights. In other words, the application of equitable tolling would not affect the substance of a taxpayer’s claim, merely its ability to bring the claim.

The IRS argued that the restrictions on assessment and collection in Sec. 7436(d)(1) that are tied to the 90–day deadline indicated that Congress did not intend equitable tolling to apply. These provisions specify that the IRS cannot assess, collect, or take other specified administrative actions until the 90–day deadline has expired (Sec. 7436(d)(1)). The Tax Court found, however, that these restrictions do not relate to a taxpayer’s substantive rights but rather to the procedural steps the IRS employs to collect a deficiency. Consequently, the court determined there was “nothing inconsistent with permitting equitable tolling in relation to the filing deadline to hear a taxpayer’s case and allowing the IRS to proceed with assessment and collection after the 90–day deadline has expired.”

The Tax Court further found that the text of Sec. 7436(b)(2) was not so highly detailed or technical that an implicit exception could not be read into it, and the 90–day deadline was not repeated multiple times as with the deadline in Brockamp, 519 U.S. at 350—51. The wording used in Sec. 7436(b)(2) to establish the deadline is simple and sets forth one exception: The deadline does not apply when the IRS makes a determination not memorialized in a notice. This single exception, the court found, is “a far cry” from the highly detailed text with six exceptions in Sec. 6511 noted in Brockamp. Rather, according to the court, the exception in Sec. 7436(b)(2) is more like the singular exception in Boechler, P.C., which the Supreme Court found did not preclude reading an additional equitable tolling exception into the statute at issue in that case. Further, the court noted, no text in Sec. 7436 specifically limits the exceptions to the deadline to those expressly enumerated.

Finally, the Tax Court found that permitting equitable tolling for the Sec. 7436(b)(2) 90–day deadline would not significantly increase its own administrative burden. As the court pointed out, very few petitions are filed annually with the court for redetermination of employment status under Sec. 7436. The court noted that the Supreme Court had held that the increased administrative burden of extending equitable tolling to the deadline for filing CDP cases, which are far greater in number than cases involving Sec. 7436, was insufficient to rebut the presumption in favor of equitable tolling in Boechler, P.C. Therefore, the court concluded that the increased administrative burden related to the consideration of equitable tolling for the small number of Sec. 7436 cases filed annually, and the even smaller number that are filed after the 90–day deadline, was insufficient to rebut the presumption in favor of equitable tolling.

Given these considerations, the Tax Court found that the presumption in favor of equitable tolling was not rebutted. Therefore, the 90–day deadline, like most other claim–processing rules, can be equitably tolled.

Equitable tolling in Belagio’s case

The Tax Court then considered whether equitable tolling applied in Belagio’s case. The Supreme Court has held that to be entitled to equitable tolling, a taxpayer must establish (1) that it pursued its rights diligently and (2) that extraordinary circumstances outside its control prevented it from filing on time (Menominee Indian Tribe of Wis., 577 U.S. 250, 255 (2016)). The first prong of the test requires that a litigant take all reasonable steps to ensure the timeliness of its petition, including engaging with its attorney to ensure a petition is timely filed. The second prong of the test can be met only when the circumstances that caused a litigant’s delay are both extraordinary and beyond its control.

Belagio argued that its petition was filed a day late because its attorney did not use a private delivery service designated by the IRS to qualify under Sec. 7502(f) to have the petition treated as filed when mailed. Thus, the Tax Court found that Belagio essentially was arguing that its failure to timely file its petition was due to attorney error.

The Tax Court first noted that Belagio did not allege any facts in its objection to the IRS’s motion that indicated that it diligently pursued its rights, and there was no indication that Belagio followed up to ensure the attorney timely filed the petition. Consequently, the court held that Belagio had failed to satisfy the first prong of the test for applying equitable tolling, which was sufficient for the court to deny Belagio’s equitable–tolling claim.

Nonetheless, the Tax Court applied an analysis under the second prong of the test that extraordinary circumstances outside Belagio’s control prevented it from filing on time. Belagio alleged that the extraordinary circumstance warranting equitable tolling was the negligence of its attorney (or the attorney’s legal staff) in mailing the petition using a nondesignated private delivery service.

The Tax Court found it is well established that, generally, a client bears the risk of its attorney’s negligence, and simple negligence on an attorney’s behalf will not warrant equitable tolling. However, in rare instances, an attorney’s negligence may rise to a level warranting equitable tolling, such as when an attorney abandons their client.

The Tax Court stated that courts have consistently held that failure to properly mail a petition is “garden variety negligence” that does not warrant equitable tolling. In the Tax Court’s view, Belagio’s attorney’s legal staff’s error in selecting a nondesignated private delivery service for mailing the petition was such garden–variety neglect that did not rise to a level warranting equitable tolling. Accordingly, the court granted the IRS’s motion and dismissed the case for failure to state a claim upon which relief can be granted.

Reflections

As this case demonstrates, just because equitable tolling can apply does not mean it will apply. The two–prong test from Menominee Indian Tribe of Wis. sets a fairly high bar for its application, with the taxpayer being required to show “extraordinary” circumstances outside its control prevented it from filing on time. Citing the Supreme Court in Irwin v. Dep’t of Veterans Affs., 498 U.S. 89, 95—96 (1990), the Tax Court stated: “Equitable tolling is applied sparingly.”

Belagio Fine Jewelry, Inc., 164 T.C. No. 7 (2025)

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.