Ninth Circuit: Partnership Did Not File Return by Faxing It to IRS Agent

(Parker Tax Publishing March 2023)

The Ninth Circuit held that a partnership did not file its partnership tax return when it faxed a copy of the return to an IRS revenue agent or when it mailed a copy to an IRS attorney, because it failed to send the return to the designated place for filing under Reg. Sec. 1.6031(a)-1(e)(1). As a result, the Ninth Circuit concluded that the three-year statute of limitations never began to run, and therefore, the IRS's Final Partnership Administrative Adjustment disallowing the partnership's losses was timely. Seaview Trading, LLC v. Comm'r, 2023 PTC 55 (9th Cir. 2023).

Background

Seaview Trading, LLC (Seaview) is a California-based limited liability company classified as a partnership for federal tax purposes. In 2005, Seaview received a letter from an IRS agent saying it had not filed its 2001 tax return. Seaview said it filed its 2001 Form 1065, U.S. Return of Partnership Income, in July 2002 when it mailed the return to the IRS service center in Ogden, Utah - the correct place to send timely returns.

In response to the letter from the IRS, Seaview's counsel faxed the IRS agent a signed copy of its 2001 Form 1065 and produced a certified mail receipt for the return's mailing. However, Seaview conceded that it could not prove that the IRS received its 2001 return in 2002. On its 2001 Form 1065, Seaview reported a $35 million loss from a tax-shelter transaction. In October 2005, the same IRS agent informed Seaview that its 2001 return had been selected for audit and requested additional information, including all copies of the signed Form 1065. In 2007, Seaview's counsel mailed another signed copy of the 2001 Form 1065 to an IRS attorney.

In 2010, the IRS issued Seaview a Final Partnership Administrative Adjustment (FPAA) for 2001. In that notice, the IRS stated that it had no record of a tax return filed by Seaview for 2001, but that the partnership had provided a copy of the return it claimed to have filed. The FPAA also indicated that none of the income/loss/expense amounts in the 2001 return were allowable. Seaview filed a petition in the Tax Court challenging the adjustments in the FPAA on the basis that it was issued outside the statute of limitations period. The IRS argued that, under Code Sec. 6229(c), as it existed prior to being repealed by the Bipartisan Budget Act of 2015 (2015 BBA), it can assess tax attributable to a partnership or affected item at any time if the partnership does not file a return and, the IRS argued, Seaview had not filed a return.

In Seaview Trading, LLC v. Comm'r, T.C. Memo. 2019-122, the Tax Court held that because Seaview sent what purported to be copies of its return to places not designated in the Code or Reg. Sec. 1.6031(a)-1(e)(1), it did not file its return when it faxed a purported copy to the IRS agent, and it did not file a return when it mailed a purported copy to an IRS attorney. The court also concluded that the copies of Forms 1065 Seaview sent to the IRS did not constitute "returns" because when Seaview's attorney enclosed with the document a cover letter stating that the document was a "copy of its 2001 Form 1065," this indicated to the court that Seaview believed it had previously filed its return and, thus, Seaview did not intend to file a return when it mailed a copy to the IRS's attorney. Further, the court said, when Seaview's accountant faxed a purported copy of the return to the IRS agent in 2005, he enclosed a copy of a certified mail receipt purporting to show that the return had been previously filed in 2002. Seaview's accountant, the court stated, thus led the IRS to believe that the return had been previously filed in 2002. Therefore, the court concluded, Seaview did not intend to file a return when it faxed a copy to the IRS agent.

Seaview appealed to the Ninth Circuit. In Seaview Trading v. Comm'r, 2022 PTC 133 (9th Cir. 2022), a Ninth Circuit panel reversed the Tax Court and held that when (1) an IRS official authorized to obtain and receive delinquent tax returns informs a partnership that a tax return is missing and requests that tax return, (2) the partnership responds by giving the IRS official the tax return in the manner requested, and (3) the IRS official receives the tax return, then the partnership has "filed" a tax return for purposes of pre-2015 BBA Code Sec. 6229. Accordingly, the panel concluded that Seaview's 2001 tax return was filed 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. Because the return was filed in 2005, the court concluded that the IRS's notice of FPAA in 2010 was untimely. The Treasury Department appealed the panel's decision, and in Seaview Trading, LLC v. Comm'r, 2022 PTC 133, a majority of nonrecused active judges vacated the panel's opinion and ordered the case to be reheard en banc.

Seaview argued that Reg. Sec. 1.6031(a)-1(e)'s place-for-filing requirement did not apply in this case because it applies only to returns that are timely filed - not to those that are filed late. Seaview contended that its position was supported by the IRS's historical interpretation and practice, as evidenced by three agency documents. The first document was CCA 199933039, which advised that revenue officers can accept hand-carried returns for filing as delegees of the District Director and that permitting them to do so was consistent with the regulations. Seaview highlighted the memorandum's observation that "[t]he Code, regulations, and instructions of the Form 1040 do not make any reference to delinquent returns." The second document, the 2005 Internal Revenue Manual (IRM), states that examiners should advise taxpayers to deliver delinquent returns "promptly to the examiner," and then instructs IRS personnel to process the delinquent returns by sending them "to the appropriate campus." The last document, a 2006 policy statement, provides that absent an indication of fraud, all delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of an IRS representative, will be accepted.

Seaview also relied on Dingman v. Comm'r, T.C. Memo. 2011-116, a case where a taxpayer failed to file his income tax returns for several years and, during an IRS criminal investigation, delivered to IRS investigators original returns for the missing years along with checks to pay the corresponding tax liabilities. The IRS posted the payments to the taxpayer's account. Three years later, the IRS attempted to assess additional taxes against the taxpayer for fraudulent failure to file returns. The Tax Court held that the IRS's assessment was untimely because the taxpayer had filed his returns, and the statute of limitations had therefore started to run, on the date the checks were credited to his account. The Tax Court found that the crediting of those payments was evidence that the taxpayer's returns had ultimately reached an IRS office that had the authority to process them.

Analysis

The Ninth Circuit held that Seaview did not "file" its 2001 partnership return, either when it faxed a copy of the return to the IRS revenue agent or when it mailed a copy to the IRS attorney, because it did not deliver its return to the designated place for filing, and the return was never forwarded to that location. As a result, the Ninth Circuit concluded that the return was never promptly filed, the three-year statute of limitations never began to run, and therefore, the FPAA was timely.

The Ninth Circuit noted that in Badaracco v. Comm'r, 464 U.S. 386 (1984), the Supreme Court held that limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the government. That means that there must be "meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation." In the view of the Ninth Circuit, Seaview did not meticulously comply with the regulation's 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. And at no point was Seaview's return ever forwarded to the designated place for filing.

The court found no merit in Seaview's argument that the place-for-filing requirement did not apply to a delinquent return. The court pointed out 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 regulation prescribes both place-for-filing and time-for-filing requirements, the court noted that those requirements appear in separate provisions, and nothing in the text of the regulation indicated to the court that compliance with the place-for-filing requirement was conditioned upon compliance with the time-for-filing requirement.

The court also rejected Seaview's arguments regarding the IRS's historical interpretation and practice. The court found that CCA 199933039 did not support Seaview's argument that the regulations are "silent" as to the designated place for filing delinquent returns. The court explained that the memorandum discussed whether revenue officers could require taxpayers to file delinquent returns by hand delivering them to a revenue officer in their local District Director's office, rather than by mailing them to the appropriate Service Center. The memorandum concluded that "[s]ince the Code and regulations do not differentiate between timely filed and delinquent returns, taxpayers may file their delinquent returns either with the applicable Service Center or with a revenue officer." The court agreed that the Code and regulations do not differentiate between timely and delinquent returns - both must be filed in accordance with the prescribed place-for-filing requirements.

With regard to the 2005 IRM, the court reasoned that even if the revenue agent in Seaview's case was required to follow that guidance and failed to do so, that fact would not alter the court's analysis because the IRM does not have the force of law and does not confer rights on taxpayers. As for the 2006 policy statement, the court found that the document did nothing more than confirm that delinquent returns submitted by taxpayers will be "accepted" rather than rejected on the ground they are late. It does not purport to override the regulatory requirements that otherwise govern the manner in which, and the place at which, returns must be filed.

The court also said that Seaview's reliance on Dingman was misplaced. The Tax Court did not, as the Ninth Circuit noted, hold that Dingman's returns were filed when he delivered them to the IRS investigators. Rather, the Tax Court reasoned that when a taxpayer submits a return to someone who is not authorized to accept it for filing, and the return is subsequently forwarded to the correct IRS office, the limitations period commences on that later date. The Ninth Circuit observed that the Tax Court rejected the IRS's argument that Dingman had failed to "meticulously comply" with all named conditions because, in the wake of an agency-wide reorganization, the regulations in question directed taxpayers to file their returns in outdated places with non-existent recipients. The Ninth Circuit said that, by contrast, in this case the regulations in place in 2005 and 2007 offered effective guidance regarding the place for filing returns - Seaview simply failed to comply with the regulation's requirements. And, unlike in Dingman, Seaview's returns were never received at the correct location and processed there.

Observation: In a dissenting opinion, Judge Bumatay agreed with Seaview that no regulation provided rules for the filing of a delinquent return by a partnership and argued that for 20 years, the IRS has told taxpayers they can file late returns with requesting IRS officials. Judge Bumatay reasoned that, although the agency documents relied on by Seaview did not have the force of law, they demonstrated the IRS's internal views that the place-for-filing requirement does not apply to delinquent returns.

For a discussion of the procedural rules for filing partnership tax returns and signing income tax returns, see Parker Tax ¶28,550 and ¶250,145.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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