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The 9th Circuit Reverses The Tax Court, Finding That The Taxpayer Had Filed A Return When It Provided A Copy To The IRS During Its Examination

Posted on May 13, 2022

We welcome back guest blogger Janice Feldman. Janice is currently a volunteer attorney at the Harvard Law School Federal Tax Clinic and assisted in drafting the amicus brief filed by the clinic on behalf of the Center for Taxpayer Rights in Seaview Trading, LLC v. Commissioner. Prior to volunteering at the clinic, Janice worked for over 30 years in tax administration, first with the Department of Justice, Tax Division and then with the IRS, Office of Chief Counsel. She retired in 2019. At the time of her retirement, Janice was the Division Counsel/Associate Chief Counsel (National Taxpayer Advocate Program) at the Office of Chief Counsel. Keith

In Seaview Trading, LLC v. Commissioner, the 9th Circuit looked at the age-old tax question of when is a return considered filed for the purposes of starting the assessment statute of limitations. The Center and the Clinic took a keen interest in this case as this issue – when is a return filed — is central to administering a fair and just tax system. Taxpayers and the IRS, alike, need to know what actions are sufficient to trigger the statute of limitations on assessment. Under the Taxpayer Bill of Rights, taxpayers have a right to finality. IRC Section 7803(a)(3)(F). If the taxpayers’ actions are insufficient to trigger the limitations period, then the IRS can make assessments forever.  

In Seaview, the taxpayer, a partnership, believed it had filed its 2001 partnership tax return in July 2002, but the IRS had no record of the filing. In 2005, the IRS commenced an audit of the taxpayer’s 2001 return. The IRS agent conducting the exam notified the taxpayer that the IRS had no record of the taxpayer filing a 2001 partnership income tax return (Form 1065) and requested a signed copy. In response, the taxpayer faxed a signed copy of the return to the agent. The IRS later relied on the information on the faxed return to propose an additional assessment against the taxpayer. The final partnership administrative adjustment (FPAA) proposing an assessment was issued in 2010, which was more than four years after the taxpayer faxed a signed copy of the return to the revenue agent.

The Tax Court in TC Memo 2019-122 took a draconian view holding that the taxpayer did not “file” a tax return when it faxed a copy to the IRS agent. Furthermore, the Tax Court found that the 2001 return faxed to the agent did not even qualify as a “return” reasoning that the taxpayer did not intend to file a return when it faxed the return to agent because the taxpayer included a copy of the certified mail receipt showing a July 2002 mailing date. Since the tax return faxed to a revenue officer was not a tax return filing nor a return, the Tax Court found that the final partnership administrative adjustment (FPAA) issued in 2010 was not barred by the limitations period under section 6229(a). The IRS had unlimited time to assess as no return was filed.   

The taxpayer appealed to the Court of Appeals for the 9th Circuit. On May 11, 2022, the 9th Circuit rendered its decision and reversed the decision of the Tax Court. A copy of the 9th Circuit decision is located here.

The Ninth Circuit stated that “Based on the ordinary meaning of “filing,” we hold that a delinquent partnership return is “filed” under § 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.”

Since the Tax Court had concluded that the signed copy of the Form 1065 faxed to agent was not a return under the Beard test, See Beard v. Commissioner, 82 T.C. 766, 777 (1984), the 9th Circuit went on to analyze this issue. The 9th Circuit found that the Form 1065 that Seaview faxed to agent met all the Beard criteria and therefore was a return.  

I commend the 9th Circuit. This decision is a big victory for the tax system as the audit process needs to be perceived by taxpayers as fair. When a taxpayer has evinced an honest effort to satisfy his obligation to self-report his tax liability and the IRS relies on that submission as a basis of an examination, the taxpayer should be entitled to finality, and the IRS should not have unlimited time to assess. The receipt of the return by the revenue agent in this situation should start the clock running on the assessment period. The IRS will still have three years from receipt to assess, but the IRS will not have all the time in the world.

The case was decided in a split decision with a vocal dissent. The dissenter based her position on the language of the regulation. The majority acknowledge the regulation but pointed out the places in IRS subregulatory guidance in which the IRS and Chief Counsel instructed employees to accept returns in ways that differed from the rigid requirements of the applicable regulation which required submitting the return to the appropriate IRS Service Center in order for it to start the clock. Because of the importance of the decision to the system, it will be interesting to see if the IRS accepts the decision and acknowledges that its employees are directed to accept returns in certain circumstances.

The IRS may decide to limit its acquiescence of this decision to the 9th Circuit and continue to fight this issue in other circuits. It may decide to seek en banc review encouraged by the dissent or to seek Supreme Court review if it has an adequate conflict. There will be more to come about this case as the IRS reacts to the decision and plots its path forward.

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