Update – Nov. 28, 2022
On Nov. 10, 2022, the U.S. Court of Appeals for the Ninth Circuit vacated the opinion discussed below and ordered that the case be reheard by all the active judges of the court. While it is possible that the full court will reach the same conclusion as the three-judge panel, at least for now a majority of the judges voted that the case merited a full review and possibly a different result.
Original – May 23, 2022:
A three-judge panel for the U.S. Court of Appeals for the Ninth Circuit recently reversed the U.S. Tax Court and held that a delinquent partnership return is filed when an authorized IRS official asks for and receives the return from the taxpayer. Seaview Trading, LLC v. Comm'r of Internal Revenue, No. 20-72416 (9th Cir.)
The majority partner of Seaview Trading, LLC learned during an individual audit that the IRS had no record of the partnership filing a return for 2001. The partner initially provided an unsigned copy of the partnership return with proof of mailing the original, but without proof that the IRS received it. Later, and in response to an IRS auditor’s request, the partnership’s accountant faxed a signed copy of the partnership tax return to the IRS auditor in 2005, who acknowledged receipt of the signed copy. Shortly thereafter, the IRS auditor informed the partnership that it was selected for a partnership examination for the 2001 tax year. In 2010, more than three years after the partner faxed a copy of the signed return to the IRS auditor who requested it, the IRS issued a Final Partnership Administrative Adjustment (FPAA) disallowing a $35 million partnership loss. The IRS maintained that the 2010 administrative adjustment was timely, because the taxpayer had not met the technical filing requirements of section 6229(a) which required the taxpayer to mail the return to the IRS Ogden processing center before April 15, 2002.
The Tax Court agreed with the IRS. It ruled that the IRS timely issued the FPAA because Seaview never properly filed a tax return for 2001. The court reasoned that a taxpayer provided signed copy in 2005 did not constitute filing and therefore the 3-year assessment statute never began. In fact, the Tax Court additionally opined that the copy did not even qualify as a return as defined by Beard v. Commissioner, 82 T.C. 766, 777 (1984).
On Appeal, the taxpayer in Seaview argued that the 3-year limitations period began when the IRS examiner received the requested return. The IRS argued that the statute of limitations never started running because the 2001 tax return was never properly filed under section 6229(a), which provides for timely filing at the appropriate service center. The Court noted that the IRS regulation only applied to timely filed returns as to the filing location and was therefore not constrained by the regulation’s definition of what constituted a “filed return” in the case of delinquent return. The Court turned to the ordinary meaning of the word ‘filing’ and other IRS practices regarding processing delinquent returns such as the Internal Revenue Manual (IRM) and the Chief Counsel Advice (CCA) Memoranda. These sources instructed IRS personnel how to request, accept and process delinquent returns when a taxpayer is under examination.
In reversing the Tax Court, the Court of Appeals held that (1) when 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, and (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 section 6229(a). Consequently, the IRS issued an untimely FPAA because 3-year statute began to run when the taxpayer filed the return in 2005.
The panel of judges deciding this case was split, two to one. A Ninth Circuit judge wrote the opinion, and he was joined by a District Court judge from another circuit sitting by designation. The dissent in this case provided a well-reasoned opinion defending the Tax Court’s decision in favor of the government. The large adjustment at issue in this case ($35 million) and the split between the two judges of the Ninth Circuit could increase the likelihood that the government will request a rehearing by the full panel of Ninth Circuit judges. The government has 45 days to request such a rehearing.
Taxpayers are again reminded of the importance of record keeping. It is essential that taxpayers create and maintain proof of all correspondence with the IRS. Moreover, taxpayers should insist on obtaining proof of receipt the IRS through authorized private delivery service tracking or U.S. certified mail with return receipt.