By Jonathan D. Grossberg
In Seaview Trading, LLC v. Comm., (CA 9 2023) 31 AFTR 2d ¶2023-476, the en banc Ninth Circuit held that delinquent partnership returns must be filed with the service center designated by the IRS. Faxing a return to a revenue agent who requested it or mailing a return to an IRS attorney does not constitute filing for purposes of starting the limitations period. Leslie Book, one of the authors of IRS Practice and Procedure, commented, “I find the Seaview decision to be a very difficult and potentially unfortunate decision for taxpayers. My understanding is that some IRS employees routinely ask for back returns, and while Seaview involves a well-represented taxpayer the case has far reaching implications. To that end, I believe taxpayers (and some representatives) falsely believe that directly providing a return to an IRS employee is sufficient for all purposes. This case shows otherwise.”
How it began.
The story begins in July 2005 when, during an audit, the IRS told Seaview that it hadn’t received its 2001 partnership return. Seaview’s accountant then faxed the revenue agent a “copy” of the partnership’s 2001 Form 1065. This fax included a certified mail receipt that Seaview claimed proved it filed its 2001 Form 1065 in July 2002.
Note. Seaview claimed there were two returns in the certified mail envelope it sent to the IRS in July 2002. The IRS received the related entity return that Seaview said was in that envelope.
After the IRS assessed a 2001 deficiency in 2010, Seaview asked Chief Counsel to review the decision. During this process, Seaview also mailed the Chief Counsel attorney with a copy of its 2021 return. During the review, Seaview claimed that the limitations period had expired in 2005. However, Chief Counsel rejected that argument finding that the IRS never received the original return and that faxing a copy of the return to the revenue agent didn’t comply with the rules for “properly filing a return.”
The Tax Court agreed with the IRS that Seaview never filed its 2001 return and, therefore, the IRS could assess a deficiency at any time. On its initial review, a panel of the Ninth Circuit disagreed and vacated the Tax Court’s decision. The en banc Ninth Circuit rejected the panel’s decision, holding that Seaview’s submission to the revenue agent was not a “properly filed tax return.”
Necessary care and diligence.
With respect to the necessary care and diligence, Book noted that, “while the main issue in the opinion concerns whether providing the return to an IRS employee is sufficient, practitioners need to note that Seaview was in this position because there was a related entity return and it could not prove that it had mailed the partnership return in the first instance. The uncertainty as to what return that Seaview’s accountant had mailed via certified mail resulted in the taxpayer being in its predicament. To avoid such problems, taxpayers and their advisors would be well advised to ensure that they have appropriate procedures in place that document what in fact was mailed. And of course, to be prudent, if not e-filing a document, advisors should be mindful of sending returns or other important documents to the appropriate IRS location via certified mail or an authorized private delivery service.”
Caution.
For all returns of any individual or entity, tax advisers should counsel their clients to always file a return as directed by the relevant regulations and forms for the relevant tax year, even if an IRS employee specifically requests the return.
Majority opinion.
The majority opinion held that the relevant regulation, Reg §1.6031-1(e)(1), clearly provided that all returns must be “filed with the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form.” The majority noted that the regulation did not distinguish between timely and delinquent returns. The Supreme Court has said that IRS regulations receive deference and are accorded the force of law if the IRS promulgates the regulation following proper procedures within the scope of its authority. As the majority correctly points out, other IRS documents, such as revenue rulings, revenue procedures, chief counsel advice, and the Internal Revenue Manual, do not have the same force of law as regulations.
The fundamental disagreement between the majority and the dissent relates to statutory interpretation. The majority implicitly follows the Chevron deference doctrine. Chevron provides that regulations are presumptively valid, and provide binding guidance for taxpayers, when Congress has not spoken directly to the precise question at issue and the agency’s answer is a based on a permissible construction of the statute. This deference only applies to regulations, which go through a process of notice and comment, and not to other administrative pronouncements such as revenue rulings and revenue procedures. The majority, therefore, reads the regulation in accordance with its plain terms. Because Seaview did not file its return with the designated service center, it never filed its return pursuant to the regulation. The IRS had the authority to promulgate the regulation because Congress has not spoken directly to the issue of where returns should be filed. And, it was reasonable for the IRS to require all returns to be filed at a designated service center.
Dissent.
On the other hand, the dissent finds that the regulation is not specific enough and the IRS’ other public guidance contradicts its litigating position in Seaview. The dissent points to the various forms of nonregulatory public guidance that contradict the IRS’ litigating position. Therefore, the dissent would read broadly the plain language of the statute that refers to a return being “filed” and would find that Seaview’s return was filed. Specifically, the dissent rejects that the regulation applies here. The dissent would hold that the regulation only applies to timely filed returns. The dissent argues that both paragraphs of the regulation cannot apply to delinquent returns because the second paragraph, which refers to the time for filing returns, clearly only applies to timely returns. Thus, the first paragraph must also only apply to timely returns. The majority reads the two paragraphs separately.
The amicus brief filed by the Center for Taxpayer Rights and the Harvard Law School Federal Tax Clinic points out another problem with the IRS’ position and the Tax Court’s reasoning in deciding in the IRS’ favor at the trial: the taxpayer must file an original return for the statute of limitations to run. Thus, if the taxpayer provides a copy of the return to an IRS agent, this does not begin the running of the statute of limitations. In essence, rather than preserving the argument that the taxpayer did in fact timely file, but IRS lost the return, the taxpayer must admit to late filing to begin the running of the statute of limitations.
Impact on taxpayers.
The decision in this case has far-reaching implications for taxpayers. Seaview was very well represented by CPAs and attorneys, but when the IRS requests back returns in audits, most taxpayers are unrepresented and are unfamiliar with the regulations that govern filing returns. According to Keith Fogg, Emeritus Clinical Professor of Law at Harvard Law School, “the practice of requesting back returns by an IRS employee should always be accompanied by a warning to the taxpayer that delivery of the return does not satisfy the filing requirements. Without treating a return provided under these circumstances as filed or an adequate warning that providing the return does not satisfy the filing requirements, many taxpayers will be lulled into believing that handing a return to an IRS employee at the employee’s request acts to file the return with all of the attendant issues that flow from filing. The fact that the IRS has a fair amount of internal guidance that conflicts with its regulation also makes this a tough decision for taxpayers.”
Taxpayers should be careful to ensure that they follow regulations when filing timely and delinquent returns.
For more information about when a return is filed for assessment period purposes, see Checkpoint’s Federal Tax Coordinator ¶T-4006.
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