Ninth Circuit Reverses Tax Court; FPAA Ran Afoul of Statute of Limitations

(Parker Tax Publishing June 2022)

A Ninth Circuit panel reversed the Tax Court and held that 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 Code Sec. 6229(a). Accordingly, the panel concluded that the taxpayer's 2001 tax return was filed in 2005 when the IRS agent requested the missing return, the taxpayer delivered it, and the IRS acknowledged receipt during the auditing process in connection with the FPAA and, as a result, the IRS's notice of Final Partnership Administrative Adjustment in 2010 was untimely. Seaview Trading, LLC v. Comm'r, 2022 PTC 133 (9th Cir. 2022).

Background

Seaview Trading, LLC (Seaview) is a California-based limited liability company classified as a partnership for federal tax purposes. Seaview believed it filed its 2001 Form 1065, U.S. Return of Partnership Income, in July 2002, but the IRS had no record of receiving it. In its Form 1065 for 2001, Seaview reported a $35 million loss from a tax-shelter transaction. Seaview claimed it mailed the return to the IRS service center in Ogden, Utah - the correct place to send timely returns. But the IRS had no record of receiving such a filing. Even though Seaview produced a certified mail receipt for the return's mailing, it conceded that it could not prove that the IRS received its 2001 return in 2002.

In 2005, in response to a letter from an IRS revenue agent notifying it that the IRS had not received its 2001 federal income return, Seaview faxed the agent a signed copy of Form 1065. The next month, the same IRS agent informed Seaview that its 2001 return had been selected for examination and requested further information, including all copies of the signed Form 1065. In 2006, during an interview with Seaview's accountant, the IRS noted that the accountant had previously provided the IRS with a signed tax return. 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 notice 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 adjustment of losses. Seaview argued that the IRS issued the FPAA 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.

In Seaview Trading, LLC v. Comm'r, T.C. Memo. 2019-122, the Tax Court held that Seaview did not "file" a tax return when it faxed a copy to the IRS agent or mailed a copy to the IRS counsel and, in any case, the copies of the 2001 Form 1065 sent to the IRS in 2005 and 2007 were not "returns." Seaview and the IRS then settled all their disputes but reserved Seaview's right to appeal the Tax Court's decision. Seaview filed an appeal with the Ninth Circuit, arguing that (1) the submission of its Form 1065 in 2005 constituted the "filing" of a tax return which started the running of the three-year statute of limitations period, and (2) the late submission of its Form 1065 qualified as a "return."

Analysis

The Ninth Circuit panel reversed the Tax Court. The panel first addressed whether the statute of limitations period for the adjustment of partnership losses under pre-2015 BBA Code Sec. 6229(a) had begun to run. This issue turned on whether Seaview's tax return was ever "filed." The panel 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(a). 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 panel next addressed whether Seaview's belated submission of its Form 1065 qualified as a "return." The panel applied the test under Beard v. Comm'r, 82 T.C. 766 (1984), which provides that: (1) the document must purport to be a return, (2) it must be executed under penalty of perjury, (3) it must contain sufficient data to allow calculation of tax, and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. The court found the first requirement to be straightforward because the Form 1065 faxed over by Seaview unambiguously purported to be a return. The court noted that the Form 1065 was signed under penalty of perjury by Seaview's majority partner and disagreed with the IRS's argument that because the faxed Form 1065 didn't bear an original signature, the return did not meet the signed-under-perjury requirement. Citing the Tax Court's decision in Coffey v. Comm'r, 150 T.C. 60 (2018), the court said that the lack of a wet signature doesn't necessarily prevent a document from being a "return." In Coffey, the Tax Court held that a scanned copy of a return counted as a return because nothing "in the Code or regulations ... explicitly calls for an 'original' signature." Additionally, the court stated, Seaview's faxed Form 1065 contained sufficient data for the IRS to calculate the tax liability as it showed comprehensive details of Seaview's income, assets, and deductions for 2001.

Lastly, the court found that Seaview's faxed Form 1065 represented an honest and reasonable attempt to satisfy the requirements of the tax law. The court noted that, in September 2005, less than two months after learning that the IRS had not received its 2001 tax return, Seaview faxed over the Form 1065 to the IRS revenue agent and the IRS was then able to use the faxed Form 1065 to facilitate its audit and complete its assessment. Under these circumstances, the court had no trouble finding that the faxed Form 1065 was an honest and reasonable attempt at complying with the law. The court concluded that because the Form 1065 that Seaview faxed to the IRS in 2005 met all the Beard criteria, the faxed Form 1065 was a "return."

Observation: In a dissenting opinion, Judge Bade opined that delinquent returns delivered to IRS officials cannot be considered "filed" because of caselaw requiring "meticulous compliance by the taxpayer with all named conditions" to secure the benefit of the statute of limitations. She wrote that it was undisputed that Seaview failed to file its return to the correct location in Ogden, Utah, in the manner prescribed in the applicable statute and regulations, either on time or belatedly, and that conclusion should end the inquiry and the Tax Court holding should be affirmed. The majority, however, said that such an argument only begs the question of what the "named conditions" are for filing delinquent returns as the Tax Code and regulations are silent on the proper procedures for filing a delinquent tax return. Instead, it seemed to the majority that the ordinary meaning of "filing" under pre-2015 BBA Code Sec. 6229(a) governs delinquent returns and, thus, when an authorized IRS official requests a missing return from a taxpayer, the taxpayer complies with the conditions of filing by delivering the return in the manner requested.

For a discussion of the statute of limitations on assessments of tax, see Parker Tax ¶260,130.

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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