Tax Court Petitions Delivered by a FedEx Service Not on the IRS's Formal List Were Untimely

(Parker Tax Publishing July 2020)

A Ninth Circuit panel affirmed the Tax Court's dismissal, for lack of jurisdiction, of untimely petitions for redetermination of two medical marijuana dispensaries' federal income tax deficiencies. The panel rejected the taxpayers' argument that the Tax Court was inaccessible on the filing deadline date and also held that the petitions could not be deemed timely under the mailbox rule set forth in Code Sec. 7502 because the particular FedEx service used by the taxpayers was not on the IRS's formal list of designated delivery services to which the mailbox rule applies. Organic Cannabis Foundation v. Comm'r, 2020 PTC 179 (9th Cir. 2020).

Background

Organic Cannabis Foundation, LLC and Northern California Small Business Assistants, Inc. operate medical marijuana dispensaries (the taxpayers). On January 22, 2015, the IRS issued notices of deficiency to the taxpayers for tax years 2010 and 2011 which stated that the taxpayers could not, by reason of Code Sec. 280E, deduct amounts paid or incurred during the tax years in carrying on a trade or business that consists of trafficking in controlled substances. In response to the deficiency notices, the taxpayers sought to file their Tax Court petitions for redetermination by April 22, 2015, the last day to file such petitions under the 90-day rule in Code Sec. 6213(a).

In preparing the two Tax Court petitions for filing, the taxpayers' attorneys delegated the task of arranging delivery to the Tax Court to a secretary who selected an overnight delivery service that was not then on the IRS published list (it was added two weeks later) of approved delivery services. Under Code Sec. 7502(f) and the "mailbox" rule, a document is deemed filed when dispatched, but only if the taxpayer uses one of the particular delivery services that the IRS has specifically designated for that purpose in a published notice.

The original FedEx label prepared by the secretary stated that the shipping date was "21APR15" and that the package was to be delivered "WED - 22 APR 8:30A" by "FIRST OVERNIGHT." At some point in processing the package, however, FedEx apparently prepared a new label with a notation indicating it was created on "04/22" and that redesignated the package for delivery on "THU - 23 APR 8:30A" by "FIRST OVERNIGHT." This new label was affixed directly over the prior label, and the package arrived in that form at the Tax Court on the morning of April 23. The limited FedEx tracking information that was later available concerning the package no longer listed any of the details of the package's transit while being handled by FedEx; instead, it merely stated that the "Ship date" was "Wed 4/22/2015" and that the package was delivered at "7:35 am" on "4/23/2015 - Thursday."

On the morning of April 22 (the due date for the petitions), one of the attorneys asked the secretary who had prepared the FedEx package to check on its status. The secretary checked her email and saw that she had not received the usual automatic notice from FedEx confirming its delivery. She called the Tax Court Clerk's Office and was told that the package had not been received. She then called FedEx's customer service number and spoke with a representative to whom she provided the package's tracking number. As the secretary later described it, the FedEx representative responded that "the driver's delivery notes stated the driver had tried to deliver but could not because . . . he or she could not get to the door for some plausible reason like construction, or some sort of police action (perhaps the representative said the access was blocked off because of a safety threat)." When the secretary arrived at the firm the next morning, April 23, she saw that she had an email in her inbox confirming that the package had been delivered that morning at 7:35 a.m. Eastern time.

The Tax Court subsequently concluded that the petitions had not been timely received and that the mailbox rule did not apply. It thus dismissed the petitions for lack of jurisdiction.

Before a Ninth Circuit panel, the taxpayers argued that (1) the petitions should be deemed timely because delivery had been attempted on April 22, but the Tax Court was inaccessible; (2) the use of FedEx First Overnight should be deemed to satisfy Code Sec. 7502(f) or to substantially comply with that provision; (3) even if the petitions were untimely, Code Sec. 6213(a)'s 90-day deadline should be subject to equitable exceptions, such as equitable tolling and waiver; (4) because the deficiency notice mailed to Organic Cannabis omitted its P.O. Box number, the mailing should be deemed to be invalid and that the 90-day limit should have been calculated from Organic Cannabis's actual receipt of the notice on February 3, 2015, thus extending the Tax Court petition deadline.

Analysis

The Ninth Circuit panel affirmed the Tax Court's dismissal for lack of jurisdiction. With respect to the taxpayers' argument that the Tax Court was inaccessible on April 22, thereby extending the due date for filing to the next day, the court noted that the nature of the obstacle that FedEx claimed to have encountered was not one that would be expected to make it impracticable to reach the Tax Court's Clerk's office for the entire day. The court observed that the taxpayers did not show that the Tax Court Clerk's Office remained inaccessible for the several hours that followed FedEx's attempted delivery and held that, for non-electronic filings, a clerk's office is "inaccessible" on the "last day" of a filing period only if the office cannot practicably be accessed for delivery of documents during a sufficient period of time up to and including the point at which the clerk's office is scheduled to close.

The court also agreed with the Tax Court's conclusion that the taxpayers could not avail themselves of the mailbox rule because the particular delivery service used did not fall within the statutory definition of a "designated delivery service." Unlike the Federal Rule of Appellate Procedure 25(a)(2)(ii), which applies a mailbox rule to the timely delivery of a brief to "a third-party commercial carrier," Code Sec. 7502 does not allow taxpayers to use the services of any bona fide commercial courier. Instead, the court noted, Code Sec. 7502(f)(2) specifies that a particular delivery service provided by a trade or business will count as a "designated delivery service" only if such service is designated by the IRS, and the FedEx service used by the taxpayers' lawyers failed to meet that requirement. The court also rejected the taxpayers' argument that, because FedEx First Overnight was indisputably eligible for designation on the day they used it, and was formally designated just two weeks later, they should be deemed to have substantially complied with Code Sec. 7502(f)'s mailbox rule.

In addressing the argument that, even if the petitions were untimely, Code Sec. 6213(a)'s 90-day deadline should be subject to equitable exceptions, such as equitable tolling and waiver, the court said that no such exceptions may be applied if the deadline is jurisdictional and it agreed with the Tax Court that Code Sec. 6213(a)'s time limits are jurisdictional.

Finally, the court examined Organic Cannabis's contention that it should declare invalid the tax deficiency notice sent to it because it was improperly addressed and, given Organic Cannabis's late filing of its petition, the IRS's use of an incorrect address was not harmless error. The Tax Court held that, even assuming the notice was improperly addressed, it was still valid because Organic Cannabis suffered no prejudice given that it actually received the notice 78 days before a petition in the Tax Court was due. The Ninth Circuit agreed that the deficiency notice sent to Organic Cannabis was valid, but reached that conclusion for the simpler reason that it was not misaddressed at all. For purposes of sending a notice of deficiency to a taxpayer, the court said, it is generally "sufficient" if the IRS mails the notice to the taxpayer's "last known address." According to Organic Cannabis, the last known address the IRS should have used is "P.O. Box 5286, Santa Rosa, CA 95402-5286" but the address listed in the IRS's mailing log omitted "P.O. Box 5286" and instead simply listed the address that was used as "Santa Rosa, CA 95402-5286."

The court noted that the U.S. Postal Service has reserved the five-digit ZIP code "95402" solely for P.O. Boxes in Santa Rosa and by using the Zip Code "95402," the IRS thereby designated that the item was addressed to a P.O. Box for that Zip Code in Santa Rosa, and the additional four digits that the IRS added to that Zip Code - "5286" - provided the relevant P.O. Box number. Thus, the court concluded, contrary to Organic Cannabis's contention that the IRS failed to address the envelope to "P.O. Box 5286," the IRS communicated precisely that information to the U.S. Postal Service in the address it used, which was therefore sufficient.

For a discussion of the mailbox rule and the private delivery services that are treated the same as a U.S. postmark, see Parker Tax ¶250,120.

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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