Ninth Circuit's Opinion in Seaview Trading Vacated; En Banc Rehearing Ordered

(Parker Tax Publishing November 2022)

In response to a Treasury Department appeal, a majority of nonrecused active judges of the Ninth Circuit vacated a three-judge panel opinion in Seaview Trading v. Comm'r, 2022 PTC 133 (9th Cir. 2022) and ordered that the case be reheard en banc. In Seaview Trading, the three-judge panel reversed the Tax Court and held that an IRS Notice of Final Partnership Administrative Adjustment (FPAA) issued in 2010 was untimely after concluding that the taxpayer's missing 2001 tax return was filed in 2005 when an IRS agent requested the missing return, the taxpayer delivered it, and the IRS acknowledged receipt during the auditing process in connection with the FPAA. Seaview Trading, LLC v. Comm'r, 2022 PTC 344 (9th Cir. 2022); Treasury Petition for Rehearing in Seaview Trading; Seaview's Response to Petition for Rehearing En Banc.

Background

Seaview Trading, LLC (Seaview) is a California-based limited liability company classified as a partnership for federal tax purposes. In 2005, Seaview received a letter from an IRS agent saying it had not filed its 2001 tax return. Seaview said it filed its 2001 Form 1065, U.S. Return of Partnership Income, in July 2002 when it mailed the return to the IRS service center in Ogden, Utah - the correct place to send timely returns.

In response to the letter from the IRS, Seaview's counsel faxed the IRS agent a signed copy of its 2001 Form 1065 and produced a certified mail receipt for the return's mailing. However, Seaview conceded that it could not prove that the IRS received its 2001 return in 2002. On its 2001 Form 1065, Seaview reported a $35 million loss from a tax-shelter transaction. The next month, the same IRS agent informed Seaview that its 2001 return had been selected for audit and requested additional information, including all copies of the signed Form 1065. 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 FPAA 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) which overhauled the partnership audit regime, it can assess tax attributable to a partnership or affected item at any time if the partnership does not file a return and, the IRS argued, Seaview had not filed a return.

Tax Court's Decision

In Seaview Trading, LLC v. Comm'r, T.C. Memo. 2019-122, the Tax Court held that because Seaview sent what purported to be copies of its return to places not designated in the Code or Reg. Sec. 1.6031(a)-1(e)(1), it did not file its return when it faxed a purported copy to the IRS agent, and it did not file a return when it mailed a purported copy to an IRS attorney. The court also concluded that the copies of Forms 1065 Seaview sent to the IRS did not constitute "returns" because when Seaview's attorney enclosed with the document a cover letter stating that the document was a "copy of its 2001 Form 1065," this indicated to the court that Seaview believed it had previously filed its return and, thus, Seaview did not intend to file a return when it mailed a copy to the IRS's attorney. Further, the court said, when Seaview's accountant faxed a purported copy of the return to the IRS agent in 2005, he enclosed a copy of a certified mail receipt purporting to show that the return had been previously filed in 2002. Seaview's accountant, the court stated, thus led the IRS to believe that the return had been previously filed in 2002. Therefore, the court concluded, Seaview did not intend to file a return when it faxed a copy to the IRS agent.

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."

Ninth Circuit Panel's Analysis

In Seaview Trading v. Comm'r, 2022 PTC 133 (9th Cir. 2022), a Ninth Circuit panel reversed the Tax Court and 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. 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.

Dissenting Opinion

One judge on the Ninth Circuit panel dissented. Judge Bade noted that, for many years, in all its communications with the IRS and in litigating its case before the Tax Court, Seaview maintained that it had filed its 2001 partnership return in 2002, and that it had filed the return to the correct location (i.e., the IRS service center in Ogden, Utah). Before the Ninth Circuit, the judge observed, Seaview acknowledged that it could not show that its return ever reached the Ogden Service Center. It was thus undisputed, in the judge's opinion, that Seaview failed to file its return to the correct location, either on time or belatedly and that conclusion should have ended the court's inquiry and led to the affirmation of the Tax Court's decision.

According to Judge Bade, the majority's opinion reads a massive gap into the regulations by concluding that Reg. Sec. 1.6031(a)-1(e) (2001) - the regulation setting forth the place, time, and manner requirements for filing partnership returns - only applies to timely returns. Under the majority's sweeping holding, she said, as long as a taxpayer does not comply with the regulatory deadlines for filing a return (or in other words as long as the taxpayer submits a return late), the taxpayer is not subject to the regulation's other provisions and can "file" its return by sending it to virtually any IRS employee. According to the judge, the majority thus effects a sea change in the interpretation of long-standing, and previously uncontroversial, filing regulations.

Citing the Supreme Court's decisions in Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930) and Badaracco v. Comm'r, 464 U.S. 386 (1984), Judge Bade also opined that the majority was disregarding Supreme Court precedent which holds that taxpayers must meticulously comply with filing requirements to benefit from the statute of limitations and that the court must strictly construe the statute of limitations in favor of the government.

Government's Rehearing Arguments

In its request for an en banc rehearing, the Treasury Department argued that the majority opinion is in serious tension with Supreme Court and circuit court precedent as identified in Judge Bade's dissent and misconstrues long-standing regulations governing the filing of tax returns. Before this decision, the government said, courts consistently held that for a return to be "filed," it had to be delivered to the specific IRS office or officer designated in the applicable statute and Treasury regulation.

According to the government, the majority's opinion found a nonexistent gap by holding that, because Seaview violated Reg. Sec. 1.6031(a)-1(e) regarding the time for filing, the preceding provision in the regulation regarding the place for filing no longer applied. No other court, the government noted, has identified the "gap" found by the majority or held that a different rule should apply to late-filed returns; but under the majority's opinion, the government argued, any silence regarding specific rules for late filings will open the door to arguments that there are "gaps" to be filled by reference to "ordinary meaning" principles.

The government also argued that the majority opinion substantially affects a rule of national application in which there is an overriding need for uniformity. Further, the government said, the opinion also blurs the line as to what constitutes the "filing" of a tax return which will also affects criminal prosecutions.

For a discussion of the procedural rules for filing partnership tax returns and signing income tax returns, see Parker Tax ¶28,550 and ¶250,145.

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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