Coffey v. Commissioner, No. 18-3256 (8th Cir. 2020) reverses a fully reviewed and heavily fractured decision of the Tax Court. The case spent approximately eight years in the Tax Court getting to a decision and almost three years in the circuit court. We wrote about the Tax Court case here, here and here primarily focusing on the heavily split decision and what it means when no clear majority of the Tax Court exists. Based on the difficulty the Tax Court had in deciding the case, it’s safe to say the issue presents plenty of challenges.
Yesterday, I discussed the Quezada case in which the Fifth Circuit overturned the district court which overturned the bankruptcy court in deciding that the information provided in Mr. Quezada’s Forms 1040 and 1099 sufficiently provided the IRS with the information it needed for backup withholding meaning that these two forms essentially served as the Form 945 Mr. Quezada should have filed to report backup withholding meaning that the statute of limitations on assessment for backup withholding ran by the time the IRS made thee assessment. Today, we look at whether a return was filed based on an entirely different set of facts but also considering whether information on one return could satisfy the requirements of another. Like Quezada, the circuit court reverses the lower court but here it reverses a decision holding that the ersatz documents satisfied the requirements and holds that they do not. Both cases involved the statute of limitations on assessment.
The Coffeys claimed residence in the US Virgin Islands. This time of year many of us would like to be residents of the Virgin Islands and not just for tax reasons. For 2003 and 2004 they filed USVE returns which consisted of complete Forms 1040 and numerous other schedules and forms. Although they did not file the returns with the IRS, the USVI’s Bureau of Internal Revenue sent to the IRS the first two pages of their return for each year as well as the Virgin Island and “regular” US Forms W-2. The returns and W-2s were sent to the IRS about five months after receipt of the documents. These documents were sent to the IRS pursuant to a process which would cause the IRS to send to the Virgin Islands any overpayment that would otherwise have been refunded to the Coffeys.
The IRS did not just send to the Virgin Islands the Coffeys’ refunds for the two years. It audited the documents it received and issued a notice of deficiency for the two years. The notice went out in 2009 well more than three years after the years at issue. The IRS took the position in the notice that Judith Coffey had never qualified as a resident of the Virgin Islands and therefore could not claim the special credit available to VI residents. The fractured Tax Court decision held that the statute of limitations for assessment of their US taxes began upon receipt of the pages of the Form 1040 sent by VI to the IRS. Of course, the IRS took the position that receiving a portion of the Form 1040 from the VI taxing authority did not constitute a filing of a tax return with the IRS and consequently did not trigger the running of the statute of limitations on assessment.
Section 932(a)(2) of the Internal Revenue Code requires that Virgin Island non-residents must file their tax return with both the IRS and the VI taxing authority. The court notes the statute of limitations on assessment does not begin to run until a taxpayer files a return. The IRS, as in Quezada, argues for strict construction of whether the statute of limitations bars the IRS from assessing.
The Coffeys made two arguments in support of their position that the statute had run. First, they argued that the sending of a portion of their return to the IRS by the VI taxing authority met the filing requirement. Second, they argued that the filing in the VI alone met their US tax filing requirement.
As in Quezada, the case of Commissioner v Lane-Wells Co., 321 U.S. 219 (1944) ends up in the first paragraph of the court’s analysis. The Eighth Circuit says:
Returns are “filed” if “delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations.
Quoting from Commissioner v. Sanders, 834 F.3d 1269, 1274 (11th Cir. 2016) which was quoting from Allnutt v. Commissioner, 523 F.3d 406, 413 (4th Cir. 2008).
The Eighth Circuit also quotes from Lane-Wells:
The purpose of filing requirements “is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.
The Eighth Circuit cites to an earlier decision by it in Heckman v. Commissioner, 788 F.3d 845 (8th Cir. 2015) which it describes as a similar case to Coffey. In Heckman the taxpayers did not report some taxable income and the IRS learned about the failure during an unrelated audit of the taxpayer. When the IRS issued a notice of deficiency more than three years after the return filing, Heckman argued the statute of limitations barred the notice because of the actual notice of the IRS; however, in Heckman the Eighth Circuit held that even though the IRS knew about the income, that knowledge did not start the running of the statute of limitations on assessment. In making that holding the court said that the statute started running only when the taxpayer’s return was filed.
Here, the sending of the information from the Virgin Islands did essentially the same thing as the related audit of Mr. Heckman. It provided the IRS with actual knowledge but not with a filed return. Here, the Coffeys even made clear they did not intend to file a return with the IRS and they failed to follow the statute for return filing by non-Virgin Island residents. The court also pointed out that in sending a portion of their return to the IRS, the Virgin Islands did not act as an agent of the Coffeys:
That the IRS actually received the documents, processed and audited them, and issued deficiency notices is irrelevant for statute of limitations purposes. See Heckman, 788 F.3d at 847–48. The IRS’s actual knowledge did not create a filing. The statute of limitations in section 6501(a) begins only when a return is filed. Because the Coffeys did not meticulously comply with requirements to file with the IRS, the statute of limitations never began.
In their second argument, that filing with the Virgin Islands counts as a filing with the IRS, the Coffeys were aided by an amicus brief filed by the Virgin Islands. This argument turns on the Coffeys’ genuine belief that they met the residence requirements of the Virgin Islands. They argue that if they had a good faith belief they were VI residents filing their return with VI satisfies the return filing requirement and starts the statute of limitations within the US. Not so says the Eighth Circuit:
The taxpayer’s “subjective intent is irrelevant” in determining what is an honest and genuine return. Citing In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006).
Colsen involved a taxpayer who filed a late return and waited two years before filing bankruptcy seeking to obtain a discharge. In the bankruptcy world the Colsen case involves the minority view of whether a taxpayer can file a return after the IRS has made an assessment pursuant to the substitute for return procedures. I have written glancingly about Colsen on many occasions and most recently here. The Eighth Circuit explains that Colsen dealt with whether a document met the test to be a return and had nothing to do with whether a document was filed. Applying that logic to the Coffeys’ situation the Eighth Circuit finds that the honesty and genuineness of their returns has no bearing on whether the returns were filed.
The Eighth Circuit judges decided the case without the fracturing that occurred at the Tax Court. Maybe non-tax lawyers have the advantage of being a bit removed from the law on which they are ruling. They seemed to have none of the angst present in the Tax Court’s decision in Coffey and set out a bright line rule relying heavily on prior circuit precedent.
The creation of a bright line rule certainly benefits the IRS in administration. It can argue that if a taxpayer does not follow the rules it creates with regard to return submission do not constitute the filing of a return and benefit from all of the downstream effects of that result. The IRS would have the knowledge of the return and be able to react to the return at its leisure. Situations may exist where the IRS knowledge and its practice with regard to acceptance of a return may make a closer case or make another court less comfortable with the outcome.