Tax Notes logo

Ninth Circuit En Banc Panel Reverses Seaview Trading

Posted on Apr. 24, 2023

We should have covered this case much earlier but sometimes when a case comes out we look for an appropriate guest blogger and the process of getting out a post on an important case gets sidetracked.  That seems to have happened here.

We wrote about Seaview Trading in May of 2022 when the 9th Circuit reversed the Tax Court.  In its holding, the 9th Circuit found that delivery of a delinquent return to a revenue agent who requested it served as the filing of the return starting the statute of limitations on assessment.  This decision had significance.  So much significance that the IRS could not live with the decision and requested an en banc review which the 9th Circuit granted.  While the case was under en banc consideration, we wrote about a Rule 28(j) letter the IRS sent to the court.

On March 10, 2023, the 9th Circuit sitting en banc reversed the decision of the panel restoring the Tax Court’s decision that handing the delinquent return to the requesting revenue agent did not meet the requirements for filing a return.  This meant that the statute of limitations on assessment remained open at the time the IRS sent the taxpayer adjustments to the return since the statute of limitations on assessment never runs with respect to an unfiled return.   In this post I will explain why the full court reversed the panel and talk about the vigorous dissent.

While the taxpayer in this case was very well represented, in many instances when the IRS employee requests back returns, the taxpayer is unrepresented and unfamiliar with the regulations that govern filing. 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.

The Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case at the panel stage but not during the en banc consideration.

Seaview apparently failed to file its return for the tax year 2001 by the due date or during the period after the due date. At some point a revenue agent reached out to Seaview requesting the return. Seaview faxed a complete, signed copy of the return to the revenue agent in 2005. It mailed a signed copy to a Chief Counsel, IRS attorney in 2007. If either of those actions satisfied the requirements for filing a return, the statute of limitations on assessment would have run by the time the IRS sends the notice of partnership adjustment in 2011.

The relevant regulation, 26 C.F.R. § 1.6031(a)-1(e) (2001), provides:

(e) Procedural requirements—

(1) Place for filing. The return of a partnership must be filed with the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form (see § 601.601(d)(2)).
(2) Time for filing. The return of a partnership must be filed on or before the
fifteenth day of the fourth month following the close of the taxable year of the partnership.

The IRS instructions to taxpayers in 2001 with a principal place of business in California was to file their return at the Ogden Utah Service Center. Seaview thought it timely filed its 2001 return and provided the RA not only with a copy of the return but with a copy of the certified mailing receipt for the envelope in which it allegedly placed the 2001 return in July of 2002; however, Seaview conceded on appeal that it cannot prove the IRS received the 2001 return as part of the mailing signified by the receipt.

While Seaview gave copies of its return to the RA and later to a Chief Counsel attorney, neither of the individuals to whom it gave a return forwarded the 2001 return to Ogden and Seaview also did not send a return to Ogden during this period.  In October 2010, the IRS issued a notice of final partnership adjustment disallowing a $35 million loss claimed on the 2001 return.  In Tax Court, Seaview conceded it was not entitled to the claimed loss and limited its argument to the timeliness of the notice because it came too late after Seaview hand delivered the returns to the RA and the Chief Counsel attorney.  The Tax Court rejected Seaview’s argument, but it prevailed at the 9th Circuit panel garnering two votes of the three panel members.

The en banc opinion starts its legal discussion with a quote that limitations periods are “strictly construed in favor of the government.”  That quote provides a roadmap for the discussion to come.  The opening paragraph ends with another quote:

“meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation.” Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930).

Since Seaview did not follow the regulation requirement and the relevant IRS instructions for 2001 returns by sending the return to the Ogden Service Center the en banc court reverses the panel decision and reinstates the Tax Court decision. It points out that its conclusion is consistent with the decisions of other circuits and with a long line of Tax Court opinions.

Seaview argued that the regulation only applies to timely filed returns. The regulation prescribes both place for and time for filing requirements. The en banc court rejected that interpretation stating that the regulation makes no distinction between timely and untimely returns.

Seaview argued that handing the return to a requesting IRS employee satisfies the requirement for filing a return based on the IRS’s own historical interpretation and practice.  It pointed to three guidance items promulgated by the IRS: 1) IRS, Chief Counsel Advice No. 199933039 (Aug. 20, 1999) stating Revenue Officers should accept hand delivered returns for filing as delegates of the District Director; 2) IRM § (2005) which instructions IRS personnel to process delinquent returns by sending them to the appropriate campus; and 3) IRS Policy Statement 5-133, Delinquent Returns—Enforcement of Filing Requirements (Aug. 4, 2006),  which says that absent fraud “[a]ll delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted.”

The en banc court rejected the argument that these documents overrode the requirement of the regulation.

One judge, Judge Bumatay who served on the panel that overturned the Tax Court decision, dissented.  He finds the manual provision and other actions of the IRS regarding returns to effectively override the strict language of the regulation.  He minces no words in criticizing the decision of the majority:

What makes our court’s decision most perplexing is that the IRS’s public guidances about filing delinquent tax returns with requesting officials adheres to the Tax Code and IRS regulations. The Tax Code only requires filing a return as the IRS “may prescribe in regulations.” 26 U.S.C. § 6230(i) (repealed 2015) (emphasis added). But here, the IRS has promulgated no regulation on how partnerships must file “delinquent” returns. In such cases, we follow the plain meaning of “filing.” And, as the IRS has previously concluded, sending a delinquent return to a requesting IRS official fits with the plain meaning of the term. So the IRS’s public statements about filing delinquent returns with an IRS representative follows the law, and we should have held the IRS to its promises. Instead, our court lets the IRS “speak[] out of both sides of its mouth.”

Judge Bumatay notes that publicly the IRS encourages taxpayers to file returns with IRS representatives while allowing those representatives to decide whether to “file” the return by not forwarding the return to the appropriate Service Center.

[W]e are nation of laws, not bureaucrats. It’s the plain meaning of the Tax Code that governs this case—not the whims of some IRS agent. While the majority may feel that tax liabilities may be easily afforded—or even deserved— by a multi-million-dollar partnership like Seaview, the consequences of our court’s decision will fall on countless taxpayers without the legal resources or means to defend themselves against the arbitrary power of individual IRS officials. (emphasis added)

The dissent goes on for several more pages explaining why Judge Bumatay finds the IRS position in this case inconsistent with the IRC, the regs and its internal guidance. The reason the Tax Clinic wrote an amicus brief supporting a well-heeled, well represented partnership that invested in a tax shelter is captured by the bolded section of the final quote. The regulation should not be viewed in a vacuum. If an IRS employee solicits a return in their official capacity and a taxpayer remits the return, the taxpayer should be allowed to rely on that remittance as a filing even if the IRS employee does not follow the IRM and forward a copy of the return to the appropriate Service Center.

Of course, taxpayers should file their returns timely with the appropriate Service Center.  Anyone advising a taxpayer should advise them to file their late returns with the appropriate Service Center even if requested to file a return with an IRS employee acting in their official capacity.  The en banc decision and the position of the IRS do not align with fairness to taxpayers.  From a taxpayer rights perspective, this decision fails to protect their rights.

Subject Areas/Tax Topics
Copy RID