The story is familiar: a taxpayer or their practitioner allegedly mails a refund claim before the statute of limitations has expired. The IRS never receives the claim. The mailing was not done by registered or certified mail, nor by authorized private delivery service. Eventually the taxpayer or their practitioner checks on the supposedly filed claim only to discover that IRS has no record of receiving it. The taxpayer learns of this after the SOL has expired, so when they mail a supposed copy of the earlier claim or new claim, IRS rejects it as untimely.
These are the facts from Crispino v US , a case out of a federal district court in New Jersey. The case sweeps in some important administrative law principles, including Chevron and the Brand X doctrine.
The underlying tax issue stems from a rollover of an IRA. On their 2009 return the Crispinos reported it as tax-free; IRS examined the return and concluded the rollover was taxable. It resulted in an additional $134,000 of assessed tax liability. IRS collected the assessment through two levies in June of 2013.
The Crispinos disagreed with the IRS’s characterization of the IRA transfer. The opinion states that their “tax agent” Minelli asserted in a deposition that that he mailed a refund claim using a postage label printed from a Stamps.com postage meter on April 15, 2015. Having heard nothing about the claim, Minelli also testified that at some point in 2015 he checked on the claim’s status and learned that the IRS did not have a record of receiving it. In November of 2015, Minelli mailed a copy of the supposedly earlier filed claim. On December 31, 2015 IRS mailed a disallowance on the basis that the claim was untimely because it was filed beyond two years of the tax’s payment.
In December of 2017 the Crispinos filed a complaint seeking a refund of the $134,000. The complaint alleged that they timely filed the claim. The US filed a motion for summary judgment alleging that the claim was untimely.
The issue in the case tees up the common law mailbox rule and regulations that expressly overturn that rule. The regs provide that Section 7502 is the only way to prove that documents that IRS never receives were actually mailed.
This is important because a statutory tax-filing requirement generally can be satisfied only by actual, physical delivery. Section 7502 provides an exception to the physical delivery rule if a document is postmarked before the deadline and received after the deadline. In addition, sending the document via registered or certified mail, or with an authorized private delivery service, establishes that the document was in fact received even if the document never was received or the IRS has no record of receiving it.
The issue as to whether a taxpayer can introduce extrinsic evidence to prove mailing in the absence of using a 7502-proscribed method or whether Section 7502 was the exclusive way to prove mailing has been contested over the years. Some circuits said yes; others said no. The Third Circuit, where an appeal in this case would lie, had come down in favor of allowing a taxpayer to prove mailing beyond what Congress established in 7502.
In 2004, IRS issued proposed now finalized regs that purported to resolve the split. The regulation establishes that absent delivery a taxpayer can only rely on 7502 to prove mailing. The reg reads:
Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] as provided for by paragraph (e)(2)(ii) of this section, are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.
The Crispinos challenged the regulation’s validity. Under Chevron Step One, the district court concluded that the language in 7502 “d[id] not direct a result” as to whether the statute displaced the mailbox rule. Under Step Two, the district court, citing the 9th Circuit’s analysis in Baldwin v US (a case Carl Smith discussed in Ninth Circuit Holds Reg. Validly Overrules Case Law; Disallows Parol Evidence of Timely Mailing) found that the regulation’s interpretation was reasonable:
[T]he mere fact that dueling principles of statutory interpretation support opposing constructions of a statute does not prove, without more, that the agency’s interpretation is unreasonable.” It is possible for an agency’s construction to be reasonable “even if another, equally permissible construction of the statute could also be upheld.
Should Chevron even play a role if prior circuit court precedent held in favor of the common law rule? The Crispinos argued that pre-regulation Third Circuit precedent that allowed extrinsic evidence to prove mailing controlled. This brings in the so-called Brand X doctrine, which provides that, a “prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005). The district court concluded, as did the Ninth Circuit in Baldwin, that prior taxpayer-friendly appellate law precedent on the issue did not mean “that its interpretation of § 7502 followed from the unambiguous terms of the statute.”
As an aside, for readers who would like to dig deeper in the Brand X issue, check out Kristin Hickman’s excellent Notice & Comment blog post, Justice Thomas, Brand X, and Baldwin, where she discusses Justice Thomas’ dissent from the Supreme Court’s denial of certiorari in Baldwin, interesting in part because Thomas authored the Brand X opinion that he has later questioned.
The taxpayers also argued that the regulation impermissibly conflicts with Rule 406 of the Federal Rules of Evidence. Rule 406 provides that
[e]vidence of a person’s habit or an organization’s routine practice may be admitted to prove that on a particular occasion the person or organization acted in accordance with the habit or routine practice. The court may admit this evidence regardless of whether it is corroborated or whether there was an eyewitness.
Brushing this off, the court stated that the regs make habit evidence less relevant but does not preclude the introduction of that evidence.
A final argument the taxpayers made concerned the IRS’s application of the levy proceeds to the assessed liability. In addition to the 2009 year at issue in the case, there were older assessments. The Crispinos argued that the IRS should have applied the levy proceeds to those earlier years; that would have presumably allowed the later filed “copy” of the original claim to have been made within the two-year SOL. Unfortunately for the Crispinos for involuntary payments such as levy proceeds, the IRS is free to allocate the payments as it sees fit.
The Crispinos are out of luck, at least insofar as getting a court to consider the claim’s merits. Whether they have a cause of action against their practitioner is another matter. The case is yet another reminder that if one is snail mailing something important to the IRS, it is worth the extra time and money to mail it in a way that eliminates any risk of non-delivery.