Figuring out when or whether a taxpayer has filed a return is important for many reasons. On the one hand, proper filing limits the time for the IRS to assess. Thus taxpayers generally want the courts to find they have filed. On the other hand, filing a frivolous or fraudulent return can lead to penalties. In those situations, taxpayers want the courts to find they have not filed!
Sometimes a taxpayer will give an IRS employee a copy of a return they claim was previously filed. Does that constitute the filing of a return? Well, it depends. Just like last week, I think it useful to compare the Tax Court and Circuit Court cases.
In a logic-challenged opinion, the Ninth Circuit recently decided giving a copy did constitute filing a return … for for statute of limitations purposes. See Seaview Trading, LLC v. Commissioner, 447 F.3d 706 (9th Cir. 2022), rev’g T.C. Memo. 2019-122. While I agree with the dissenting judge that “the majority’s analysis and conclusions are logically absurd and should not be the holding of this court,” there is no denying the decision was good news for taxpayers.
Now comes the Tax Court and in Chule Rain Walker v. Commissioner, T.C. Memo. 2022-63 (June 15, 2022), Judge Nega decides that giving an IRS employee a copy of a frivolous return does not constitute filing a return … for frivolous penalty purposes!
Win-win for taxpayers? As usual, the devil is in the details, which you can find below the fold.
Congress wants taxpayers to file their returns. To encourage filing, Congress imposes various monetary and non-monetary consequences for failing to file. The most obvious non-monetary consequence is that failing to file a return allows the IRS to asses tax “at any time.” §6501(c)(3). In contrast, properly filing a return triggers a 3-year limitation period for the IRS assess any taxes in addition to those shown on the return. Failing to file also carries monetary consequences in the form of “additions to tax” for failing to file. §6651(a).
But Congress does not want taxpayer to file frivolous returns. Section 6702 requires the IRS to assess a $5,000 penalty when a taxpayer “files what purports to be a return” but it either has obviously bogus information or insufficient information to calculate a tax, and either reflects a position publicized as frivolous by the IRS or reflects an intent to “delay or impede the administration of Federal tax laws.” §6702(a).
(1) What Constitutes Proper Filing
As I have explained in other posts, the general rule is that a return is filed when it is physically received by the proper IRS office. See Bongam v. Commissioner, 146 T.C. 52 (2016). That generally means the applicable Service Center. The applicable regulation is Treas. Reg. 1.6091-2, (as amended in 2004 to reflect the massive IRS reorganization in 2000). The regulation lays out the basic rule that “whenever instructions applicable to income tax returns provide that the returns be filed with a service center, the returns must be so filed in accordance with the instructions.” Reg. 1.6091-2(c). When there are no applicable instructions, taxpayers may “file with any person assigned the responsibility to receive returns at the local Internal Revenue Service office that serves the legal residence or principal place of business of the person required to make the return.” Reg. 1.6091-2(a)(1).
Courts apply the filing requirements strictly because they are usually looking at whether the taxpayer has properly triggered the assessment limitation period. A typical example is Winnett v. Commissioner, 96 T.C. 802 (1991). In Winnett the taxpayers mailed their return (remember those days?) to the wrong Service Center (remember those?) which received it and forwarded it to the proper Service Center. The resulting NOD was issued more than three years after the first Service Center received the return but less than three years after the second Service Center received the return.
The taxpayers argued that the IRS policy (in the IRM) was to treat a return as filed on the first date any service center received it. The Tax Court explained the problem with that reasoning: internal IRS policy and procedures cannot alter a statutory limitations period. “Under the established general rule a statute of limitation runs against the United States only when they assent and upon the conditions prescribed. For a taxpayer to secure the benefit of the limitation, there must be meticulous compliance by the taxpayer with all named conditions.” Id. at 808, citing and quoting Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930). Accordingly, deciding whether the taxpayer had properly filed was a question of law that could not be altered by internal IRS practice or procedures.
(2) Can You File A Return By Giving It To An IRS Employee?
No. And Maybe. And Yes.
No. Often taxpayers provide a copy of their return to an IRS employee during audit. Generally that does not work because particular IRS employees are not identified in either statutes or regulations as authorized to accept and process tax returns. Courts have long held that in order for returns to be considered “filed” for §6501 purposes, the returns must be delivered, in the appropriate form, to someone authorized by law to receive them. Gotta be submitted to the right place and in the right form. See W.H. Hill Co. v. Commissioner, 64 F.2d 506 (6th Cir. 1933) (giving return to RA did not constitute filing); see also Allnutt v. Commissioner, 523 F.3d 406 (4th Cir. 2008) (giving return to Chief Counsel’s office did not constitute filing). And, of course, the 2004 regulations support that long-standing rule of law by requiring taxpayers to file according to the instructions on the relevant form they are filing.
Maybe. But the 2004 regulations give taxpayers a fallback, by permitting physical delivery to “any person assigned the responsibility to receive returns at the local Internal Revenue Service office that serves the legal residence or principal place of business of the person required to make the return.” Treas. Reg. 1.6091-2(a)(1). Again, however, that fallback is available only if there are no contrary instructions on the relevant form or document the taxpayer is seeking to file.
The regulation’s fallback position has a long history. There are certain government employees whose job historically has included collecting delinquent returns for processing. Back in the day (as in 1862) they were called Collectors. They are now called Revenue Officer (RO’s). Chief Counsel CCA 199933039 does a great job explaining how and why the IRS will treat a taxpayer as filing a return when they give it to an RO who is requesting it. And although that guidance was written in 1999, it seems to fit with the regulation’s fallback: RO’s might well be a “person assigned the responsibility to receive returns at the local Internal Revenue Service office.” But then again, it might not. See Harold v. United States, 628 B.R. 45 (2021) (copy of return faxed to RO was not a filing, in part because the RO was not an office or person specified in either §6091(b)(1) or the regulations for filing of tax returns).
Cautious Yes. In one case, the Tax Court permitted a taxpayer an even more generous fallback than the current regulation. That is because the Tax Court refused to apply the regulation to events arising before the regulation was issued in final form. In Dingman v. Commissioner, T.C. Memo. 2011-116, the taxpayer was under criminal investigation in 2003. In early 2003 his attorney gave the Special Agent signed returns for years 1996-2000 along with checks to pay the liabilities reported for two of the years. The IRS speedy quick cashed the checks, posting them as advanced payments on February 19, 2003, but did not assess the liabilities until February 28, 2006.
Judge Marvel decided that the assessment was untimely because, she ruled, the taxpayer had filed his delinquent returns no later than February 19, 2003. She declined to follow the current Treasury Regulations because they were not finalized until after the events in question. Therefore, “to summarize, in the first 3 months of 2003, the only relevant guidance to a taxpayer regarding the filing of his return was the guidance provided by section 6091, obsolete regulations, and any instructions for specific returns.”
Judge Marvel then resolved the issue without any reliance on the regulation. She first found that the posting of the payments “gives rise to an inference that an IRS office with authority to receive and process the documents had received the returns and checks by that date. and recorded them as advance five years of unfiled returns with checks to pay off two of them.” She then shifted the burden of rebutting that inference to the IRS and found it failed to do so because it relied solely on the transcript. Ergo, the assessment was out of time.
Extravagant Yes. Recently, the Ninth Circuit has greatly expanded the fallback far beyond the regulations, or recognition, relying on Dingman. In Seaview Trading, LLC v. Commissioner, 447 F.3d 706 (9th Cir. 2022), the taxpayer was a two-member partnership. Here are the basic facts: (1) In 2005, an IRS RA told Seaview that the IRS had no record of receiving Seaview’s 2001 tax return (Form 1065). (2) In 2005, Seaview’s accountant responded to the letter by faxing a self-described copy of the return, along with a certified mail receipt. The IRS then opened an audit for 2001. (3) In 2007, while under audit, Seaview’s attorney also faxed another self-described copy of the 2001 return. This time it was sent to a Chief Counsel attorney, not the RA. (4) The IRS issued the Final Partnership Administrative Adjustment (FPAA) more than three years later after any of those dates.
Seaview had three potential filing dates: (1) the original filing date; (2) the 2005 submission to the IRS RA; and (3) the 2007 submission to IRS Chief Counsel attorney.
For some reason, Seaview did not even attempt to argue the first date. I welcome comments and thoughts on that. I have no idea why; if it truly had a certified mail receipt, that would give it a deemed filing date regardless of whether the IRS actually received the return. See §7502(c) and Treas. Reg. 301-7502-1(c)(2). So I have to believe that it goofed up the mailing. As have many taxpayers.
Tax Court Judge Ruwe rejected Seaview’s argument that it had filed its return on either of the other two dates. That is because it could never show that its returns were physically delivered to the proper office. Remember, under the regulations you do not get the fallback position if the instructions to the documents being filed give specific filing instructions and you don’t follow those. Judge Ruwe explained:
“The instructions for Form 1065 for 2001 state that the proper service center for filing was the Ogden, Utah, service center. Thus, Seaview did not submit a return to the proper place for filing when it faxed a copy to Agent Johnson in 2005 or when it sent a copy to respondent’s counsel in 2007. Neither of the purported returns was forwarded to the Ogden service center.”
As to Dingman, Judge Ruwe properly noted that it was an outlier.
Finally, Judge Ruwe held that even if Seaview had filed something, what it filed failed to qualify as a return under the Beard test because Seaview explicitly said that it was a copy of a return. Accordingly, there was no reason for the receiving employee to forward the document to the proper office for processing.
The Ninth Circuit reversed Judge Ruwe, over what could be described as a blistering dissent. The majority decided to ignore the statute and regulations and instead create a judge-make rule “[b]ased on the ordinary meaning of ‘filing.’” That’s a jaw-dropper. The term “filing” is one of the most specialized terms of art in tax, defined by statute, regulation. and case law. Nonetheless, the Ninth Circuit majority decided it could do a better job writing the law and concluded that “a delinquent partnership return is “filed” under § 6229(a) when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return.”
Relying on Dingman, relevant IRM provisions, and Chief Counsel Advisory 199933039, the majority then went on to decide that RA’s have authority to obtain and process delinquent returns. Accordingly, the Court found that Seaview filed its 2001 partnership return when it faxed the self-described copy to the RA in 2005. The majority did not seem to know or care about the difference between RA’s and RO’s.
As to Judge Ruwe’s alternative holding—that the self-described copies were not returns under Beard, the majority looked only to whether the document purported to be a return. Here, it did because it was the right Form. The majority rejected the idea that the taxpayer had to intend the document to be a return rather than a copy.
Seaview looks like great news for taxpayers! At least for §6501 assessment SOL purposes.
But Seaview looks like bad news for taxpayers like the one in today’s case: tax protestors. If filing a copy of a return constitutes filing of what purports to be a return, then that means that a taxpayer who sends in a copy of a frivolous return is open to multiple sanctions under §6702 because that statute imposes a $5,000 penalty each time a taxpayer “files what purports to be a return of tax.” §6702(a).
We learn today that is not the case. Let’s take a look.
Facts and Lesson: TP Did Not File Frivolous Return By Giving Copy to RO
The IRS is prohibited from labeling tax protestors “tax protestors.” I’m not. Still, I prefer to call them hobbyists. Mr. Walker is a hobbyist who plays with the idea that “private sector employees” do not receive “wages” subject to taxation. Pursuing his hobby, he and his wife reported zero wages on their 2016 return even though he had received $57,000 from his employer and his wife had received $10,000 from hers. They attached to their return Form 4852 to “correct” their employers’ W-2’s to zero wages. That’s exactly the kind of return that the IRS has long told folks is a frivolous return. See Rev. Rul. 2006-16 (“These taxpayers may attempt to avoid their federal tax liability by submitting a Form 4852 … with a zero on the line for the amount of wages received.”).
The Walkers’ return was identified as a frivolous return and the IRS Frivolous Returns Program (FRP) unit sent them a letter asking them to re-submit a proper return. The IRS letter warned them that they faced a $5,000 penalty each time they made a frivolous submission.
Intent on his hobby, Mr. Walker responded with a letter filled with more tax protestor nonsense, along with affidavits from both he and his wife asserting frivolous reasons they were not subject to tax. Also attached to the letter was a “reference copy” of the return the Walkers had submitted originally. He was serious in claiming it was not frivolous.
The FRP unit then dinged him for two §6702 penalties, one for the original return filed and one for the copy of the return submitted with the letter. It is not clear whether the penalties were assessed solely against Mr. Walker or against both joint filers. It’s only Mr. Walker who is before the Court here, however.
After the penalties were assessed, the IRS started collection and, as part of that effort sent Mr. Walker a levy CDP notice. He was able to catch the CDP Butterfly and, once again, to pursue his hobby. He not only protested more protestor arguments, he also protested that his particular brand of idiocy had not been specifically identified as frivolous by the IRS to justify the §6702 penalty.
When Appeals sustained the IRS collection, Mr. Walker welcomed the opportunity to promote his hobby before a new (to him) audience: he timely filed his petition with the Tax Court.
You can contest the correctness of an assessment in a CDP hearing if you have not had a prior opportunity to do so. But if you want to complain to Tax Court about it, you need to be sure and raise the issue in Appeals. Since the §6702 penalties were immediately assessable, Judge Nega found that Mr. Walker had no prior opportunity to contest them. Further, he had contested their validity in Appeals when he had argued that the IRS did not identify his particular flavor of Kool-Aid enough to justify penalties. So that preserved his right to contest them again in Tax Court.
Judge Nega then proceeds to ignore Mr. Walker’s arguments, but he does independently spot and correct what he believes in an IRS error: imposing a second penalty for sending in a copy of the return. Judge Nega points out that sending a copy of a frivolous return will not be seen as filing when (1) the return is clearly identified as a copy and (2) is not used as the basis for seeking a larger or different refund. Op. at 8. One way that the return is clearly identified as a copy is when it shows the same signature date as the original.
Here, Mr. Walker’s protest letter to the FRP unit specifically said he was attaching a “reference copy” of his return and the copy did in fact have the same signature date as the original. Judge Nega writes: “We conclude here that the return copy petitioner submitted did not purport to be a return under section 6702(a). Accordingly, we will not sustain the Appeals officer’s determination insofar as it relates to the second penalty.” Op. at 9.
I’m not sure I can distinguish Seaview from today’s case. I welcome comments and thoughts. The cases just seem in tension. In both cases the taxpayer gave a self-described copy of a return to an IRS employee authorized to receive it. Just as the RA asked the Seaview partnership to send in its Form 1065, so did the FRP employee ask Mr. Walker to send in a proper return. Just as Seaview responded to the RA’s request by sending in a self-described exact copy, so did Mr. Walker respond by sending in a self-described exact copy. The Ninth Circuit says Seaview thereby filed a return. But Judge Nega says Mr. Walker did not thereby file a return or, more accurately, did not file what purported to be a return for §6702 purposes. Notice too that Judge Nega is here consistent with Judge Ruwe’s opinion in Seaview: that in deciding whether a copy met the “purport to be a return” idea in §6702 (which is also one of the Beard factors, remember). Both are in tension with the Ninth Circuit’s analysis, which looked only to whether the document submitted looked like a return and not at the context in which the document was submitted.
As usual, I welcome comments on how one might reconcile Seaview and Walker. Is it really a win-win for taxpayers? That’s pretty rare in tax. If you cannot reconcile them, which is correct? You know what I think, here in my dry and dusty little patch of fly-over country.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to wave as they fly over Texas, and also to return each week to TaxProf Blog for another non-frivolous Lesson From The Tax Court.