Procedure & Administration: Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Procedure & Administration

Ninth Circuit again addresses return filing

The Ninth Circuit, sitting en banc, held that faxing a return to an IRS revenue agent or mailing it to an IRS attorney does not qualify as filing the return under the return filing requirements of Regs. Sec. 1.6031(a)-l(e).

Background

Seaview Trading LLC was classified as a partnership for federal tax purposes. For 2001, Seaview prepared a Form 1065, U.S. Return of Partnership Income, that reported a $35.5 million loss from a tax-shelter transaction.

Seaview believed it filed this return in July 2002 by having mailed it to the proper IRS service center in Ogden, Utah. The IRS, however, had no record of receiving Seaview's 2001 return. Although Seaview had a certified mail receipt for the return's mailing, it conceded that it could not prove that the IRS received its 2001 return in 2002.

In July 2005, an IRS revenue agent sent Seaview a letter notifying the LLC that the IRS had not received its 2001 federal partnership income tax return. The IRS, in an attachment to the letter, asked Seaview if it had filed a return and, if so, what type of return was filed and when and at what service center Seaview filed it. It also requested that the LLC provide all retained copies of the return, as well as copies of receipts and other proof of mailing for the return. In September 2005, Seaview's accountant faxed the IRS revenue agent a signed copy of Seaview's 2001 Form 1065 return, along with the certified mail receipt.

In October 2005, the IRS sent Seaview a letter telling the LLC that it had been selected for audit. Again, the IRS asked for a copy of the 2001 return. It further asked for any amendments to the return and documents related to certain entries on Seaview's return.

As part of its examination of the LLC, the IRS interviewed Seaview's accountant in January 2006 and interviewed its majority partner in June 2007. During both interviews, the IRS acknowledged it had received Seaview's faxed 2001 tax return and introduced the Form 1065 as an exhibit for both interviews. In July 2007, Seaview's counsel mailed another signed copy of the 2001 tax return to an IRS attorney at the attorney's request.

In October 2010, the IRS issued Seaview a Final Partnership Administrative Adjustment (FPAA) for the 2001 tax year. In that notice, the IRS stated that "[p]er Internal Revenue Service records, no tax return was filed by [Seaview] for 2001," but said, "[d]uring the examination," the partnership provided "a copy of a 2001 tax return which taxpayer claimed to have filed." The Service determined that "none of the income/loss/expense amounts reflected on [Seaview's] 2001 unfiled tax return [were] allowable." Thus, the IRS adjusted the 2001 reported loss from over $35 million to $0.

Seaview challenged the IRS's adjustment in Tax Court. The LLC, having provided an IRS revenue agent a copy of the 2001 return in 2005, moved for summary judgment, asserting that the return had been filed in 2005 and, consequently, the 2010 tax adjustment was time-barred under the three-year statute of limitation.

The Tax Court denied the motion. The court held that Seaview did not "file" the tax return by faxing a copy to the IRS revenue agent or by mailing a copy to the IRS counsel. It further held that the copies of the return it sent the IRS in 2005 and 2007 were not returns because neither Seaview's accountant nor its attorney intended to file a return when they sent copies of the 2001 return in 2005 and 2007. Accordingly, the copies were not a return under the tests in Beard, 82 T.C. 766 (1984), because they did not purport to be a return. Seaview appealed the Tax Court's denial of summary judgment to the Ninth Circuit.

A three-judge panel of the Ninth Circuit, with one judge dissenting, reversed the Tax Court and held that the IRS's notice of FPAA in 2010 was untimely, determining that Seaview's 2001 tax return was filed in 2005, 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. The court found that while a timely return must be sent to a service center to be filed under Regs. Sec. 1.6031(a)-l(e), delinquent returns were not subject to the regulation, and, based on the IRS's informal guidance and practices, a delinquent return could be filed with an IRS official authorized to receive it.

The IRS disagreed with the Ninth Circuit's interpretation of the rules regarding the time and place for filing partnership returns, and it petitioned the Ninth Circuit for a rehearing of the case en...