The Tax Court Jurisdictional Brouhaha that Should Never Have Been - Malpractice Alert (1/16/2017)

For many years through 2015, I taught Tax Procedure at the University of Houston Law School.  Some professors teach the subject at a more theoretical level, spending a lot of time, for example, on Chevron and its policy implications.  I do a combination of the theory and the every day rules required to work through the various aspects of tax procedure to benefit the client.  In conjunction with that course, I have published a free downloadable Tax Procedure text.  Actually, the text comes in two editions -- a student edition without footnotes and a practitioner edition with footnotes.  (These may be downloaded from the links to the right of the blog page; I update these two editions annually by mid-August for use by students and law professors.)  The design of the nonfootnoted student edition is for a tax procedure class.  My goal for the student edition is to provide summaries of the procedures, with only key Code sections and key cases cited in the text.  In the practitioner edition, I provide authority and digressions in the footnotes that I don't expect students to know for the class.

One of the important subjects I discuss is the timely mailing, timely filing statute, § 7502, here, for key documents required to be filed under the Code.  In a nutshell, as I state in my text:  the timely mailing, timely filing statute, often called a rule, "treats the mailing date as the filing date for a return (or certain other documents) received by the IRS after the due date (either the original due date where there is no extension or the extended due date if there is an extension) but mailed on or before that due date."  The discussion of the rule from the book may be viewed on line or downloaded, here.  This linked document is from the practitioner version with footnotes for more detail.  I do provide at the end of this blog entry, the cut and paste from the student edition without footnotes.

One of the points I hammered into my students in class when we covered this subject in class was that there is an easy way to absolutely assure that the conditions for application of the rule will be met and that easy way should be used in all -- ALL -- cases where mailing is close to the deadline (and even in other cases from an abundance of caution).  If that easy way is chosen (see the linked materials), the document will be treated as timely filed even if it never gets to the place of filing (the IRS or the Tax Court).  That easy way is to use an authorized USPS service or an authorized private postage service (such as FedEx or UPS).  (Must be careful to use the authorized service in each case).

Filing dates are critical to avoid penalties (e.g., for late filed returns).  Penalties are bad, but it could be worse.  In one key facet of the tax practice they are critical.  That is the filing of certain documents with the Tax Court, most commonly the petition for redetermination of a notice of deficiency.  Timely filing is required for a key remedy -- prepayment judicial review in the Tax Court for a deficiency redetermination.  Section 6213(a), here, requires filing within 90 days for Tax Court review to redetermine the deficiency.  Thus, given the importance of timely filing of the petition for redetermination (and some other filings with the Tax Court), as a practitioner, I always use one of the guaranteed methods.  (See the linked portions of my text above and the cut at paste at the end of this blog entry.)

In Tilden v. Commissioner, ___ F.3d ___, here, the Seventh Circuit addressed a situation where the tax practitioner failed to use a guaranteed easy way to assure application of the timely mailing, timely filing rule.  The practitioner used the the Stamps.com third party service that operates like a private postage meter.  The statute generally makes postmarks made by the USPS dispositive, but other non-USPS postmarks are dispositive only pursuant to regulations issued by the IRS.  § 7502(b). Those regulations appear at 26 CFR § 301.7502-1, here.

For application of the rule to a private post metering service (including Stamps.com) postage the mailing must meet the conditions in the regulations.  I won't get into the details here of the various faints and starts encountered in the Tax Court's and then the Seventh Circuit's meandering through the applicable regulations.  The Tax Court held that the taxpayer did not meet the conditions.  The Seventh Circuit held that the taxpayer did, although it was a thin reed of a victory for the taxpayer.

Indeed, in one sense, it was a thin reed of a victory for the taxpayer's lawyer who took the risk by not using the guaranteed easy authorized USPS or private delivery service method to file.  Here is what the Court had to say about that:

Although the taxpayer thus prevails on this appeal, we have to express astonishment that a law firm (Stoel Rives, LLP, of Salt Lake City) would wait until the last possible day and then mail an envelope without an official postmark. A petition for review is not a complicated document; it could have been mailed with time to spare. And if the last day turned out to be the only possible day (perhaps the firm was not engaged by the client until the time had almost run), why use a private postmark when an official one would have prevented any controversy? A member of the firm’s staff could have walked the envelope to a post office and asked for hand cancellation. The regulation gives taxpayers another foolproof option by providing that the time stamp of a private delivery service, such as FedEx or UPS, is conclusive. 26 C.F.R. §301.7502–1(c)(3). Stoel Rives was taking an unnecessary risk with Tilden’s money (and its own, in the malpractice claim sure to follow if we had agreed with the Tax Court) by waiting until the last day and then not getting an official postmark or using a delivery service

I recommend to readers the following discussion of the Tilden Tax Court and Seventh Circuit opinions.  Carl  Smith, Tilden v. Comm’r: Seventh Circuit Reverses Tax Court’s Untimely Mailing Ruling (Procedurally Taxing Blog 1/16/17), here.

JAT Addendum:

Here is a cut and paste of the current draft of the text for the 2017 edition (without footnotes).  The footnotes are in the pdf of the practitioner edition linked here):

D. Timely-Mailing, Timely-Filing Rule.

1. The Statutory Rule.

Section 7502 provides a “timely-mailing, timely-filing” rule, which treats the mailing date as the filing date for a return (or certain other documents) received by the IRS after the due date (either the original due date where there is no extension or the extended due date if there is an extension) but mailed on or before that due date.  The timely-mailing, timely-filing rules (and risks) may be summarized as follows:

1.   The document filed must be a “return, claim, statement, or other document required to be filed.”  I focus here on the “required to be filed” element.  Original tax returns are the quintessential type of document that is required to be file and thus clearly meets this element of the statute.  Tax Court petitions are also required to be filed by the Code in order to meet the jurisdictional requirements for the Tax Court and, in that sense, are required to be filed and thus meet this element of the statute.  What about amended returns?  The standard conceptualization of the amended return is that the Code itself does not require amended returns to be filed.  So, do amended returns qualify?  The answer is that some clearly do and some may not.  Since, as we see later, the Code requires claims for refunds to be filed within a statute of limitations period, amended returns making refund claims qualify as returns required to be filed thus permitting the taxpayer to meet this element of the timely mailing, timely filing rule.  But, that analysis may not apply to amended returns reporting additional liability.  The IRS earlier ruled that amended returns reporting additional liability are not “required” and thus any tax reported on such returns actually filed after the assessment limitations period but otherwise mailed within the assessment period, do not qualify under § 7502.  In that instance, the conclusion meant that the IRS could not assess and must return any payment remitted with the amended return reporting a liability.  However, in a 2015 Chief Counsel Advice, the IRS questioned that conclusion.

2. The mailing must occur within the time otherwise prescribed (either on or before the due date, whether original or extended).

3. The delivery to the IRS must occur after the time otherwise required for filing (either the original due date or extended due date).  If the delivery to the IRS occurs within the time otherwise required, the timely-mailing, timely-filing rule is not needed and does not apply.  This aspect of the timely-mailing, timely-filing rule is, of course, subject to the rule that returns filed before the original due date are deemed filed on the original due date (April 15 for individuals).  So, an individual return mailed to the IRS on April 1 but received after the original due date of April 15 is deemed filed on the date of mailing (April 1) but is subject to the rule that it is deemed filed on the original due date (April 15).  By contrast, an individual return on extension through October 15 is mailed on October 1 but received after October 15 is deemed filed on October 1 (because the timely-mailing , timely-filing rule is needed).  To carry this one step further, in the latter example, if the return is received by the IRS on October 5, the return is filed on October 5 (rather than October 1) because the timely-mailing, timely-filing rule only apples if the return is filed after the extended due date (October 15).  This latter result can thus give the IRS several days on the statute of limitations for a return that has an extended due date if the IRS receives it before the extended due date.

4. If the U.S. Postal Service (“USPS”) fails to deliver the mailing to the IRS or the Tax Court (or alternatively, the IRS or the Tax Court has lost it and has no record that it was delivered), the taxpayer may be out of luck.  There is a critical exception, however.  By use of the USPS’s registered mail or certified mail, pursuant to the conditions in the Regulations, the mailing will be prima facie evidence that the IRS received the mailing and the document will be deemed timely filed on the date of mailing.  Indeed, the document will be deemed timely filed even if the IRS has no record of ever receiving the document or it could be affirmatively proved that the IRS did not receive it.  This means that the taxpayer (or his practitioner) has it within his or her power to assure timely-filing simply by meeting this condition.  The taxpayer still must prove that he or she sent the document by registered or certified mail as prescribed in the Regulations; that is done by taking the envelope to the Post Office and having the USPS clerk stamp the retained receipt with a USPS stamp indicating the date.  A similar guarantee applies to certain authorized private delivery services, which I discuss later.

5. There are risks if the foregoing guaranteed methods are not used.  Simply mailing a return using a USPS postage stamp will not work unless the IRS or the Tax Court receives the envelope and, if there is a postmark, the postmark establishes or can be proved that the postmark was within the prescribed period or, if there is not a postmark, the taxpayer can prove that it was timely and properly mailed.  Obviously, simply using a USPS stamp will inject risks that the USPS may not receive or properly process the mailing so that the taxpayer may be required at a minimum to explain the delay while in the bowels of the USPS.  Similarly, if non-USPS post metering, such as private post metering or third party services such as Stamps.com, are used, the taxpayer is subject to rules prescribed in Regulations.  Because such non-USPS post metering  can be manipulated, the Regulations require that the mailing sent by non-USPS post metering actually reach the office to which it is mailed within the normal period (based on USPS statistics) or, if delivered later than that normal period, the taxpayer can persuasively show the following: (i) timely delivery to the USPS, (ii) delay due delay in USPS transmission of the mail, and (iii) the cause of the delay (often an impossible burden while the mailing was within the very large bowels of the USPS).  As you can see there are risks related to the use of simple postage or private post metering.

6. The foregoing rules apply to mail posted through the USPS.  Two key expansions of the rule apply.  First, mail sent via private delivery services that meet certain strict tests prescribed in IRS Regulations and in periodic announcements qualify for the rule.  The usual suspects (Federal Express, United Parcel Service, DHL, etc.) are approved but only as to certain types of delivery service they offer.  These rules permit qualifying private deliveries to guarantee that the timely-mailing, timely-filing rule will apply.  Second, mail delivered via foreign country postal services to the IRS qualifies for the rule.  Note the underlining carefully, because foreign country postal service mailings do not qualify if sent to the United States Tax Court.  Persons in foreign countries desiring to qualify for the timely-filing, timely-mailing rule for Tax Court petitions and notices of appeal must use the designated delivery services.  Finally, the use of such private delivery services does have some risk, for the date of timely-mailing is the date the private delivery services records its acceptance of the document package over which the practitioner or taxpayer using the service has no control.

In considering whether to go to the extra effort and expense required to insure that a document timely mailed will qualify for the timely-mailing timely-filing rule, a taxpayer and/or practitioner should consider the potential costs if the document is delivered late and the taxpayer is unable to prove entitlement to the rule.  For returns, the penalty for late delivery is a late filing and/or late payment penalty and, if the return is lost, potentially a criminal investigation or prosecution for failure to file.  For petitions to the Tax Court, the penalty is dismissal of the case, with, in the case of a petition for redetermination of a deficiency, loss of a prepayment remedy.  So that the taxpayer takes the risk that the USPS will not postmark the envelope, that the postmark on the envelope will be legible, and that, if illegible or late, the taxpayer cannot explain any delays in the USPS delivery.  Since timely Tax Court petition filing is jurisdictional and cannot be remedied, it is the better part of wisdom for the taxpayer or practitioner to take the necessary effort and expense to use the registered or certified mail or the qualified private delivery procedure unless there is plenty of time left so that the taxpayer or practitioner can confirm the actual filing within the prescribed period.

How does a taxpayer or practitioner prove that the certified mail receipt (or private delivery) relates to the particular return that the IRS is questioning, particularly if for some reason the IRS did not receive the mailing at all?  Be wary of this issue and be prepared to prove, at least by some circumstantial evidence (regular pattern of practice, etc.) enough evidence from which a court may reasonably infer that the certified mail matches up with the return in issue.