Hi, My name is Greg Armstrong, and I’m a director in the KPMG Washington National Tax practice, and a member of the TDR network.
This installment of In Dispute is directed at taxpayers residing or doing business in the 9th Circuit and who need to mail documents to the IRS or to the Tax Court.
In April, the Ninth Circuit applied Chevron deference to Treasury regulations under Section 7502 to reverse a federal district court decision that had ruled in favor of a taxpayer couple.
In Baldwin v. United States, the Ninth Circuit held that the taxpayers could not rely on the common-law mailbox rule to argue their refund claim was timely. The court found that Section 7502 and its regulations provide the exclusive method to prove delivery of a timely mailed return to the IRS.
In this case, the taxpayers – the Baldwins – prepared an amended tax return for 2005 to claim a refund of about $167,000. The 2005 claim was based on a $2.5 million net operating loss carryback.
The due date for the Baldwins’ amended 2005 tax return was October 15, 2011.
The Baldwins asserted that they mailed their amended 2005 tax return to the IRS in June 2011 -- well before the October 15th deadline. But – as you can guess -- the IRS never received that return, or any other return postmarked by that deadline.
The IRS eventually received an amended 2005 return from the taxpayers in July 2013, but the envelope containing that return was postmarked after the statutory deadline had passed. Thus the IRS denied the Baldwins’ refund claim as untimely.
The Baldwins brought suit in federal district court, where -- based on the testimony of two of the Baldwins’ employees -- the trial court ruled in their favor, holding that an amended return had been timely filed under the common-law mailbox rule.
The common-law mailbox rule, as you may recall, provides that taxpayers can establish proof of proper mailing by testimonial or circumstantial evidence. This gives rise to a rebuttable presumption that the return was physically delivered to the IRS in the time such a mailing normally would take to arrive.
On appeal, the Ninth Circuit reversed and remanded with instructions to dismiss the case.
The Ninth Circuit explained the evolution of the common law mailbox rule and how Congress enacted section 7502 to address some of that rule’s problems. Under section 7502, a document is generally deemed timely filed so long as two prongs are satisfied: 1. A document is delivered to the IRS after the due date for filing and 2. The document is postmarked on or before the due date.
The Ninth Circuit reviewed the split in the courts over what effect section 7502 had on the common law mailbox rule. Some circuits have said that the statute supplants or replaces the rule altogether, while others hold it supplements or is a “safe harbor” to the common law rule. In the 9th Circuit’s view, this split was resolved in 2011 when Treasury issued regulations interpreting section 7502 as creating the only proof of delivery of a document to the IRS.
Applying Chevron’s two-step analysis, the Ninth Circuit found that Treasury’s 2011 regulation was reasonable. First, the court ruled that section 7502 is silent on whether it replaces the common-law mailbox rule. Second, the court determined that Treasury’s construction of the statute to provide the sole means by which taxpayers may prove timely delivery, in the absence of direct proof of actual delivery, was reasonable.
The holding in Baldwin has had an immediate impact. In Waltner v Commissioner, issued April 30th, the 9th Circuit ruled a taxpayer’s notice of appeal was untimely because it failed to meet section 7502’s standards. The Waltners, much like the Baldwins, could only offer up testimonial evidence to prove their notice of appeal was timely. Also like the Baldwins, the Waltners’ efforts ultimately proved unsuccessful.
Please feel free to contact me at 202-533-8816.