Reversing a district court decision, the Ninth Circuit rejected a husband and wife's argument that the common law mailbox rule allowed them to claim a refund on an amended return the IRS said it never received.
Facts: Howard and Karen Baldwin's 2007 tax return reported a net operating loss of approximately $2.5 million from their business, which they sought to carry back to the 2005 tax year. To carry back the loss and obtain a refund, the Baldwins were required to file their amended 2005 tax return by three years after the extended due date for their 2007 return, or Oct. 15, 2011. They asserted that they mailed their amended return by U.S. mail in June 2011, but the IRS did not receive it by the deadline. The IRS did receive an amended return from the Baldwins in July 2013, but it was postmarked after the statutory deadline had passed, and so the Service denied their refund claim as untimely. The Baldwins filed a refund suit in district court.
In the district court, the Baldwins offered the testimony of two of their employees who deposited the amended return in a mailbox at the Hartford, Conn., post office on June 21, 2011. The district court held that under the common law mailbox rule, the Baldwins' amended return was timely filed and they were entitled to the sought refund (Baldwin, No. 2:15-CV-06004 (C.D. Cal. 12/2/16)). The same court subsequently ordered the government to pay the Baldwins' attorneys' fees and costs.
Issues: The common law mailbox rule developed to determine whether and when a return was filed, short of direct evidence of physical delivery to the IRS. Under the rule, courts held that proof of proper mailing of a return or other tax document, including by testimonial or circumstantial evidence, established a rebuttable presumption that the return or other document was delivered to the IRS within the time such a mailing would ordinarily arrive.
Congress subsequently enacted Sec. 7502(a)(1), which provides that a return's postmark date is deemed to be its date of delivery. Sec. 7502(c) provides that registered mail provides prima facie evidence of delivery and authorizes the IRS to issue regulations by which certified mail and electronic filing may also establish such evidence. Some circuits, including the Ninth, have held that while the statute provided a safe harbor, it did not negate the common law mailbox rule. Others have held that the statute established the exclusive exceptions to the physical delivery rule, supplanting the common law mailbox rule.
In 2011, Treasury sought to resolve the circuit split by amending Regs. Sec. 301.7502-1(e) to state that registered or certified mail or proof of proper use of a duly designated private delivery service are the exclusive means to establish prima facie evidence of delivery or a presumption of delivery.
In its appeal, as it had before the district court, the government argued that because the Baldwins did not provide the proof required under Regs. Sec. 301.7502-1(e), their amended return was not timely received. Thus, they had not filed a valid refund request, and the courts lacked jurisdiction to grant one.
The Baldwins countered that Treasury unreasonably construed Sec. 7502 and that the common law mailbox rule should not be deemed repealed by the regulation. Alternatively, they argued that Sec. 7502 and Regs. Sec. 301.7502-1(e)(2) apply only when a return is sent before, but received after, the applicable due date and not when, as in their case, a return is never received. In addition, they argued that the regulation was promulgated in August 2011, two months after they allegedly mailed their amended 2005 return, and therefore did not apply.
Holding: The Ninth Circuit held that the district court did not have jurisdiction to hear this dispute because, as a prerequisite to bringing the action, the taxpayers had to file a timely claim for a refund with the IRS. The panel held that Regs. Sec. 301.7502-1(e)(2) was a valid regulation and provided the exclusive means to prove delivery of the amended return, ruling the common law mailbox rule did not apply.
To determine the validity of the regulation, the Ninth Circuit employed the two-step analysis under Chevron U.S.A. Inc v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). After deciding that Sec. 7502 was silent as to whether the statute displaces the common law mailbox rule, the panel concluded that the regulation at issue was valid because it was based on a permissible construction of the statute. The fact that prior to the promulgation of the regulation, the Ninth Circuit had ruled that Sec. 7502 did not negate the mailbox rule (in Anderson, 966 F.2d 487 (9th Cir. 1992)) was noncontrolling, since the regulation's interpretation of the statute, while conflicting, was nonetheless reasonable and therefore entitled to deference, the court held.
The court also rejected the taxpayers' alternative arguments, noting that Sec. 7502 also addresses situations where the IRS has not received a document. As for the taxpayers' argument against the regulation's retroactivity before August 2011, when it was finalized, the court noted that by its terms it applies to documents mailed after Sept. 21, 2004, the date it was proposed. Under Sec. 7805(b), the IRS is authorized to issue regulations that are retroactive to the date they are proposed.
The district court's judgment was reversed and remanded with instructions to dismiss the case, since timely filing was a requirement for maintaining the tax refund suit. The award of attorneys' fees and costs was also reversed, since the Baldwins were no longer prevailing parties.
- Baldwin, No. 17-55115 (9th Cir. 2019)
— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.
