Ninth Circuit reverses its earlier holding in Seaview Trading

The Ninth Circuit, sitting en banc, reversed its panel decision that an LLC’s faxing of its delinquent partnership return to an IRS revenue agent or its subsequent mailing to an IRS attorney constituted the return’s filing for purposes of the then-applicable three-year statute of limitation for the IRS to issue a Final Partnership Administrative Adjustment (FPAA).

Facts: In July 2005, an IRS agent in South Dakota contacted Seaview Trading LLC, a limited liability company treated as a partnership for tax purposes, and requested its 2001 partnership return, which the IRS’s records indicated it had never received, along with proof of the return’s mailing. Seaview’s accountant faxed the requested copy along with a certified mail receipt dated July 2002. (Seaview later conceded that it could not prove that the envelope to which the receipt pertained had contained the return.)

After the IRS began an examination of Seaview, in July 2007, an IRS attorney in Minnesota requested the 2001 return, and Seaview’s attorney mailed the same copy.

In October 2010, the IRS issued Seaview an FPAA notice disallowing a $35.5 million loss from a tax shelter transaction for 2001. Seaview conceded that it was not entitled to claim the loss but contended in a Tax Court proceeding that the FPAA was untimely because the limitation period under then-applicable Sec. 6229(a)(1) (since repealed) had expired, as measured from the return’s faxing in 2005 or mailing in 2007.

The Tax Court held for the IRS (Seaview Trading*, LLC*, T.C. Memo. 2019-122). Seaview appealed to the Ninth Circuit, which in a May 2022 three-judge panel decision (with one judge dissenting) reversed and remanded the Tax Court’s ruling (Seaview Trading, LLC, 34 F.4th 666 (2022); see also “Tax Matters: IRS Agent’s Receipt of a Copy of an LLC’s Return Constitutes Its Filing, Ninth Circuit Holds,” JofA, Aug. 2022). The government petitioned for an en banc rehearing, which the Ninth Circuit granted, vacating the panel decision (Seaview Trading, LLC, 54 F.4th 608 (2022)).

Issues: Former Sec. 6229(a)(1) generally allowed the IRS to make assessments with respect to a partnership or affected item no later than three years after the later of the date on which the partnership return for the tax year was filed or the last day for the return’s filing (disregarding extensions). Sec. 6229(c)(3), however, provided that where no return was filed, the assessment could be made “at any time.” Former Sec. 6230(i) (also since repealed) provided that partnership returns must be filed in the time, place, and manner prescribed in regulations.

Regs. Sec. 1.6031(a)-1(e) provides that a partnership return must be filed with the service center designated in the relevant IRS revenue procedure, publication, form, or form instructions. The instructions to the 2001 Form 1065, U.S. Return of Partnership Income, required Seaview, as a partnership with its principal place of business in California, to file its return with the Ogden, Utah, IRS service center. At the time for the return’s filing, the regulation also provided that it must be filed on or before the 15th day of the fourth month following the close of the tax year of the partnership.

The IRS argued that because Seaview did not file its 2001 return with the Ogden service center, the return was never filed within the meaning of former Sec. 6230(i).

Seaview argued that either the return copy it faxed to the revenue agent in September 2005 or the copy it mailed to the IRS attorney in July 2007 constituted a filing that started the running of the limitation period. Alternatively, Seaview argued that Regs. Sec. 1.6031(a)-1(e) did not apply to delinquent returns such as the one at issue, but because it prescribed both the place and time for filing, it applied only to timely filed returns.

Holding: The Ninth Circuit noted case law holding that tax collection limitation periods are to be strictly construed in favor of the government (Badaracco, 464 U.S. 386, 392 (1984)). This entails “meticulous compliance” with “all named conditions” to benefit from the limitation, the court said, citing Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930). Seaview did not meticulously comply with the regulations by filing its return with the Ogden service center, the court said. The court noted that a return filed with the wrong place that is forwarded to the designated place for filing will be treated as filed when it is received at the designated place, but Seaview’s return was never forwarded to the Ogden service center, so the rule did not apply, the court said.

As for the applicability of Regs. Sec. 1.6031(a)-1(e), the court noted that the designated place and time for filing are in separate paragraphs, and “nothing in the text of the regulation indicates that compliance with the place-for-filing requirement is conditioned upon compliance with the time-for-filing requirement, such that filing at the designated place somehow becomes optional whenever a taxpayer files its return late.”

Thus, because Seaview’s 2001 return was never properly filed, the LLC was not entitled to the benefit of the three-year statute-of-limitation period, so Seaview could be assessed taxes attributable to partnership items at any time, the court said. According to the court, this conclusion “is consistent with cases from other circuits and a long line of Tax Court decisions” (e.g., Allnutt, 523 F.3d 406 (4th Cir. 2008)).

■ Seaview Trading, LLC, No. 20-72416 (9th Cir. 3/10/23)

To comment on this column, contact Paul Bonner, the JofA’s tax editor.