Or, When is a Return Filed?

That’s what Tax Court had to determine in the case of Martin R. Dingman, 2011 T.C. Mem. 116, filed 6/1/11. Martin had plenty of problems. The C.I.D. nailed him for criminal non-filing, and he pled guilty.

But while the investigation was ongoing, Martin had his accountants prepare returns for the missing years, and Martin’s attorneys handed these returns to the CID. Somehow, never explained by IRS, IRS’ records show checks in the amounts Martin’s attorney tendered to C.I.D. received at a date which would prove Martin right and the statute expired by the date of the later assessment of the Section 6651(a) fraud penalty that IRS was belatedly trying to collect via this levy.

IRS claimed Martin had signed a statute of limitations extension agreement, but never produced it. Likewise, IRS admitted they never served notices of deficiency (90-day letters) (although IRS first claimed 90-day letters were sent). So Tax Court treats this CDP case as one where Martin had no opportunity to contest the assessment, and gives it de novo treatment.

The only question before Tax Court: did giving C.I.D. the returns (and checks in payment of at least some of the tax due) start the clock running on the three-year statute of limitations?

Judge Marvel wades through Regulations, General Counsel Advices, Notices and a bushel-basketful of cases for 37 pages to conclude that, because IRS’ records, incomplete and unexplained as some of them might be, indicate that the checks were paid and therefore the returns (erroneously styled “amended returns”) were in fact received by the critical date, handing them to C.I.D. did effect “filing.”

Burden of pleading and proof rest upon Martin. Even after IRS goes forward with contrary evidence, burden of persuasion still rests on Martin. Judge Marvel credits Martin’s testimony about delivery and expressly rejects IRS’ transcripts, which contain unexplained codes and remarks.

But Martin still faces the “meticulous compliance by the taxpayer with all named conditions,” hurdle from  Winnett v. Commissioner, 96 T.C. 802, 807-808 (1991) (quoting Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249(1930)). In plain English, must apply strict rules of golf, no gimmes, no Mulligans.

Martin clears the hurdle, helped by the IRS Reorganization of 1998. The filing protocols had changed, but not Section 6091 (the filing section) or the Regulations, when Martin’s attorney gave C.I.D. the checks and returns. IRS had earlier issued a Notice trying to clarify the confused situation, but the Notice wasn’t effective as of the date Martin’s attorney handed C.I.D. the returns.

IRS issued Regulations embodying the Notice provisions the next year, and claimed they were mere clarifications and therefore were retroactive. Wrong, says Judge Marvel. There is nothing in the Regulations or anywhere else that say they are to be given retroactivity.

So Judge Marvel goes on to say: “The record does not establish exactly how or when petitioner’s counsel delivered the package of returns and checks to the CID. In the normal case, such a gap in the record would dictate that the taxpayer, who has the burden of proof on the limitations issue, must lose. This is not the normal case, however. [Editorial comment–Couldn’t agree more, Judge!]

“Although the record is not clear regarding the details of the delivery of the tax return package to the IRS, the record clearly establishes two important facts: (1) The tax return package was delivered to the IRS no later than February 19, 2003, and (2) the package was received by an IRS office that had the authority to process its contents. We know these facts because the income tax transcripts in the record confirm that the checks to pay petitioner’s 1996 and 1997 tax liabilities as reported on petitioner’s 1996 and 1997 returns were processed, deposited, and ultimately credited to petitioner’s 1996 and 1997 accounts on February 19, 2003.” 2011 T.C. Mem. 116, at p. 26.

IRS called no witnesses and produced no evidence except the discredited transcripts. IRS only argued a long line of cases holding delivery to a Revenue Agent is not filing within Section 6091. Judge Marvel disposes of this argument summarily: “None of the cases respondent cites involved an attempt by the taxpayer to file executed original returns with payments, and none of the cases involved evidence that the payments made with the returns were actually processed by the IRS and credited to the taxpayer’s account.” 2011 T.C. Memo. 116, at p. 30 [emphasis added].

Finally, and most importantly, in the words of Tax Court: “Moreover, we have held that if a taxpayer submits a return to a person who is not authorized to accept the return for filing and the return is then forwarded to the correct IRS office, the period of limitations commences when the office designated to receive the return actually receives it. See Winnett v.Commissioner, 96 T.C. at 808 (holding that for purposes of determining the beginning of the period of limitations a return is deemed filed when it is received by the ‘revenue office designated to receive such return’); Allnutt v. Commissioner, T.C. Memo. 2002-311 (returns deemed filed when the District Director’s office stamped them received).” 2011 T.C. Mem. 116, at page 35.

Martin wins, statute of limitations expired, no Section 6651 penalty.

Takeaway? Make sure you file per Regulations and Instructions for the form in question, get receipts, and save all copies and canceled checks.