The 9th Circuit decided, en banc, Seaview Trading, LLC v. Commissioner, vacating a decision the court previously made in 2022. For the purposes of this article the 2022 decision will be referred to as Seaview (2022) and the decision overturning that decision will be referred to as Seaview (2023).
Seaview (2022) concerned the filing requirements of a partnership tax return for the 2001 tax year. It was a debate of the extent technicalities should control all else, and the reliability of IRS guidance. This is an area that typically does not lead to much infighting on the 9th circuit, yet this decision was uncommonly contentious. According to the dissent, “in addition to being deeply implausible and contrary to law, the majority’s analysis and conclusions are logically absurd and should not be the holding of this court.”[1]
Representatives of Seaview Trading, LLC faxed its 2001 Form 1065 in 2005 to a revenue agent and mailed it to an IRS attorney in July 2007. The IRS then disallowed a $35.5 million loss associated with a tax shelter in October 2010. If either Form 1065 transmission constituted a filing, the statute of limitations would bar the reassessment. The court in Seaview (2022) ruled in favor of the taxpayer, relying on IRS guidance that seemingly contradicted regulations requiring returns to be filed in specific locations. Seaview (2023) focused on prior caselaw requiring “meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation.”[2] As the taxpayer never filed Form 1065 to the designated location, it could not benefit from the statute of limitations. This all may seem rather technical, and ultimately it is, but in this case it was the deciding factor in determining if $35.5 million was owed or not.
The dissenting judge in Seaview (2023) was the majority opinion author of Seaview (2022), Circuit Judge Bumatay. He exclaimed: “Today, our court throws our tax system into disarray. Now taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns.”[3]
The taxpayer presented three pieces of IRS material in its defense:
Seaview (2023) held that the Chief Counsel Advice was inapplicable because it was concerned with whether the taxpayers could be required to hand-file delinquent returns to revenue agents rather than mail them.[7]
Regarding the passage in the Internal Revenue Manual, Seaview (2023) remarked “even assuming the revenue agent in Seaview’s case was required to follow this guidance and failed to do so, that fact would not alter our analysis because the ‘Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers.’”[8]
The majority opinion dismissed the 2006 policy statement: “That statement does nothing more than confirm that delinquent returns submitted by taxpayers will be ‘accepted’ rather than rejected on the ground they are late. It does not purport to override the regulatory requirements that otherwise govern the manner in which, and the place at which, returns must be filed.”[9]
Seaview (2023) also highlighted the respect, if not deference, the 9th Circuit pays to Tax Court decisions: “The Tax Court has also repeatedly held that a return is not properly ‘filed’ unless it is submitted to, or eventually received by, the person or office specified in the applicable regulations as the designated place for filing. Although Tax Court decisions do not bind us, we have consistently recognized that court’s unique expertise in tax matters, and here we find its decisions persuasive.”[10]
The dissent to Seaview (2023) directly linked the case to the recent Supreme Court case Bittner v. United States, claiming that the majority in Seaview (2023) permitted the IRS to “speak out of both sides of its mouth” which the Supreme Court disallowed, using discrepancies in IRS statements in the taxpayer’s favor.[11] It seems that, all else being equal, IRS guidance at variance with its current litigation position is most persuasive when the legal interpretation is to be strictly construed against the government (as with penalties, i.e. rule of lenity) and least persuasive when the matter must be strictly construed against the taxpayer (as with the statute of limitations). Unfortunately for the taxpayer, perhaps most disputes (i.e. dealing with exclusions and deductions) in tax law require strict construction in favor of the government.[12]
If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.
[1] Seaview Trading, LLC v. Comm’r of Internal Revenue, 34 F.4th 666, 680 (9th Cir.), reh’g en banc granted, opinion vacated, 54 F.4th 608 (9th Cir. 2022), and on reh’g en banc, No. 20-72416, 2023 WL 2442606 (9th Cir. Mar. 10, 2023).
[2] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *4 (9th Cir. Mar. 10, 2023)(quoting Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930)).
[3] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).
[4] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).
[5] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).
[6] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).
[7] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).
[8] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023)(quoting Fargo v. Comm’r, 447 F.3d 706, 713 (9th Cir. 2006)).
[9] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).
[10] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *5 (9th Cir. Mar. 10, 2023)(omitting internal citation).
[11] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *8 (9th Cir. Mar. 10, 2023)
[12] “But allowance of deductions from gross income does not turn on general equitable considerations. It depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” Deputy v. du Pont, 308 U.S. 488, 493 (1940)
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