By Ellin Beltz – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=76915424
Originally published on Forbes.com.
When they give out the award for extraordinary service by a tax blogger, Carlton Smith should be near the top. He noticed a decision that was flat out wrong and before the month was over it had been reversed after he gave the taxpayer’s attorney a heads up. Here is the story.
Backgound
In January I wrote about a decision in the United States District Court for the Western District of Wisconsin. I left out the name, but now I will tell you it is Harrison v IRS. It was a cautionary tale. The Harrisons lost out on a refund of more than $7,000 because their Form 1040 arrived a few days after three years had passed from its extended due date.
They thought what is inaptly called the mailbox rule applied. When the mailbox rule applies a return is deemed to be filed when it is mailed. The reason mailbox is an inapt name for the rule is that what you should do is go to the counter and pay a little extra for a return receipt which you see being stamped, so you can later prove when you mailed it.
In this case there was no question about when the return was mailed. It was about whether the mailbox rule applied to a return that was already late for purposes of the statute of limitations on a refund claim. Judge William Conley ruled pretty emphatically that it was not, while expressing some concern that the result seemed harsh.
Decision Was Wrong
What did not occur to me is that Judge Conley was flat out wrong in making that ruling. I am not really that embarrassed, because it also got by the IRS and DOJ attorneys and also the plaintiff’s attorneys.
There was a Second Circuit decision Weisbart v United States Department of Treasury with similar facts that went for the taxpayer. Based on that case IRS Chief Counsel changed their position and the regulations were amended. But that was way back in 2001 and it seems nobody looked at the regulations.
It did not, however, get by Carlton Smith of Procedurally Taxing. He wrote a post with the pity title District Court Gets Timely Mailing Is Timely Filing Rule of Section 7502 Wrong as Applied to Refund Claim Lookback Period of Section 6511(b)(2)(A) And then he went above and beyond a tax blogger’s duty.
I have sent an e-mail to the Harrisons’ counsel suggesting a motion for reconsideration or an appeal to the Seventh Circuit.
And it turned out that a motion for reconsideration was all that was required. DOJ after checking with IRS folded. Here is the part that strikes me as most embarrassing for the government. After conceding on the Weisbart decision, the IRS amended the regulations and included an example of a taxpayer whose facts were, in effect, identical to the Harrisons.
Not The Judge’s Fault
From Carlton’s Smith’s explanation, it seems that the way lawyers behave or are supposed to behave in litigation is different than the way I behave in an audit.
Think of authority, things like court decisions, regulations, ruling etc. as if they are cards in a game. The game I am playing with the revenue agent in the audit is a little like Magic The Gathering. I’m trying to have a better deck than the agent does and I am only going to play the cards that help my client.
Litigation is more like a duplicate bridge tournament where there is just one deck and you have to let the opponents know what your bids mean. It’s not a perfect analogy, but it will have to do.
The Internal Revenue Code all by itself is a few thousand pages (not 70,000 as you may have read) before you get into the regulations and other authority. The IRC is also known as Title 26 of the United States Code. There are 53 other titles in the USC and a district court judge, presumably, might have to deal with any of them.
So the lawyers on both sides are supposed to lay out everything relevant and then make their arguments. Why none of them looked at the regulation is a bit of a mystery.
Judge Conley really chewed out the government attorneys.
“Nevertheless the court will require defendant to circulate this opinion and order, along with the Chief Counsel’s Notice and 26 C.F.R. §§ 301.7502-1(f) and § 301.6402- 3(a)(5) to all attorneys in the IRS Office of Chief Counsel and to the Tax Division of the U.S. Department of Justice in hopes that these actions will prevent future opposition to meritorious claims for refunds, as well as any instinct to ignore the duty of candor to the court by burying precedent no matter how well reasoned, helpful or directly on point it may be simply because one is not ethically bound to disclose it.”
I Love The 21st Century
Carlton Smith deserves a lot of credit for spotting the problem and then being proactive about it. Nonetheless, I think some of the credit for this happy ending goes to the information age we live in. He was reading the decision shortly after it came out and could easily contact the plaintiff attorney by email.
The original decision came out on January 9 and the revised judgement was issued on January 29.
On January 31, Mr. Smith had another pithy title on Procedurally Taxing – District Court Reverses Its Section 6511(b)(2)(A) Ruling and Excoriates IRS and DOJ for Not Citing Relevant Authority.
Still Be Careful Out There
This whole drama does not persuade me that Reilly’s Seventeenth Law of Tax Planning – Don’t cut your deadlines close and use the US Mail with proof of mailing – is in need of modification. The mailbox rule applies to more things than I, the DOJ and IRS attorneys and Judge Conley thought, but not to absolutely everything you might have to file.
I want to thank Leslie Book also of Procedurally Taxing for alerting me to this story.
Other Coverage
Ed Zollars has a really good piece in which he discusses how such an error might have been made.
“A key reason that causes researchers to miss such important details is that we tend to latch onto the first items we find that give us an answer we like. On the advisers side, the Code, at least as they read it, seemed to support their position that the filing was timely. When first challenged on this matter, most likely when the IRS notified the taxpayers that their refund would not be paid, they likely stuck with their initial research.”
At Joseph B. Cohan and Associates in the eighties, Herb Cohan, of blessed memory, would research by going around the office asking people until he got an answer he liked. Those were the days.
Mr. Zollars pretty shrewdly figured out what had happened.
“In this case, it’s likely that very soon after this case got published online and in tax news services, other tax professionals who deal in the area, both inside and outside the IRS, read the decision and had the immediate reaction that it was incorrectly decided since Reg. §301.7502-1(f) clearly resolved the matter in the opposite fashion. Such reactions were likely communicated to counsel on both sides. The taxpayer’s counsel filed his motion for reconsideration five days after the decision came down, with the IRS agreeing ten days later.
Amy Lee Rosen has Judge Says Gov. Atty Conduct ‘Egregious’ In Awarding Refund behind the Law360 paywall.