PARTNERSHIP FAILED TO SHOW EXTENSION REQUEST WAS TIMELY MAILED

Posted by Kim Chen on June 22nd, 2018

Jones, Bell, Abbott, Fleming & Fitzgerald, LLP v. U.S., (DC CA 6/15/2018) 121 AFTR 2d 2018-860
A district court has concluded that a partnership failed to sustain its burden of proof to show that it timely requested an extension of time to file and that IRS improperly assessed a failure-to-file penalty under Code Sec. 6698 against it, and so the partnership was not entitled to a refund of that penalty.
Background. Under Code Sec. 7502(a)(1), if any return, claim, statement, or other document is required to be filed or any payment is required to be made within a prescribed period or on or before a prescribed date under any provision of the internal revenue laws, and after the prescribed period or date, the document or payment is delivered by U.S. mail to the agency, officer, or office with which it is required to be filed or made, then the U.S. postmark on the cover in which the document or payment is mailed is considered to be the date of delivery or date of payment.
Observation: The timely-mailing-as-timely-filing rule of Code Sec. 7502(a)(1) is sometimes referred to as the “postmark rule” or “postmark date rule”.
To satisfy the mailing requirements for this timely-mailing-as-timely-filing rule, the document or payment:
• Must be postmarked on or before the date prescribed for the filing or payment (including extensions);
• Must be deposited in the mail in the U.S.; and
• Must be in an envelope or other appropriate wrapper, that is properly addressed and postage pre-paid. (Reg § 301.7502-1(a))
Where all of these requirements are met, the postmark date is treated as the date of filing or payment. Thus, the postmark rule effectively extends the filing deadline, because it provides that in certain circumstances a document mailed to IRS is considered delivered and therefore filed on the date it is postmarked, rather than on the date it is physically delivered to IRS. (Reg § 301.7502-1(a))
If a document or payment is sent by U.S. registered mail, the date of registration is treated as the postmark date. (Code Sec. 7502(c)) And if a document or payment is sent by U. S. certified mail and the sender’s receipt is postmarked by the postal employee to whom the document or payment is presented, the date of the U.S. postmark on the receipt is treated as the postmark date. Thus, use of registered or certified mail avoids the risk that the document may not be postmarked on the same day that it’s deposited in the mail. (Reg § 301.7502-1(c)(2))
In Anderson v. U.S., (CA 9 1992) 70 AFTR 2d 92-5010, the Ninth Circuit held that a taxpayer adequately established the date that her tax return was filed. Her testimony “provided direct proof of a timely postmark because she actually saw the postal clerk stamp her document”. The taxpayer also submitted an affidavit from a friend who accompanied her to the post office and waited in the car, who stated that the taxpayer returned to the car from the post office without the envelope that had contained the tax return.
In Lewis v. U.S., (CA 9 1998) 81 AFTR 2d 98-2098, the Ninth Circuit found that the taxpayer had timely mailed an extension request. The taxpayer stated in a declaration that he timely deposited his extension request at the post office. In addition, there was evidence that on the same day, the taxpayer sent a check for state taxes to the State of California and that it was cashed the next day, which provided “strong circumstantial evidence supporting [the taxpayer’s] statement as to when he mailed the federal application”. The Ninth Circuit stated that IRS does not have to take a taxpayer’s unsupported word, but when a taxpayer with an unblemished reputation for paying taxes produces circumstantial evidence supporting his word, the government needs more than a skeptical smile to support its doubt of his credibility. The Court also noted that IRS had not preserved the postmarked envelope and thus had to bear the adverse inference to be drawn.
Code Sec. 7491(a)(1) and Code Sec. 7491(a)(2) shift the burden of proof to IRS as to any factual issue relevant to a taxpayer’s liability for tax if the taxpayer
1. Introduces credible evidence with respect to the issue and
2. Satisfies certain other conditions, including cooperation with IRS’s requests for witnesses, information, and documents.
Facts. David Lickhalter, a Certified Public Accountant (CPA), as the Controller of Jones, Bell, Abbott, Fleming & Fitzgerald, LLP (the partnership), prepared its tax return for the 2015 calendar year.
On Oct. 24, 2016, IRS assessed a failure-to-file penalty of $9,360 against the partnership for its 2015 partnership tax return. Whether IRS properly imposed a penalty turned on whether the partnership timely filed a Form 7004 (which IRS ultimately received).
For the 2015 tax year, the deadline to file Form 1065 (Return of Partnership Income) was Monday, Apr. 18, 2016. For that return, a partnership could obtain an automatic five-month extension to file Form 1065 by timely filing a Form 7004 (An Application for an Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns). A timely Form 7004 filed in 2016 would extend the deadline to file the Form 1065 from Apr. 18, 2016, to Monday, Sept. 19, 2016.
As a matter of practice, every year Lickhalter stated that he prepared a Form 7004 for the partnership, and, until 2016, the partnership had not had a problem with IRS receiving the form or with receiving the extension. Lickhalter stated in his declaration that he “prepared and caused to be filed and mailed to IRS an Application for Automatic Extension (Form 7004) on or before April 18, 2016” for the partnership. He further stated that he placed the form in an envelope addressed to IRS and placed the envelope in the partnership’s office mailing system, where envelopes were deposited with the U.S. Postal Service.
Andrew Tisnado, the partnership’s office services clerk, was responsible for collecting mail, causing that mail to be properly stamped, and placing the mail in the Postal Service receptacle in the partnerships’ building. Twice a day, Tisnado collected sealed and addressed envelopes and affixed the proper postage to the envelopes, which might also require him to weigh envelopes using a postage machine. Then, at approximately 2:45 p.m., he deposited the addressed and stamped envelopes in the Postal Service receptacle in the partnership’s building, from which the Postal Service collected mail after 3:00 p.m. each weekday.
When mail was prepared after 3:00 p.m., Tisnado collected the additional envelopes, placed the proper postage on them, and took them directly to a U.S. Post Office that collected outgoing mail each weekday after 5:30 p.m.
Tisnado worked on Apr. 18, 2016, and he stated that he had no reason to believe that he did not follow his normal procedure for mailing the envelopes that needed to be mailed that day. However, he did not specifically remember the mail that he processed on Apr. 18, 2016.
Tisnado had never been advised that envelopes that were put out for mailing were not collected, were lost, or otherwise were not properly processed for mailing.
Court’s conclusion. The district court held that the partnership failed to establish that IRS improperly imposed a failure-to-file penalty.
The court determined that the partnership bore the burden of proof with respect to whether the penalty was properly imposed. In reaching its conclusion, the court found that Code Sec. 7491 was inapplicable because:
1. Code Sec. 7491(a)(1) applies only to factual issues relating to a taxpayer’s liability for any tax imposed by subtitle A or B of Code; whereas this case involved a penalty assessed under Subtitle F;
2. The partnership did not attempt to show that it satisfied the criteria required for Code Sec. 7491(a)(1) to apply; and
3. Code Sec. 7491(c), which does apply to penalties, is applicable to individuals, and not a partnership such as the taxpayer.
Regardless of the foregoing, the court found that IRS would still satisfy its burden of proof. A penalty assessment is presumed to be correct. It was stipulated that IRS did not receive the partnership’s extension request until after the deadline for the partnership to file its return and that IRS imposed a penalty for the untimely submission of the return.
The district court also determined that Code Sec. 7502(c) did not apply here because there was no evidence, and the parties did not stipulate, that the partnership used either registered or certified mail to send its extension request. By its own terms, Code Sec. 7502(c) applies only when the document is sent by registered or certified mail. The district court also noted that there was no evidence before the court of the date of the postmark on the envelope containing the partnership’s Form 7004.
While the court allowed that a taxpayer is not limited to producing either a postmark, a registration, or a certified-mail receipt and may produce extrinsic evidence to prove that a document was timely mailed to IRS, such other evidence did not automatically satisfy its burden of proof.
The district court reasoned that because Lickhalter did not indicate when he placed the envelope into the office mailing system, it was not certain if he did it in time for Tisnado to collect it or for it to be taken to a Postal Service depository on Apr. 18, 2016. On the record before the court, it was equally plausible that the partnership’s Form 7004 could have been deposited for mailing in a Postal Service depository on Apr. 18, 2016 after 5:30 p.m.; Apr. 19, 2016; or some other date. As a result, the partnership failed to sustain its burden that it was more likely than not that the partnership’s Form 7004 was deposited for mailing in a Postal Service depository on Apr. 18, 2016. The fact that IRS received Form 7004 on Apr. 26, 2016, eight days after Apr. 18, 2016, suggested, at least circumstantially, that the Form 7004 was deposited with the Postal Service after Apr. 18, 2016.
The district court found that this case was distinguishable from Anderson and from Lewis, on which the partnership relied. In both Anderson and Lewis, there was at least some direct evidence of when the document to be mailed was delivered to the custody of the U. S. Postal Service, as well as other evidence to corroborate it. Here, by contrast, there was neither direct evidence of the partnership’s timely mailing of its Form 7004 nor any corroboration. Lickhalter did not personally mail the form, instead stating only that he placed it in the office mail system. He did not say when he did this, and Tisnado did not testify that he remembered depositing the Form 7004 in a U.S. Postal Service depository on Apr. 18, 2016. As a result, the partnership did not demonstrate when the form was taken to a U.S. Postal Service depository on Apr. 18, 2016 or processed by the U.S. Postal Service on Apr. 18, 2016. The district court concluded that the partnership’s showing of timeliness was not comparable to that of the taxpayers in Anderson and Lewis

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