Update: On January 29, 2020 the District Court issued an order granting the motion for reconsideration and, at the same time, issued a revised judgment in favor of the taxpayer in the case.

The IRS is asking the District Court in the case of Harrison v. Internal Revenue Service, USDC WD Wisconsin, Case: 3:19-cv-00194-wmc[1] to reverse its holding in favor of the Government, supporting the taxpayer’s motion for reconsideration[2] in the IRS’s own notice of non-opposition to that motion.[3]  So why is the IRS asking the Court to reverse the holding in favor of the agency?

Well, it turns out that there existed controlling authority in favor of the taxpayers’ position but, in the words of the plaintiff’s motion for reconsideration, “all parties failed to cite the relevant authority and the Judge didn’t cite the case either.”

This particular case came up in a discussion on /r/taxpros on Reddit[4] where an individual with screen name of u/MeadowsofSun posted a write-up of the original opinion and user /u/probfriendhelp posted a reply detailing the IRS’s reversal of course on the case.

So what was the case about? The issue involved whether a taxpayer had managed to file his late filed 2012 income tax return, for which he was claiming a refund of $7,386.48, prior to the expiration of the statute of limitations for filing the claim.  The taxpayers had filed a request for an extension of time to file the return for the year in question through October 15, 2013, but had not actually filed the return until October 2016.

The taxpayers had mailed the claim on October 11, 2016, as evidenced by a postmark on the envelope.  However, the IRS did not receive the late filed return until October 17, more than three years after the original extended due date.  The catch was that if the actual date of filing was deemed to be October 11, the claim was filed in a timely manner and, as we discovered in the IRS notice of non-opposition, the taxpayer would be due the amount claimed.[5]  However, if the date of filing is deemed to be October 17, then the taxpayer’s claim was late and no balance would be paid.

The issue in this case was whether the rule found in IRC §7502(a) applied to a late filed return.  IRC §7502(a) reads:

(a) General rule

(1) Date of delivery

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

The Court ruled that the postmark date is the filing date under this rule only if the postmarked date precedes the due date for filing the return, but does not apply to a return filed after the due date (including extensions).[6]  With the return being filed late, they had waited too long to attempt to claim their refund and had forfeited their right to it. [7]

But it turns out that Reg. §301.7502-1(f), dealing specifically with late filed returns, comes to a very different conclusion.  It reads:

(f) Claim for credit or refund on late filed tax return

(1) In general.

Generally, an original income tax return may constitute a claim for credit or refund of income tax. See section 301.6402-3(a)(5). Other original tax returns can also be considered claims for credit or refund if the liability disclosed on the return is less than the amount of tax that has been paid. If section 7502 would not apply to a return (but for the operation of paragraph (f)(2) of this section) that is also considered a claim for credit or refund because the envelope that contains the return does not have a postmark dated on or before the due date of the return, section 7502 will apply separately to the claim for credit or refund if --

(i) The date of the postmark on the envelope is within the period that is three years (plus the period of any extension of time to file) from the day the tax is paid or considered paid (see section 6513), and the claim for credit or refund is delivered after this three-year period; and

(ii) The conditions of section 7502 are otherwise met.

(2) Filing date of late filed return.

If the conditions of paragraph (f)(1) of this section are met, the late filed return will be deemed filed on the postmark date.

This clarification to the regulations under IRC §7502 was adopted by the IRS in 2001.  The IRS changed its litgating position on the matter in Chief Counsel Notice CC-2001-019 that was issued in March 2001 in response to the holding of the Second Circuit Court of Appeals on this matter in the case of Weisbart v. United States, 222 F.3d 93 (2d. Cir. 2000).  And although the IRS does not mention it, the IRS had acquiesced to the Weisbart decision in AOC 2000-009, issued on November 30, 2000.

As the plaintiff’s motion noted, none of those sources were cited by either party in the case before the Court, and the items weren’t discovered by the Judge who was handling the case.  The IRS’s Notice of Non-Opposition notes that the IRS Counsel had uncovered the Weisbart case in their research into the case, but concluded it did not control in the Seventh Circuit, where any appeal of this case would take place.[8]  In fact, the Judge hearing the case noted in his opinion that the issue appeared never to have been considered by the Seventh Circuit.[9]

So how did everyone miss what now counsel on both sides agree is controlling authority on the matter?  After all, it seems likely that if this regulation had been raised when the IRS first denied the refund that the matter could have been settled without any petitions being filed in court.

Unfortunately, tax law is complicated and there are a lot of ways to get diverted down the wrong road in an adviser’s research into positions.  It seems the advisers found IRC §7502(a) by itself as the answer and worked strictly from the IRC text.  The advisers apparently did not find the Weisbart case, nor did they discover Reg. §301.7502-1(f) nor the IRS Chief Counsel Notice on point.

The IRS eventually turned to case law that looked at §7502(a) and its application to late filed returns.  While they became aware of the Second Circuit’s Weisbart decision, they noted that the Seventh Circuit itself had never looked into this issue, thus concluding it did not apply.  They did not look to see if there was any IRS action related to this decision, causing them to miss both the agency’s acquiescence and the Chief Counsel Notice,  As with the plaintiff, it does not appear that in their research they ever looked at the underlying regulation at Reg. §301.7502-1(f).

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. 

And, while correct that the Internal Revenue Code is the primary source, and if the language is clear on point trumps other authority, with an exception for U.S. Constitutional issues or later adopted treaties, they appear to have failed to look to see if the regulations had spoken to this issue (which they had)—or, at least didn’t appreciate the importance of Reg. §301.7502-1(f).

The reaction is somewhat natural, since it’s easy to feel insulted that the IRS is claiming an error was made by the adviser, one that was going to cost the client over $7,000. 

The IRS got themselves into a similar position.  Clearly, the IRS employee that did the initial review to determine if the refund was going to paid came to the conclusion, likely based on case law that found its way into the later IRS briefs and the opinion, that IRC §7502(a) was ambiguous regarding whether it applied to late filed returns and that the IRS had been successful in arguing that only the actual date of receipt applied for late filed returns in some, even if not all, cases previously decided.

When the matter moved to the District Court, counsel for both sides continued down these same paths.  The judge, noting that both parties were represented by counsel, most likely reasonably concluded that each party was presenting him with the materials that best bolstered their case, so he did not go out to do a bunch of independent research.

One key step that both sides should have followed in our traditional tax research flowcharts is to always check the applicable regulation(s) for any IRC section on which you plan to rely.  This can be a frustrating exercise since regulations often go unmodified years after the relevant code provision has changed, and thus large parts may be outdated and other areas never discussed.

But in this case the parties would each have found that the regulation had been updated a number of times after the last change had been made to the law.  You can virtually always find out when the Code provision was last changed by looking at your tax research service’s code history link for any particular section.  Similarly, the research services generally list the dates with links to the treasury decisions issued to modify any regulation, often at the end of the regulation.  As well, many services will begin the regulation with a note regarding any laws enacted that have revised the section being analyzed in the regulation for which there has yet to be a modification in the regulation.

Understanding that this regulation appeared to be current and up to date with the IRC section itself, the researcher would have confidence that what is in Reg. §301.7502-1 represented positions that were binding on the IRS and, upon finding Reg. §301.7502-1 that appeared 100% on point, be relatively confident in a taxpayer friendly outcome.

Another step that appears to have been skipped by government counsel in their research was consulting a citator for any later actions on cases that impacted this case.  Having identified Weisbart as having decided an identical issue, a look at the RIA Citator 2d would have uncovered AOD 2000-009 where the IRS acquiesced and announced the agency would no longer attempt to argue that §7502(a)’s postmark rule did not apply to late filed returns.  The entry in the citator would have also referred the researcher to TD 8932 where the IRS modified Reg. §301.7502-1(f) to specifically incorporate the Weisbart result.

This article is not meant to be too critical of the parties in this case—in the heat of trying to get things accomplished and deal with demands on an adviser’s time, following those “theoretical” rules for doing tax research can seem like a waste of time, especially when you are already committed to an answer based on your prior work.  We all hate to be seen as not being “practical” in our work and, most of the time, that additional work will just confirm what we first found.

Similarly, when someone questions a result the researcher feels he/she has already resolved, we tend to get defensive and harden our position. Even if the adviser is brought in later, the client (or IRS) by now has a clear answer they prefer.  It’s easy to modify our approach to further research by either stopping any additional research at all or evaluating all new information we do uncover to fit the answer we’ve already decided to accept.

But, as this case notes, going back to basics can actually save a substantial amount of time and prevent all parties from missing the obvious.

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.

The key take-away from this situation is to remind advisers about the importance of following the basic rules of tax research.  We need to resist the temptation to stop our work when we first find some authority that gives us the answer we like, but rather to specifically take the time to look for other guidance, even if that guidance creates issues with what we’ve already found.

We also have to accept that, at some point, we all will make mistakes in conclusions we arrive at in tax research.  So when our answer is questioned by another at least potentially knowledgeable party (be that the IRS or another adviser), we have to be willing to accept that we might be wrong or, at least, our research might be incomplete at this point.

[1] Harrison v. Internal Revenue Service, USDC WD Wisconsin, Case: 3:19-cv-00194-wmc, January 9, 2020, https://ecf.wiwd.uscourts.gov/doc1/20515379693 (Retrieved January 29, 2020, Pacer registration required)

[2] Motion for Reconsideration of a Court Order and Opinion Dated January 9, 2020 Pursuant to Federal Rule of Civil Procedure 59, Harrison v. Internal Revenue Service, USDC WD Wisconsin, Case: 3:19-cv-00194-wmc, January 15, 2020, https://ecf.wiwd.uscourts.gov/doc1/20515383109 (Retrieved January 29, 2020, Pacer registration and payment required)

[3] United States’ Notice of Non-Opposition to Plaintiff’s Motion for Reconsideration, Harrison v. Internal Revenue Service, USDC WD Wisconsin, Case: 3:19-cv-00194-wmc, January 24, 2020, https://ia801407.us.archive.org/15/items/harrison_v_irs_reconsider/show_temp.pdf (Retrieved January 29, 2020)

[4] https://www.reddit.com/r/taxpros/comments/evg8m4/court_ruled_that_postmark_rule_didnt_apply_to/ (Retrieved January 29, 2020)

[5] United States’ Notice of Non-Opposition to Plaintiff’s Motion for Reconsideration, p. 4

[6] Harrison v. Internal Revenue Service, original opinion, p. 6

[7] Harrison v. Internal Revenue Service, original opinion, p. 8

[8] United States’ Notice of Non-Opposition to Plaintiff’s Motion for Reconsideration, p. 3

[9] Harrison v. Internal Revenue Service, original opinion, p. 6