Note: Due to my need to grade exams and turn in grades by January 2nd, this will be my last “Lesson From the Tax Court” post this year. I plan to resume on January 8th.
In law, “SOL” is an all too appropriate acronym for “Statute Of Limitations.” Tax law is full of SOL traps for taxpayers. A couple of weeks ago the Tax Court issued two opinions addressing a common SOL trap for taxpayers: the §6213 rule that taxpayers within the U.S. have 90 days from the date the IRS sends out a Notice of Deficiency (NOD) to petition the Tax Court for a redetermination of the deficiency. Of course, we all know the period is really shorter than 90 days on the front end because the 90 days starts running on the day the IRS sends the NOD not the day the taxpayer opens the NOD after returning from vacation and says “OMG”!
The reason §6213 is a trap is because the general rule for filing is the “physical delivery rule”: a petition is not filed until is had been physically received by the Tax Court’s Clerk’s office before the 90th day is over. Tax Court Rule 22. If that were the only rule, then taxpayers who cannot personally file their petitions by walking into the Tax Court Clerk’s office at 400 2nd St. S.W. in Washington D.C., would live in uncertainty about whether their mailed petitions would reach the Tax Court in time.
That’s where §7502 comes in. It is true that if the Tax Court Clerk’s office receives a petition after the 90 period, that petition is late, but Tax Court Rule 22 provides that the Tax Court will pretend the petition is timely if the reason for the late delivery falls under “the circumstances under which timely mailed papers will be treated as having been timely filed, see Code section 7502.” Section 7502 is one of those rescue rules you hope never to have to use, but if you need it, you really need to know how to make it work for you, to beat the SOL.
The cases of Lincoln C. Pearson And Victoria K. Pearson v. Commissioner, 149 T.C. No. 40 (Nov. 29, 2017) (before Judge Lauber) and Matthew Eric Baham and Jennifer Michelle Baham v. Commissioner, T.C. Summ. Op. 2017-85 (Nov. 29, 2017) (before Judge Wherry) both teach a lesson in how the Tax Court interprets §7502 and how taxpayers can use that statute to turn a late-filed petition into a timely-filed petition. Section 7502 is a pretty confusing statute and the Treasury regulations appear very strict. These cases show the wiggle room in the regulations and give guidance on how taxpayers should approach using §7502. I will explain §7502 and the interesting take-aways from these cases below the fold.
In Pearson, the last day for the Pearson’s to file their petition was April 22, 2015. The Tax Court actually received their petition, however, on April 29th. Seven days late. While the envelope had a Stamps. com pre-printed postage label dated April 21st it was not marked as received by the U.S. Post Office tracking system until April 23rd. One day late. The Court ruled the petition timely.
In Baham, the last day for the Bahams to file their petition was October 22, 2014. The Tax Court actually received their petition, however, on October 28th. Six days late. While the envelope had an Endicia.com pre-printed postage label dated October 22nd, it was not marked as received by the U.S. Post Office tracking system until October 23rd. One day late. The Court ruled the petition timely.
Whaaaa? Let’s take a look.
Section 7502 is often called the “statutory mailbox rule.” It’s a “mailbox” rule because it deems a document to be filed on the date when it is properly mailed. So even when the document arrives late under the physical delivery rule, if it was mailed on time, it is deemed filed on time. It’s a “statutory” rule because what “properly mailed” means is defined...by...statute! There is some controversy over the extent to which the statutory mailbox rule displaces the common law mailbox rule---see discussion in McBrady v. United States, 167 F.Supp. 3d 1012 (D.Minn. 2016)--- but neither Baham nor Pearson involve taxpayers trying to claim the common law rule, so there is no reason to see whether the implementing regulation, Treas. Reg. 301-7502-1, has been successful in totally obliterating all aspects of the common law rule.
Treas. Reg. 301.7502-1(c), titled “Mailing Requirements,” says that taxpayers must meet three requirements to get the benefit of the §7502 statutory mailbox rule. First (c)(1)(i) gives an address requirement. It requires taxpayers to properly address the petition. Second, (c)(1)(ii) gives a deposit requirement. It requires that taxpayers must deposit the petition “with the domestic mail service of the U.S. Postal Service (USPS)” before the end of the SOL. Third, (c)(1)(iii) gives a post-mark requirement. It requires the envelope containing the petition to be properly post-marked.
It is this third requirement where the regulation gets gnarly and where today’s cases get weedy. All post-marks must show a legible date that is before the end of the SOL. So, for example, if a taxpayer goes to the USPS office and actually deposits the petition on the 90th day (the last day of the SOL), but the USPS does not process the petition until the next day, the taxpayer is SOL (unless the taxpayer was smart enough to get a certified mail receipt or registered mail receipt, in which case subsection (c)(2) allows that receipt to be deemed to be a USPS post-mark).
I think it is useful to think about this third requirement as dividing post-marks into three kinds: USPS post-marks, Private Delivery Service (PDS) post-marks, and taxpayer-generated post-marks. If you want to get technical, (c)(1)(iii) divides post-marks into (A) USPS post-marks and (B) “postmarks made by other than USPS.” But (c)(3) takes PDS marks out of that category and treats them separately in an entire additional set of rules, originally published in Rev. Proc. 97-19,. 1997-10 I.R.B. 55 and most recently updated in Notice 2016-30. Oh, o.k., if you want to get super technical, you could say that the “other than USPS” category also includes private delivery services that have not been approved by the IRS. But for today’s lesson can we just think of this third category as taxpayer-controlled marks, such a private postage meters or their modern equivalents? Judge Buch’s concurrence in Pearson gives a good run-down on all the different types of post-marks taxpayers might have.
These two cases do not involve either USPS post-marks or PDS post-marks. Both taxpayer couples used private company postage providers, (PC providers) which are companies licensed by the USPS to sell postage online and allow customers to privately print their own postage without having to lease the private postage meter equipment. PC providers are the modern equivalent of a private postage meter. The Pearsons used Stamps.com. The Bahams used Endicia.com.
The regulations do not trust this third type of post-marks because taxpayers have too much control over the private postage meters and other methods of printing private shipping labels. That means taxpayers can back-date envelopes. That is the reason, for example, that subsection (c)(1)(iii)(B)(3) provides that if the envelope contains both a non-USPS post-mark and also a USPS post-mark, only the USPS post-mark counts for meeting the post-mark requirement.
You can also see this distrust of non-USPS post-marks in how the regulations treat envelopes that have only a non-USPS post-mark on them, like the petitions in these two cases. If the only post-mark is a non-USPS (and non PDS) post-mark, then whether the post-mark meets the post-mark requirement depends on whether the petition is “received...not later than the time when [the petition] would ordinarily be received if it were postmarked at the same point of origina by the U.S. Postal Service on the [90th day].” Let’s call this the “ordinary course” requirement. If the petition is received by the Tax Court in the ordinary course of time it takes for the USPS to deliver the mail, then (c)(1)(iii)(B)(1) says the non-USPS post-mark is good enough. But if the petition is received by the Tax Court after the ordinary course of time it takes for the USPS to deliver the mail, then (c)(1)(iii)(B)(2) requires the taxpayer to prove three additional facts: (i) that the petition was actually deposited into the U.S. mail system on or before the 90th day, and (ii) the delay was caused by the USPS, and (iii) what caused the USPS to delay the mail.
Let’s see how all that works in these two cases. You will see, I think, that there is a lot of play in the joints of this regulation.
In Pearson, the Court spends a lot of time in its opinion trying to decide whether the Stamps.com postage label was the equivalent of the output of a private postage meter. Eventually, the Court held that the Stamps.com postage label was a “postmark not made by the USPS.” That’s the statutory language in 7502(b). The regulation language is “postmark made by other than USPS.” Same-same. Either way, the Court decides that postage printed from Stamps.com is this third kind of post-mark---the kind under taxpayer control. The Court then also addressses the question of whether the tracking information created by the Post Office is a "USPS post-mark" within the meaning of the statute. The Court here adopted the reasoning of the 7th Cir. in Tilden v. Commissioner, 846 F.3d 882 (2017), which reveresed T.C. Memo 2015-188. That's why Pearson is a reviewed case.
Once it concludes that a Stamps.com label is the taxpayer-controlled kind not to be trusted without additional verification, the Court looks to the regulation requirements for what additional verification is needed. The Court says it has “no difficulty concluding that...the petition was timely mailed regardless of whether we consider subdivision (iii)(B)(1) or subdivision (iii)(B)(2) of the regulation to be controlling.” It first finds that an eight day delivery period meets the ordinary course requirement. It so finds because the parties stipulated to that "fact." That's good enough to meet the (iii)(B)(i) requirements.
The Court should have stopped there. It’s analysis of (c)(1)(iii)(B)(2) looks only at the first requirement that taxpayers must prove: timely deposit. As to that the Court accepts the government’s concession that the petition was put into the U.S. Mail on the last day of the period. The Court then ignores the regulation’s requirement that taxpayer’s prove the delay was the fault of the USPS and, further, prove why the USPS screwed up. The Pearsons did not make any such proof.
The Court was right to look at whether the Pearsons timely deposited their petition, but not because of (c)(1)(iii)(B)(2). The timely deposit requirement there simply repeats the timely deposit requirement in (c)(1)(ii). So the Court’s finding about timely deposit is indeed critical for its holding, but just not the way the Court articulates it.
The take-away here is that even if your document appears to be really late, if you can get IRS Counsel to stipulate that got there in about the same time it would have using the Post Office, then you can satisfy the regulation's "ordinary course" requirement. Here's the language you want to cut and paste whenever possible. It's from note 8 in Judge Wherry's Baham opinion:
We note that while the parties cannot stipulate jurisdiction, they “may agree on the facts that determine jurisdiction.” Pearson v. Commissioner, 149 T.C. ___, ___ (slip op. at 13) (Nov. 29, 2017) (quoting Tilden v. Commissioner, 846 F.3d 882, 887 (7th Cir. 2017), rev’g T.C. Memo. 2015-188).
Judge Wherry's analysis of the §7502 regulations in Baham is also worth your attemtion, even though this is just a Summary Opinion. In Baham, Judge Wherry is again confronted with a non-USPS post-mark. The wrinkle there is that the taxpayers did not actually deposit the petition in the Post Office. Nope, they instead went to a private store, called the UPS Store. I’m sure you have one somewhere close to you. It’s Entrepreneur Magazine’s 4th ranked national franchise opportunity.
The Bahams said they dropped off their petition at the UPS Store just before 3:00 pm on October 22, 2014, which was their 90th day. Folks, that’s not in compliance with the subsection (c)(1)(ii) of the regulation, which says that to be timely deposited in the U.S. mail, the petition has to actually be deposited at a U.S. Post Office! And while the Bahams did pay the UPS Store to send the petition return-receipt, they did not actually obtain a USPS return receipt date so they could not invoke the safe-harbor rule of (c)(2). So when Judge Wherry saw the USPS tracking information that showed receipt at about 8 am on October 23rd he was concerned that the petition was not timely filed. It got into the USPS system one day late.
What rescued the Bahams here was, again, the help of the IRS attorney, who stiputated that the UPS Store actually did deposit the petition with the Post Office on October 22nd. Other than that stipulattion, there was no way for the Bahams to have proved actual deposit with the Post Office. All they had was their USP Store receipt showing the time and date they deposited their petition with the UPS Store.
Both cases thus teach the lesson that taxpayers can print their own stamps but must be very careful to actually deposit their petitions with the U.S. Post Office by the last day. Baham teaches the additional lesson that taxpayers who rely on third parties to do their mailing for them do so at their peril. The Bahams got lucky. Will you?
Coda: It may be true that §7502 should not be so important now that taxpayers can file petitions electronically and so should not be caught in the trap of finishing a petition on the day before the SOL runs without being able to physically deliver the petition to Court. But it turns out that §7502 is still quite important and these two cases show that despite the regulations very careful and strict wording, taxpayers may be able to wriggle through and get their day in court.