Law is often a mixture of form and function. Formalist rules help create order and certainty but sometimes do so at the expense of justice and meaning. Discerning and following the function or purpose of the law may create juster outcomes but sometimes does so at the expense of certainty. All can agree that there is a time and a place for each mode of analysis, but the devil is in the details.
The speed limit sign to the right illustrates the difference. It's a sign you might have encountered driving through Montana up until 1999 when the Montana Supreme Court ruled that the "reasonable & prudent" rule was unconstitutionally vague. It gives two rules for drivers: a bright-line night rule that you may not drive faster than 65 mph and a fuzzy day rule that gives no set speed limit but just says you may not drive unreasonably or imprudently.
In applying the speed limit sign, formalists and functionalist might disagree on when the night rule applies. A formalist might look to the dictionary definition of night as the period between sunset and sunrise and so apply the night rule at the minute after sunset. But a functionalist might say that the purpose of the night rule is to set a limit when night-time conditions make it presumptively unsafe to drive faster. So a functionalist might not apply the night rule until later after sunset, and might also apply it during the “day” when a weather event, such as a haboob or an eclipse, creates sufficiently night-like conditions. Of course, formalist thinkers might disagree among themselves if they use different dictionary definitions of “night." Likewise, functionalist thinkers might disagree among themselves if they have different ideas about the purpose of the night rule.
Last week’s reviewed opinion Melissa Coffey Hulett a.k.a. Melissa Coffey, et al v. Commissioner, 150 T.C. No. 4 (January 20th, 2018) is a case where the Tax Court takes a largely functional approach to IRC §6501(a) statute of limitations on assessment and yet the functionalists on the Court disagree with each other about the proper outcome. Section 6501(a) says that the IRS has a period of three years “after the return was filed” to assess “any tax imposed by this title.” The opinion for the Court, authored by Judge Holmes, is a mix of formalism and functionalism, using the passive voice in the statutory language as an opening to implement one important purpose of §6501: closure. A concurring opinion by Judge Thornton gives a more robustly functionalist view, resting entirely on the closure purpose of the statute. And a spirited dissent, authored by Chief Judge Marvel, also presents a functionalist analysis but one that focuses on a different purpose of the statute to come to a different outcome in the case.
What I find particularly interesting about this case is how all three approaches seem to be inconsistent with the Tax Court’s approach to interpreting the §6501(c) exception to §6501(a)’s general three year rule. That statute presents a similar question of statutory interpretation but all of the opinions in last week’s case are contrary to the Tax Court’s rationale in Allen v. Commissioner, 128 T.C. 37 (2007).
Details below the fold.
Facts of the Case
Although the case is titled “Melissa Coffey...et al” the Tax Court opinions focus entirely on two of the “et al’s”: the married couple James and Judith Coffey (“the Coffeys”). I am not sure who the other taxpayers are except that I assume they are related and their cases present the same issue as do the Coffeys.
The tax years at issue are 2003 and 2004. IRC §932(c)(2) says that taxpayers who are bona fide residents of the Virgin Islands need only file with the Virgin Islands Bureau of Internal Revenue (VIBIR). All others must file both with the VIBIR and with the IRS. For the years at issue the Coffeys filed their tax returns only with the VIBIR, claiming they were bona fide residents for those years. The 2003 return was filed on October 14, 2004 and the 2004 return was filed on October 24, 2005. As Judge Holmes’ opinion notes, their return were complex and contained multiple schedules forms, and papers explaining various return positions.
The Coffeys did not file returns with the IRS. However, per a long-standing arrangement with the IRS, the VIBIR eventually sent copies of the first two pages of the Form 1040 to the IRS. The IRS received a copy of the Coffeys' 2003 From 1040 on February 5, 2005 and it received a copy of their 2004 Form 1040 on March 27, 2006. The IRS eventually selected these years for examination and eventually sent the Coffeys a Notice of Deficiency in September 2009. All these "eventuallys" added up.
The Coffeys petitioned the Tax Court to protest the NOD and then moved to dismiss the case on the basis that the NOD was untimely, since September 2009 is more than three years after the IRS received a copy of their returns from the VBIR. The IRS responded that because the Coffeys had not filed a return with the IRS, the assessment period had not started running and so was still open as of September 2009.
The IRS position was based on an argument that the Coffeys were not bona fide residents of the USVI in 2003 and 2004. If that were true, then they were supposed to have filed their returns for those years with both the VIBIR and the IRS. However, if they were bona fide residents of the Virgin Islands, then their only filing obligation was the one they fulfilled: to file with the VIBIR.
Judge Holmes’ opinion is that the 2 pages sent to the IRS by the VIBIR were sufficient to trigger the §6501(a) limitation period regardless of whether the Coffeys were bona fide residents of the Virgin Islands. Therefore, for Judge Holmes, the three year period started when the IRS received the 2-page copies from the VIBIR. Four other judges joined Judge Holmes’ opinion.
Judge Thornton’s concurring opinion ignores the 2-page copies. He says the returns the Coffeys actually did file with the VIBIR were sufficient to trigger the §6501(a) limitation period, again regardless of whether the Coffeys were bona fide residents of the Virgin Islands. So for Judge Thornton the three year period started much earlier, when the VIBIR received the returns. Six judges joined Judge Thornton’s opinion. What is slightly strange is that Judge Gustafson joined BOTH opinions, so it is entirely unclear when he thought the three year period began to run!
Judge Marvel’s opinion, in dissent, was that neither the 2-pages received by the IRS nor the full returns filed with the VIBIR were sufficient to trigger the limitations period in §6501. Three judges joined her opinion.
Judge Holmes’ rationale was a mix of formalist and functionalist analysis. It starts by interpreting §6501 as containing two formal requirements: there must be (1) a filing of (2) the return required to be filed by the taxpayer. There was no dispute here that something was filed, and filed with the IRS. But the dispute that Judge Holmes addresses was whether the 2 pages were enough to be the “return required to be filed by the taxpayer.” As to this question Judge Holmes’ opinion takes a highly functionalist approach. He writes that the statutes failure to define what constitutes as return “leaves us with the discretion to make the definition of return fit the context, and to be practical about it.” He then goes through the famous four factors of Beard v. Commissioner, 82 T.C. 766 (1984). That case consolidates prior case law into a four-factor test. To be a return sufficient to trigger §6501(a) the document must (1) contain sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to comply with the law; and (4) be signed under penalties of perjury.
Judge Holmes’ opinion is well worth studying because he goes through each of the four factors to demonstrate how the Tax Court has historically taken a functionalist view of each factor, such that a document might constitute a return even if it does not meet all four factors. For example, he rejects the formalist notion that the information given to the VIBIR should be deemed available to the IRS just because the IRS could ask for it. Instead, he frames the question as “how incomplete a return can be before it’s not a 'return' at all.” As to that question he shows the answer is entirely functional: if the IRS can process the return, it’s a return! It does not have to be complete. It does not have to have all the schedules and forms. And the subjective intent of the taxpayer to comply is not as important because "that would place...burden on an IRS intake clerk of having to contemplate...the state of mind of an unknown taxpayer." Instead, a document can serve as a return if serves the function of a return, to allow the IRS to handle it through normal processing channels. Since the IRS did that here, including selecting the returns for audit, Holmes thinks the documents had “sufficient” data to satisfy the Beard factors.
Underlying Holmes’ approach to each of the four Beard factors is the recognition of the purpose underlying §6501: closure. He writes “we also understand the importance of the statute of limitations and the ability of taxpayers to plan their affairs."
Judge Thornton’s opinion relies even more on §6501’s function of providing closure. His opinion disregards the formalist requirement of filing with the IRS altogether! Instead, it’s all about closure. He would find that the Coffeys act of filing with the VIBIR was sufficient to trigger the §6501(a) limitation period because otherwise “the repose offered by the limitations period would be of doubtful value: Even bona fide residents who filed correct returns would never be free from the threat of a possible IRS challenge and future litigation with respect to their residency status.”
For both Judges Holmes and Thornton, the §6501(c) exception for fraud is presumably sufficient protection for taxpayer who fraudulently claim to be residents of the Virgin Islands. In other words, even careless or negligent taxpayers are entitled to the benefits of §6501(a)’s closure function by simply filing with the VIBIR. Only fraudulent taxpayers won't get the benefit of relying on the information sharing agreement with the IRS. Think about how difficult it is for the chronically understaffed IRS to catch out fraud and you can see how important the closure function of §6501(a) is to these judges.
Judge Marvel also focuses on function over form, but because she finds a different purpose for §6501 she interprets its language differently. She finds that the language “the return required to be filed by the taxpayer” means that the taxpayer must do the filing. Judge Holmes reads this language as only describing the document to be filed. He relied on the passive voice used in the statute when he writes "The Coffeys might not have sent the forms themselves, but we have not found any authority to say they had to." Judge Marvel finds such authority in the purpose of the filing requirement over in §6012, which she says must be read in conjunction with §6501 because the earlier statute is what creates the obligation to file a return in the first place. And that obligation is that of the taxpayer. Therefore returns must be filed by the taxpayers whose liability is reported (or their agents). Filing must be an intentional act of the taxpayer, performed in order to fulfil the obligation of the taxpayer. Whether the IRS happens to receive enough fragments is not the right question because the purpose of closure in inextricably linked to the purpose of the filing requirement. Taxpayers should not get the benefit of closure unless they have discharged their obligations. “Filing a valid Federal income tax return with the IRS for purposes of section 6501(a) requires an intentional act by the taxpayer,” writes Judge Marvel.
Inconsistency with Allen?
Allen v. Commissioner involved what happens to innocent taxpayers when their return preparers submit fraudulent tax returns. Section §6501(c) says that the IRS has an unlimited period to assess “in the case of a false or fraudulent return with the intent to evade tax.” In Allen, the Tax Court read the ambiguous term “the intent” to include the intent of persons other than the taxpayer (in that case, the return preparer) even when the taxpayer concededly had no intent to evade tax.
In my criticism of Allen I explained that it pretty much ignored the main function of §6501(a): to provide closure. I am glad to see Judges Holmes and Thornton explain and rely on the closure function of §6501(a). Judge Holmes’ opinion is consistent with Allen to the extent that both opinions focus on "the return" as the object of analysis and find that a third party’s actions can affect the assessment limitation period. However, his opinion is also inconsistent with Allen. In Coffey, Holmes says closure is so important that a third party’s actions can trigger the limitation period. Allen was the flip side. There, attributing a third party’s intent to taint a return served to subject a taxpayer to unlimited exposure to audit, cutting entirely against the very closure function that was so important to Judge Holmes in Coffey. The very types of taxpayers that receive the benefit of closure in this case will lose it in the Allen fact pattern. Judge Thornton’s opinion is in even more tension with Allen because of his stronger reliance on the closure function of §6501(a). And Judge Marvel’s opinion, with its very explicit requirement of “an intentional act by the taxpayer” is seemingly the most inconsistent with Allen. If the protections of §6501(a) can only be invoked by a proper intent of the taxpayer, then it seems inconsistent to say that those protections can nonetheless be lost when the taxpayer’s intent to honestly comply with the law is hijacked by a bad-acting third party. Why should the taxpayer's intent be critical in the one situation but irrelevant in the other?
While it is not clear to me why the closure function of §6501(a) prevails in this case and not in Allen, that is the nature of functionalist mode of analysis. The lines are inherently blurred and opinions will differ on which of competing purposes will prevail. That's the lesson I draw this week.