We recently
prepared a couple of back California tax returns for a client.
The client
had an accounting person who lived in California – at least on-and-off -for
part of one year. The client itself is located in Tennessee and had little to
do with California other than perhaps shipping product into the state. It is
long-standing tax doctrine that having an employee in a state can subject a
company to that state’s income tax, so I agreed that the client had to file for
one year.
The second
year was triggered by a one-off Form 1099 issued by someone in Los Angeles. The
dollar amount was inconsequential, and I am still at a loss how California
obtained this 1099 and why they burned the energy to trace it back to Tennessee.
I am not convinced the client sold anything into California that second year.
One could sell into Texas, for example, but have the check issued by corporate
in Los Angeles.
The client
did not care about the details. Just get California off their back.
California
requested that we fax the returns to a unit rather than sending them through
the regular system
And therein
can exist a tax trap.
Let’s talk
about it.
Seaview
Trading LLC got itself into Tax Court for transacting in a tax shelter. The
tax-gentle term is “listed transaction,” but you and I would just call it a
shelter. At issue was a $35 million tax deduction, so we are talking big bucks.
The
transaction happened in 2001. The
examination started in 2005. On July 27, 2005 the IRS sent Seaview a letter
stating that it had never received its 2001 return.
Oh, oh.
This was a
partnership, and for the year we are talking about there existed rather arcane audit
rules. We will not need to get into the weeds about these rules, other than to
say that failing to file a return was bad news for Seaview.
In 2005
Seaview’s accountant faxed a copy of the 2001 tax return to the IRS agent,
stating that the return had been timely filed and that Seaview was providing a
copy of what it had filed in 2002. He also included a certified mail receipt
for the return.
The IRS
maintained its position that it had never received the 2001 return. In 2010 the
IRS issued its $35 million disallowance.
Fast forward
to the Tax Court.
$35 million
will do that.
The Court
decided to review the case in two steps:
(1) Did faxing the return to the agent in 2005
constitute “filing” the return?
(2) If not, does the certified mail receipt
constitute evidence of timely filing?
Personally,
I would have reversed the order, as I consider certified mailing to be
presumptive evidence of timely filing. That is why accountants recommend
certified mail. It is less of an issue these days with electronic filing, but
every now and then one may decide – or be required – to paper file. In that
situation I would still recommend that one use certified mail.
The Court
held that faxing the return to the agent did not constitute the filing of a
return.
The tax
literature observed and commented that faxing does not equal filing.
But there is
a subtlety here: Seaview’s accountant indicated that he was supplying the agent
a copy of a timely-filed 2001 return. By calling it a copy, the accountant was
saying – at least indirectly – that the agent did not need to submit the return
for regular processing. That said, it would be unfair for Seaview to later
reverse course and argue that it intended for the agent to submit the return
for processing.
The IRS won
this round.
Now they go
to round two: does the certified mail receipt provide Seaview with presumptive
proof of timely mailing?
Seaview
presents issues that we do not have with our client. We are not playing with
listed transactions or obscure audit rules. California just wants its $800
minimum fee for a couple of years. They do not really care if our client
actually owes. They want money.
Our
administrative staff tried to fax the returns this past Friday but had problems
with the fax number. I called the unit in California to explain the issue and
discuss alternatives, but I never got to speak with an actual human being. I
will try again (at least briefly; I have other things to do) on Monday. If
California blows me off again, we will mail the returns.
I fear however
that mailing the returns to general processing will cause issues, as the unit
will probably issue some apocalyptic deathnote before gen pop routes the
returns back to them. We will mail the returns to the specific unit and cross
our fingers that not everyone there is “busy serving other customers.”
How I wish I
had one of those jobs.
BTW, you can
bet we will certify the mail.
