I remember when they were called Chief Counsel Advices. IRS employees – think revenue agents or officers in the field – would reach out to their employer – the IRS – for guidance on an issue.
I am looking at something called a Chief Counsel Email.
Everything changes.
It caught my eye because I was talking with a CPA last week on the very same issue.
And the IRS position is initially disturbing.
Let’s go over this.
A revenue agent (commonly called an auditor) wanted to know if an initial partnership return showing partner information but zeros for activity would constitute a valid tax return.
COMMENT: I have seen this situation many times, including last week. Someone obtains a federal EIN, putting the entity on the IRS radar. The entity then goes on to do … nothing. It never starts or starts a year or two later. Meanwhile the entity is on the IRS Christmas card list. Fail to file a return and the IRS may send a letter asking why you did not file. In response, practitioners usually file an initial return but show zeros as activity because… well because there has been no activity.
Here is the Email:
We agree with the RA’s memo that the initial return showing ownership information, but containing all 0s would most likely be considered invalid under application of the Beard test.
Not good.
To be fair, however, I do not think that it is difficult to work with this Email.
Let’s first talk about Beard.
Beard was a tax protestor.
He found himself in Tax Court over his 1981 return. He received a Form W-2, which he reported on the form 1040. He then inserted a line he described as “Non-taxable receipts” and subtracted his W-2. The result was that he owed – according to him – no taxes and was entitled to a full refund of his withholding.
The IRS wanted tax, of course, and also wanted penalties for failure to file a return. He filed something, but tampering with the forms voided the filing.
Beard responded that he obviously filed a return. The IRS was out of line saying that he had not.
The issue before the Court was: what is a tax return?
The Court presented a four-part test:
- Does it purport to be a tax return?
- Is it signed under penalties of perjury?
- Does it include enough information to calculate a tax?
- Does it represent an honest effort to satisfy the tax laws?
Beard – a protestor – missed the third test by altering the form.
Here was the Court on the fourth test:
The tampered form here is a conspicuous protest against the payment of tax, intended to deceive respondent’s return-processing personnel into refunding the withheld tax. Since such intentional tampering could go undetected in computer processing, respondent was forced to develop and institute special procedures for handling such submissions. The critical requirement that there must be an honest and reasonable attempt to satisfy the requirements of the Federal income tax law is clearly not met."
Back to our Email.
Numerous tax court decisions have found that a return (typically a 1040) containing all zeros, even if filed on an official IRS form, does not constitute a valid tax return.”
True, but …
However, these are all in the tax protestor context and other cases have held that a zero return may be valid if there is reason to believe that it is an accurate reflection of the taxpayer’s activity.”
Got it.
I will start including a schedule or attachment to the partnership tax return stating the following:
XXX Partnership/LLLC was formed on XX/XX/XX and no business operations occurred during its initial tax year ending XX/XX/20XX.”
Easy.
But it is a trap for a non-tax specialist.
This time we discussed CCA 2026030612260600 a/k/a Chief Counsel Email 202634014.
