Court Update: Day Late and a (Million) Dollar(s) Short by JONATHAN KALINSKI
On the eve of filings lawyers often stay awake at night hoping everything goes right. Occasionally something goes wrong, you just hope it doesn’t happen to you. Add one more horror story to the list. In a harsh result, the Ninth Circuit held that the Tax Court correctly dismissed as untimely Organic Cannabis Foundation’s petition.
The core facts are as follows. The IRS issued notices of deficiency for two cannabis entities with last date to file a petition of April 22. On April 21, the legal assistant prepared to mail the petitions using the fastest delivery option, FedEx First Overnight. This should have arrived at the Tax Court on April 22 without needing to rely on the mailbox rule. The mailbox rule under IRC section 7502 says that timely mailing is timely filing, even if the document arrives after the due date. After dropping off the package to FedEx however, something happened. FedEx placed a new label on the package that indicated a mailing date of April 22, with arrival set for April 23. Still no problem because the mailbox rule would apply, right? Wrong. The mailbox rule only applies if you use one of the designated private delivery options specified by the IRS. At the time the petition was mailed, FedEx First Overnight was a newer option and not on the list. Two weeks later, it was added.
On the morning of April 22 the legal assistant noticed she didn’t receive delivery confirmation from FedEx and contacted them. She was told the person couldn’t deliver it because they couldn’t get to the door because of construction or some sort of police action. No further delivery attempt was made that day. The petition was delivered the next day, April 23.
The IRS apparently didn’t think there was a problem initially as it took 15 months from the filing of the petition for them to file a motion to dismiss for lack of jurisdiction. As a former IRS Counsel attorney, generally a motion to dismiss will be filed right away when the petition is untimely.
It is easy to play armchair quarterback and second guess. If FedEx delivered the package as they apparently should have on April 22, we wouldn’t be hearing about any of this. What, if anything, could have been done differently to avoid this outcome? A couple of things come to mind. First, if using a private delivery service like FedEx or UPS, attorneys should always make sure to select one of the designated methods. This changes periodically so check the list before selecting a delivery option. Second, to avoid the issue of private delivery service, many practitioners still use the U.S. Postal Service certified mail as the gold standard. Get your green card stamped and you are good to go. It might take a week or more for the Tax Court to file the petition, but you can rely on the mailbox rule without worry. Third, and one few might have actually done, is that that on April 22 when it was clear FedEx did not deliver the petition, and the attorneys may have noticed that First Overnight was not a designated option, they could have mailed another petition using either USPS or a designated delivery option. In this scenario the first untimely petition would have arrived first, but the second one would be timely.
The taxpayer argued that even if the petition was untimely, IRC section 6213(a) is not jurisdictional and that based on recent Supreme Court precedent it should be subject to equitable exceptions to avoid harsh results. The Ninth Circuit in this case joins the Seventh Circuit in Tilden v. Commissioner in rejecting this argument. The Court holds that Congress has acted in the case of IRC 6213 to impose jurisdictional consequences. Specifically, the Court points to (1) the fact that 6213 uses the word jurisdiction, (2) the broader statutory context that 6213 operates in, and (3) the historical treatment. The Taxpayer has the option to file a petition or to pay the tax and file a claim for refund and a suit for refund. Under the taxpayer’s reading the Court stated that if the Tax Court dismissed a petition as untimely it would bar later seeking a refund. Finally, throughout history 6213 has been interpreted by court as jurisdictional. This case may reach the right result, but is undoubtedly an extreme outcome. It illustrates that practitioners need to be careful in how they mail documents to the IRS and Tax Court. Let’s hope that the taxpayer can get some relief through audit reconsideration.
 Organic Cannabis Foundation, Inc. dba Organicann Health Center v. Commissioner, 2020 WL 3278718 (9th Cir. 2020). This case involved another taxpayer, Northern California Small Business Assistants, Inc. (“NCSBA”). NCSBA’s 2012 tax year is currently before the Tax Court. In October 2019, the Court in a reviewed opinion held that IRC section 280E was not a penalty and therefore, was not subject to an Eighth Amendment excessive fines analysis. Notably, three judges dissented. A decision has not been entered in the case.