Opinion
5313-16
02-13-2024
SCOTT A. BLUM & AUDREY R. BLUM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke Judge
On November 6, 2023, respondent filed a motion for partial summary judgment requesting a ruling that he properly mailed a copy of a Notice of Beginning Administrative Proceeding (NBAP) and a Notice of Final Partnership Administrative Adjustment (FPAA) to petitioner Scott Blum as a notice partner of Democrat Strategic Investment Fund, LLC (DSIF), for its short taxable year ending December 22, 1999 (1999) and that the adjustments in this case are affected items arising from adjustments made to DSIF's 1999 taxable year.
Unless otherwise noted, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
For convenience, we refer to the copies of the NBAP and FPAA directed to Scott Blum and/or the sole proprietorship through which he held his interest in DSIF, Bogan Ventures, LLC (Bogan), as the notice partner NBAP and notice partner FPAA, respectively. We refer to the copies of the NBAP and FPAA mailed to the tax matters partner (TMP) as the TMP NBAP and TMP FPAA, respectively.
On December 22, 2023, petitioners filed a Response, as supplemented, objecting to respondent's motion. They argue that respondent did not actually mail either notice and that both notices were incorrectly addressed.
Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The moving party has the burden to demonstrate that no genuine dispute as to any material fact remains and that it is entitled to summary judgment. FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74-75 (2001). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand, 98 T.C. at 520. However, the nonmoving party may not rest upon the mere allegations or denials in its pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); Sundstrand, 98 T.C. at 520.
We find that there are genuine issues of material fact as to whether respondent properly mailed the notice partner NBAP and FPAA. Accordingly, we will deny respondent's motion.
Background
The following facts are derived from the pleadings, the parties' Motion papers, Declarations, and attached Exhibits and are stated solely for the purpose of ruling on respondent's motion and not as findings of fact. Petitioners resided in Wyoming when they timely filed the Petition.
During 1999 petitioner Scott A. Blum wholly owned Bogan, a disregarded entity for federal tax purposes under Treasury regulation section 301.7701-3(b)(ii). Bogan is a member of DSIF. On Schedule D, Capital Gains and Losses, attached to their 1999 return, petitioners reported short-term capital losses of over $75 million attributable to DSIF that arose from a tax shelter transaction referred to as the Bond Linked Issue Premium Structure. They carried forward part of the deduction to 2007 and 2010. Petitioners' 1999 personal return shows that their address is in Monarch Beach, California. Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., attached to DSIF's 1999 short year return shows that Bogan's address is in Aliso Viejo, California (Schedule K-1 address).
During the audit petitioners provided a PO Box in Jackson, Wyoming (PO Box) to the revenue agent (RA) as their mailing address. They also provided a street address in Jackson (Jackson address) to the RA for "UPS/overnight deliveries." The RAs used the PO Box for correspondence with petitioners during the audit and on audit documents including Form 886-Z, Partner's or S Corporation Shareholders' Shares of Income. The RA also knew that United States Postal Service (USPS) mail that was addressed to the Jackson address had been returned as undeliverable.
Respondent purportedly mailed the notice partner NBAP and FPAA to the Schedule K-1 and Jackson addresses. Petitioners allegedly did not receive either copy. Respondent has been unable to locate a copy of the notice partner NBAP. Copies of the notice partner FPAAs are in the record. Respondent has produced two certified mailing lists (CML) that show the Schedule K-1 and Jackson address for the mailing of the notice partner NBAP dated November 5, 2002, and the notice partner FPAA dated December 17, 2004. Respondent mailed the TMP FPAA on December 17, 2004.
On March 17, 2005, the TMP timely filed a complaint for redetermination of the FPAA adjustments in the U.S. District Court for the Northern District of California. See Democrat Strategic Inv. Fund, LLC v. United States, No. C-05-01123-RS (N.D. Cal. Jan. 20, 2015). Petitioners were aware of the District Court case while it was ongoing. During the pendency of that case, they did not take any action to indicate that they did not receive the notice partner NBAP or FPAA and did not exercise their exclusive statutory remedy under section 6623(e) to opt out of the partnership case. The District Court ruled in favor of the Internal Revenue Service (IRS), sustained the adjustments in the FPAA, and provisionally applied penalties for the partners' valuation misstatements. See Shasta Strategic Inv. Fund, LLC v. United States, 76 F.Supp.3d 895 (N.D. Cal. Dec. 19, 2014) and 2014 WL 3852416 (N.D. Cal. July 30, 2014).
In an Amendment to the Petition filed in a separate proceeding in this Court, No. 2679-06, on March 9, 2006, petitioners asserted that the TMP filed a petition in district court for redetermination of the FPAA adjustments and cited Sixty-Three Strategic Investment Funds.
On November 10, 2005, while the partnership case was ongoing, respondent mailed a notice of deficiency to petitioners for 1998, 1999, and 2002 at the PO Box address.
Discussion
Respondent is required to mail a copy of the NBAP and FPAA to each notice partner. § 6223(d)(1). He must mail the notice partner FPAA within 60 days of mailing the TMP FPAA. § 6223(a) and (d)(2). Respondent has the burden of proving that he properly mailed a notice partner NBAP and FPAA by competent and persuasive evidence. See Clough v. Commissioner, 119 T.C. 183, 187 (2002). Actual receipt is not required for an NBAP or FPAA to be effective. Crowell v. Commissioner, 102 T.C. 683, 692 (1994).
Respondent uses a CML to establish mailing of notice partner NBAPs and FPAAs. When the existence of the notice is not in dispute, a properly completed CML is prima facie evidence of the date and fact of mailing and raises a rebuttable presumption of official regularity in respondent's favor. Hoyle v. Commissioner, 131 T.C. 197, 200 (2008); Clough, 119 T.C. at 187-88, Coleman v. Commissioner, 94 T.C. 82, 91 (1990). "There is a strong presumption in the law that a properly addressed letter will be delivered, or offered for delivery, to the addressee." Zenco Eng'g Corp. v. Commissioner, 75 T.C. 318, 323 (1980), aff'd. without published opinion, 673 F.2d 1332 (7th Cir.1981). Respondent's production of a properly completed CML shifts the burden of production to the taxpayer to show that the notice partner NBAP or FPAA was not actually or properly mailed. Coleman, 94 T.C. at 91. The taxpayer may rebut the presumption by affirmatively showing that respondent failed to follow his established procedures. Id. A taxpayer's self-serving testimony that it did not receive the notice partner NBAP or FPAA is insufficient to rebut the presumption. See Chinweze v. Commissioner, T.C. Memo. 2022-56, at 8; Biomage, LLC v. Commissioner, T.C. Memo. 2013-202, at *9. When a taxpayer has rebutted the presumption, we weigh the evidence and determine on the basis of the preponderance of the evidence whether respondent mailed the notice. Chinweze, T.C. Memo. 2002-56, at 7. Taxpayers have rebutted the presumption by establishing that respondent did not use the correct address.
Although an incomplete CML does not create a rebuttable presumption of mailing, it is probative of proper mailing and may be combined with additional evidence to meet respondent's burden such as evidence of the IRS's mailing practices corroborated by direct testimony or documentary evidence that the notice was placed in the USPS's custody. Clough, 119 T.C. at 187; Coleman, 94 T.C. at 91; Portwine v. Commissioner, T.C. Memo. 2015-29, at *11. An incomplete CML is not fatal if respondent presents evidence that is otherwise sufficient to prove mailing. Clough, 119 T.C. at 188.
I. Mailing of Notice Partner NBAP
Respondent mailed a TMP NBAP dated July 3, 2002, for DSIF's1999 taxable year to DSIF's TMP, Presidio Growth, LLC. He has been unable to locate a copy of a notice partner NBAP mailed to Bogan or Mr. Blum. Respondent has produced a copy of an incomplete CML that has a USPS rectangular postmark dated November 5, 2002, and shows that a notice partner NBAP was mailed on that day to Bogan at the Schedule K-1 address. The USPS employee did not enter the number of pieces that the USPS received for mailing on the CML. Nor does the CML state the number of pieces of mail that is listed on the CML. Because the CML is missing this information, it is incomplete and does not create a presumption of mailing. See Greenberg v. Commissioner, 10 F.4th 1136, 1162 (11th Cir. 2021) (stating that a CML is complete when it includes the total number of pieces of mail listed by the IRS, the total number of pieces of mail received by the USPS, a USPS employee signature on the line labeled postmaster, and a USPS postmark).
Respondent is required to issue the notice partner NBAP within 120 days of mailing the TMP NBAP. § 6223(d)(1). Petitioners argue that if the notice partner NBAP was in fact mailed, respondent violated the 120-day requirement; respondent disagrees. We do not resolve the timing issue because noncompliance with it does not invalidate the NBAP or FPAA. Starlight Mine v. Commissioner, T.C. Memo.1991-59. Rather, it would give rise to statutory rights under section 6223(e), discussed in footnote 5.
Petitioners argue that the USPS did not make the postmark on the CML because it is square, and USPS postmarks are round, and the CML postmark includes the words "IRS OGDEN". This argument is mere conjecture. Petitioners have not offered testimony of USPS officials or any other evidence about the shape of a postmark. Our caselaw recognizes that USPS postmarks may not be round and may include "IRS". See Clough, 119 T.C. at 185-86 (finding a rectangular postmark with "IRS OGDEN UT USPS-84201" was a valid USPS postmark based on a declaration of USPS mail processing clerk); Rivas v. Commissioner, T.C. Memo. 2017-56, at 14-17 (involving "IRS OGDEN, UT" postmark on USPS Form 3877); Meyer v. Commissioner, T.C. Memo. 2013-268 (stating that a "IRS OGDEN" reference in the postmark does not mean that it is not a USPS postmark).
Where the presumption does not apply, respondent is subject to the burden of production without the presumption and can still prevail if he provides sufficient evidence of mailing. Ruddy v. Commissioner, T.C. Memo. 2017-39, at *10. An incomplete CML is probative of proper mailing and may be combined with other evidence to meet respondent's burden such as evidence of the IRS's mailing practices corroborated by direct testimony or documentary evidence that the notice partner NBAP was mailed, i.e., placed in the USPS's custody. Clough, 119 T.C. at 187; Coleman, 94 T.C. at 91; Portwine, T.C. Memo. 2015-29, at *11. Respondent has not produced sufficient evidence in support of his motion to establish that the notice partner NBAP was mailed. Accordingly, he is not entitled to summary adjudication that he mailed the notice partner NBAP.
If respondent does not establish that he mailed the notice partner NBAP, petitioners' exclusive remedy would be under section 6223(e), which allows a notice partner who was not mailed a required notice to elect out of the partnership case. The manner of the election depends on when respondent mails the notice partner FPAA. If he does so while the partnership case is ongoing (which the record before us on summary judgment seems to support that the notice partner FPAA was so mailed), the notice partner can elect to opt out of the partnership case and have his partnership items converted into nonpartnership items. § 6223(e)(2). Petitioners do not argue that Mr. Blum elected to opt out of the partnership case and have not presented any evidence that he did so. On the basis of section 6223(e), if we find respondent mailed the notice partner FPAA, his alleged failure to mail the notice partner NBAP is likely irrelevant assuming that petitioner did not make the required opt-out election. Respondent's failure to issue a notice partner NBAP does not render the FPAA invalid. Bedrosian v. Commissioner, 143 T.C. 83, 85 (2014), aff'd 940 F.3d 467 (9th Cir. 2019). Where respondent did not properly and timely mail a notice partner NBAP or FPAA, section 6223(e) is the partner's exclusive remedy. Wind Energy Tech. Assocs. III v. Commissioner, 94 T.C. 787, 791-93 (1990). Alternatively, if respondent mails the notice partner FPAA after the partnership case has concluded (or did not mail it at all), the notice partner may elect to have the partnership case apply or otherwise the partnership items automatically convert to nonpartnership items (rendering an affected items notice of deficiency invalid). § 6223(e)(3).
II. Mailing of Notice Partner FPAA
Respondent has produced copies of two notice partner FPAAs one addressed to the Schedule K-1 address and one addressed to the Jackson address. He has also produced a CML dated December 17, 2004, to establish that he mailed them. The CML is complete and appears to raise the presumption of regularity. It is postmarked and signed on the line for "Postmaster, Per (Name of receiving employee)." It shows that the IRS listed the number of pieces of mail list by the IRS and the number that the USPS received. It contains a USPS tracking number that for the copy of the notice partner FPAA sent to the Schedule K-1 address that corresponds to the tracking numbers on the notice partner FPAA.
While petitioners seem to argue that the notice partner FPAAs do not exist, the FPAAs are in the record. Petitioners also argue that respondent has not produced certified mail return receipts for the notice partner FPAAs. However, respondent is not required to request return receipt service and there is no evidence that he did so here. Lack of return receipts would not rebut the presumption of mailing.
On the basis of the record before us on summary judgment, it appears that respondent is entitled to the presumption that he mailed the notice partner FPAAs and petitioners have not rebutted the presumption. However, petitioners argue that they have not been able to complete discovery. Accordingly, we are hesitant to grant summary judgment in respondent's favor.
Because we deny respondent's motion, we have not fully addressed petitioners' arguments. However, we find that it may be advantageous to the factual and legal development of this case to point out some issues that we see with their arguments. First, we do not believe that failure to maintain certain copies of IRS notices establishes that respondent did not follow proper mailing procedures. Second, it is our understanding that the mailing of a notice partner NBAP or FPAA would not be reflected on petitioners' transcripts and petitioners have not cited any authority that it is. Third, respondent issues TMP FPAA and notice partner FPAAs on the same day. Finally, we disagree with petitioners' interpretation of the implications of a freeze code on petitioners' transcripts. On the basis of our review of the Internal Revenue Manual in effect when the FPAA was issued, we do not believe that a freeze code precludes issuance of a notice partner NBAP or FPAA or requires the consent of the Criminal Investigations unit to issue either notice. Accordingly, it seems to us that the freeze code is irrelevant to our decision of whether respondent mailed the notice partner FPAA. We note that internal memoranda, policy statements, or internal procedures such as those contained in the Internal Revenue Manual (IRM) do not have the force of law and confer no rights on taxpayers. Thompson v. Commissioner, 140 T.C. 173 (2013).
III. Correct Address
Proper mailing of a notice partner NBAP and FPAA requires that respondent mails them to the proper address. As part of his burden of proof of proper mailing, respondent must establish that the NBAP and FPAA were properly addressed. Estate of McKaig v. Commissioner, 51 T.C. 331 (1969). The presumption created by a CML only applies to a properly addressed notice. See BM Constr. v. Commissioner, T.C. Memo. 2021-13, at *12 (citing Rivas, T.C. Memo. 2017-56, at *20). Petitioners argue that respondent did not use the correct address to mail the notice partner NBAP and FPAA. They argue that respondent should have mailed them to the PO Box address.
The last known address rules applicable to IRS notices under 6212(b) do not apply to notice partner NBAPs or FPAAs. Taurus FX Partners, LLC v. Commissioner, T.C. Memo. 2013-168, at *3.; Utah Bioresearch 1984, Ltd. v. Commissioner, T.C. Memo. 1989-612. Instead, section 6223(a) requires respondent to mail copies of the NBAP and FPAA to each notice partner to the address listed for the notice partner on the partnership return for the year at issue or an updated address furnished in a written statement in accordance with the Treasury regulations. § 6223(c)(1), (2); Triangle Investors Ltd. P'ship v. Commissioner, 95 T.C. 610, 613 (1990); Treas. Reg. § 301.6223(c)-1(a). The regulations specify the required content of the written statement and state when and where it must be filed. Treas. Reg. § 301.6223(c)-1(b).
The Treasury regulations require that the written statement identify the partnership and each partner whose address is being updated, explain that information is being furnished to correct or supplement earlier information for a notice partner, identify the taxable year to which the information relates, state the corrected or additional information, and provide the name, signature, address, and taxpayer identification number of the person supplying the information. Treas. Reg. § 301.6223(c)-1(b). The updated information must be filed with the IRS service center where the partnership return was filed or if respondent has already mailed the TMP NBAP, with the IRS office that mailed the NBAP. Id. para. (b)(2). The regulation further requires that the formal written statement be filed at least 30 days before respondent mails the TMP NBAP.
When an updated address is provided in accordance with the regulations, respondent must use it to mail the notice partner NBAP and FPAA. Treas. Reg. § 301.6223(c)-1(a). In cases where respondent has received updated address information in a manner that does not satisfy the regulations' written statement requirements, respondent is not required to use it although he may use it. Treas. Reg. § 301.6223(c)-1(f). The IRS "is not obligated to search its records for information not expressly furnished" on the partnership return for the year at issue or updated in accordance with the regulations. Id. Section 6223 and the accompanying regulations place the burden on the TMP and the notice partners to inform respondent of the address changes. See Utah Bioresearch 1984, Ltd., T.C. Memo. 1989-612.
Mr. Blum is an indirect partner of DSIF. If respondent is furnished with information of an indirect partner's name, address, and profits interest in accordance with these same rules, respondent is required to mail the notice partner FPAA to the indirect partner's address in lieu of the pass-through entity. § 6223(c); Treas. Reg. § 301.6223(c)-1(a). Likewise, if respondent obtains information about an indirect partner in some other manner, he is permitted (but not required) to use it for the notice partner NBAP and FPAA in lieu of using the name and address of the pass-through partner. Murphy v. Commissioner, 129 T.C. 82, 87-88 (2007); Taurus FX Partners, T.C. Memo. 2013-68, at *13-*14.
Petitioners also argue that the TMP FPAA was not mailed to the proper address. This argument appears to lack merit because the CML shows that a copy of the TMP FPAA was mailed to the address shown for the TMP on the partnership return.
Respondent mailed the notice partner FPAA to the Schedule K-1 address.Petitioners have not asserted or offered any evidence that an updated address was furnished in accordance with the regulations. They have not presented any evidence that the written statement requirements of the regulations were satisfied with any of the address updates provided to the RA. Nor has petitioners alleged that respondent was provided with Mr. Blum's information as an indirect partner on DSIF's 1999 return or in accordance with the regulations. Instead, petitioners argue that respondent should have used an updated address that was informally furnished to the RA. We have repeatedly rejected this type of argument. Under the statute and regulations, it is immaterial that petitioner informally provided updated address information to the RA and the RAs were using it for correspondence and other documents. See, e.g., Triangle Investors LP, 95 T.C. at 615-16 (holding that an FPAA mailed to the address shown on the partnership return for the year at issue is valid even though the RA knew about an updated address); Block Dev., LLC v. Commissioner, T.C. Memo. 2017-142 (holding that respondent was not required to send notices to indirect partner even though the RA was aware of its interests, name, and address); Taurus FX Partners, T.C. Memo. 2013-168 (holding that an FPAA mailed to the address shown on the partnership return for the year at issue is valid even though the partnership filed a return for a subsequent year showing a different address); Berkshire 2006-5, LLP v. Commissioner, T.C. Memo. 2016-25 (holding that an FPAA mailed to the address shown on the partnership return is valid even though the IRS should have known that the partnership was defunct).
The ZIP code provided on Bogan's Schedule K-1 appears to be incorrect. The notice FPAA used the ZIP code provided on the Schedule K-1.
On the basis of the record before us on summary judgment, it seems that respondent mailed the notices to the proper address. However, in the light of the genuine issue of material fact relating to the mailing of the notice partner FPAA, we decline to grant respondent's motion.
Upon due consideration, it is ORDERED that respondent's motion for partial summary judgment, filed November 6, 2023, is denied.