9th Circuit: Tax filing sent via FedEx didn’t qualify for mailbox rule

Marijuana, the IRS and taxes have a difficult relationship. In Organic Cannabis Foundation LLC v. Commissioner, 2020 DJDAR 5959 (9th Cir. June 18, 2020), the unhappy story starts with a regular old tax audit. Yet this audit involved several marijuana dispensaries, which face extra tough tax treatment. Section 280E of the tax code flatly disallows all tax deductions or credits for any business that consists of "trafficking in controlled substances."

But isn't marijuana legal in California and many other states? You bet, but federal criminal law hasn't caught up, and even federal tax law still says that trafficking is trafficking. This flat "you can't deduct it" rule even includes regular trade or business expenses that are easily deductible by everybody else. That means marijuana businesses need tax lawyers to help them finesse their income and expenses very carefully. In short, tax disputes with this kind of crop are never far away, perhaps a little like bugs and crows in a garden.

This dispute with the IRS started escalating, and before you know it, the IRS wanted to turn audit notices into final tax bills. That's where knowledge of tax procedure is needed. In an audit, unless the IRS says you were 100% right, the IRS writes it up and proposes more taxes. You can "protest" to the IRS in writing, which sends your tax dispute to the IRS Appeals Office where many tax disputes are resolved. If you fail to protest, or if you do not resolve your case at IRS Appeals, you'll next receive an IRS Notice of Deficiency via certified mail. It can't come any other way.

A Notice of Deficiency is often called a 90-day letter, because you have 90 days to respond. The IRS is required to prominently display on page one of the Notice of Deficiency the actual deadline for your response. Writing to the IRS to protest a Notice of Deficiency is a waste of time. In fact, only one response to a Notice of Deficiency is permitted: filing a Tax Court petition in the U.S. Tax Court clerk's office in Washington, D.C.

Tax Court judges hear cases in federal courthouses all over the country, but the clerk's office is in Washington. If you miss the 90-day deadline, the U.S. Tax Court cannot hear your case. That's what happened here. The dispensaries tried to file their petitions in Tax Court April 22, 2015, the last day in the 90 days they were allowed to file them. Their lawyer used FedEx, which seems reasonable, right? FedEx said it tried to deliver them (too early maybe), but FedEx said it couldn't.

So, FedEx delivered to the Tax Court on the morning of April 23, 2015, one day too late. The dispensaries noted that FedEx tried to deliver them on the 22nd. It's not clear what happened, but the Tax Court and the 9th U.S. Circuit Court of Appeals both rejected the argument that the clerk's office was inaccessible on that day. In fact, the court pointed out that the dispensaries could see the tracking detail that delivery had not been made. The dispensaries had all day to keep bugging FedEx, to mail a copy by U.S. mail, etc.

Their argument that the clerk's office was inaccessible failed.

A clerk's office is "inaccessible" on the last day of a filing period only if the office cannot practicably be accessed for delivery of documents during a sufficient period of time up to and including the point at which the clerk's office is scheduled to close. The dispensaries had no evidence that the Tax Court Clerk's Office could not have been accessed during the rest of the day after FedEx unsuccessfully attempted delivery.

How about the old mailbox rule, isn't mailing usually "filing" for tax purposes? Yes, if the dispensaries had sent the petitions by regular U.S. mail, that would have been true. Postmarking is what counts, even if it had taken the Postal Service a week to deliver. There are plenty of tax cases about the mailbox rule, and various mishaps with the post. Many of those cases are about whether the taxpayer can actually prove that they mailed the Tax Court petition before the magic 90-day deadline.

Couldn't the dispensaries show that they sent it FedEx before the deadline? Yes, the IRS now lists some FedEx services as qualifying for the mailbox rule. But the dispensaries' lawyer used a particular FedEx service that was not on the IRS's list of designated delivery services qualifying for the mailbox rule. At the time, the list of designated services included FedEx, DHL and UPS. For FedEx, you could send "FedEx Priority Overnight" and "FedEx Standard Overnight," but not "FedEx First Overnight."

The dispensaries raised other arguments, including equitable tolling, but they didn't fly either. The dispensaries even argued that the IRS waived the issue, since it took a whopping 15 months after the Tax Court "filing" before the IRS filed a motion in Tax Court to throw out the case. Maybe the IRS didn't notice the filing glitch for over a year, but even that delay didn't save the dispensaries.

So, after all of this fighting in Tax Court and in the 9th Circuit just for the chance to fight over the dispensaries' tax bills, are they out of luck? Yes and no. Tax Court is the only place you can fight about your taxes before paying them. If you don't file within 90 days in Tax Court, your Notice of Deficiency becomes final. That means you get a final tax bill.

At that point, the only way to fight it then is to pay it and then ask for a refund. If the IRS denies your refund request (they will), you can sue for a refund in federal district court or U.S. Claims Court. But that is usually a lot more expensive, the procedures are quite different, and the judges may have no tax knowledge compared to the judges of the Tax Court.

Does any of this seem fair? Technicalities often do not, and this one surely doesn't feel remotely fair to these dispensaries. When it comes to tax matters, procedure isn't everything, but it is awfully important. Learning that the hard way can be painful indeed. 