Organic Cannabis Found., LLC v. Comm'r

• Decision Date: 18 June 2020
• Docket Number: No. 17-72874, No. 17-72877,17-72874
• Citation: 962 F.3d 1082
• Parties: ORGANIC CANNABIS FOUNDATION, LLC, dba Organicann Health Center, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Northern California Small Business Assistants, Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

962 F.3d 1082

ORGANIC CANNABIS FOUNDATION, LLC, dba Organicann Health Center, Petitioner-Appellant,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Northern California Small Business Assistants, Inc., Petitioner-Appellant,

v.Commissioner of Internal Revenue, Respondent-Appellee.

No. 17-72874

No. 17-72877

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 22, 2019 San Francisco, California

Filed June 18, 2020

Matthew D. Carlson (argued) and Douglas L. Youmans, Wagner Kirkman Blaine Klomparens & Youmans, Mather, California, for Petitioners-Appellants.

Paul Andrew Allulis (argued), Francesca Ugolini, and Patrick J. Urda, Attorneys; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Tax Division, United States Department of Justice, Washington, D.C.; for Respondent-Appellee. Carlton M. Smith, New York, New York; Professor T. Keith Fogg, Director, Federal Tax Clinic of the Legal Services Center of Harvard Law School, Jamaica Plain, Massachusetts; for Amicus Curiae Federal Tax Clinic of the Legal Services Center of Harvard Law School.

Before: Jay S. Bybee, N. Randy Smith, and Daniel P. Collins, Circuit Judges.

OPINION

COLLINS, Circuit Judge:

This unhappy case presents a cautionary tale about the need for lawyers to ensure that they have done exactly what is statutorily required to invoke a court's jurisdiction. The unusual Internal Revenue Code ("I.R.C.") provision at issue here allows taxpayers to benefit from a "mailbox" rule—i.e. , that a document will be deemed filed when dispatched—only if the taxpayer uses one of the particular delivery services that the Internal Revenue Service ("IRS") has specifically designated for that purpose in a published notice. In preparing two Tax Court petitions for filing, the attorneys here delegated the task of arranging delivery to a secretary who, unfortunately, selected an overnight delivery service that was not then on the published list (it was added two weeks later). The error would not have mattered if the petitions had nonetheless arrived the next day, but as it turned out, they were not received by the Tax Court until two days after being dropped off at a FedEx office in California. Because the Tax Court concluded that the petitions had not been timely received and that the mailbox rule did not apply, it dismissed the petitions for lack of jurisdiction. Finding no error, we affirm.

I

These appeals involve a challenge to income-tax deficiencies issued against two corporations, owned and controlled by a woman named Dona Ruth Frank, that planned or operated four California medical marijuana dispensaries. Appellant Organic Cannabis Foundation, LLC ("Organic Cannabis") began operating a marijuana dispensary in Santa Rosa in 2006. Appellant Northern California Small Business Assistants, Inc. ("NCSBA") held a 99% ownership interest in the Oakland Cannabis Institute, LLC and in The Petting Zoo, LLC, which respectively opened marijuana dispensaries in 2008 in Oakland and San Diego.¹ NCSBA also had a comparable interest in Napa Organics, LLC, which was planning to open a dispensary in Napa in 2010. However, according to NCSBA's petition in the Tax Court, "the dispensary never opened at the designated location and Napa Organics ceased operations in 2011."

A

On January 22, 2015, the IRS issued notices of deficiency to both Appellants for tax years 2010 and 2011. The notices stated that, by "operat[ing] a medical marijuana dispensary," Organic Cannabis and the three NCSBA-owned LLCs were subject to I.R.C. § 280E, "which disallows all deductions or credits paid or incurred during the taxable year(s) in c[a]rrying on a trade or business that consists [of] trafficking in controlled substance[s]."² After making these disallowances, the IRS's notice to Organic Cannabis calculated that, for the two years in question, it owed total additional income taxes of $1,129,276.00 as well as penalties of $225,855.20. Likewise, the notice to NCSBA stated that, by virtue of the disallowances applicable to the three LLCs, NCSBA's "share of income from the[se] flow-through entities" was increased, resulting in a total additional tax liability of $531,707.00 and penalties of $106,341.40.

The two IRS notices were separately sent by certified mail from the IRS's San Francisco office on January 22, 2015 for delivery to the same Post Office ("P.O.") Box in Santa Rosa (which was used by Dona Frank).³ According to the certified mail tracking records, the Organic Cannabis notice arrived at the Santa Rosa post office for pickup on January 24, and the NCSBA notice arrived on January 28. Both items were retrieved at the same time on February 3. Each notice stated on the cover page that the last day to file a petition for redetermination with the Tax Court was April 22, 2015.

B

Using the same law firm in Mather, California, a suburb of Sacramento, Organic Cannabis and NCSBA prepared their respective Tax Court petitions, in which they challenged both the applicability and the constitutionality of § 280E.

As the petitions were being finalized on the late afternoon of April 21—the day before they were due—one of the firm's attorneys asked a secretary to prepare a FedEx shipping envelope addressed for overnight delivery to the Tax Court in Washington, D.C. After logging into her account on the FedEx website, the secretary entered the necessary addressing information and then reviewed the delivery options. She selected the "FedEx ‘First Overnight’ " delivery option because, "given the attorneys’ obvious concerns about meeting the filing deadlines, [she] felt [she] should select the delivery method that would guarantee the earliest possible delivery." After preparing the appropriately labeled FedEx package, the secretary gave it to one of the attorneys and went home. A paper receipt from the FedEx office in nearby Rancho Cordova states that the single package (which contained both Appellants’ petitions) was dropped off at 8:04 P.M. Pacific time on April 21.

The original FedEx label prepared by the secretary stated that the shipping date was "21APR15" and that the package was to be delivered "WED – 22 APR 8:30A" by "FIRST OVERNIGHT." At some point in processing the package, however, FedEx apparently prepared a new label that bears a notation indicating it was created on "04/22" and that redesignates the package for delivery on "THU – 23 APR 8:30A" by "FIRST OVERNIGHT." This new label was affixed directly over the prior label, and the package arrived in that form at the Tax Court on the morning of April 23. The limited FedEx tracking information that was later available concerning the package no longer listed any of the details of the package's transit while being handled by FedEx; instead, it merely stated that the "Ship date" was "Wed 4/22/2015" and that the package was delivered at "7:35 am" on "4/23/2015 – Thursday."

On the morning of April 22 (the due date for the petitions), one of the attorneys asked the secretary who had prepared the FedEx package to check on its status. The secretary checked her email and saw that she had not received the usual automatic notice from FedEx confirming its delivery. She called the Tax Court Clerk's Office and "was told something to the effect that the package had not been received." She then called FedEx's customer service number and spoke with a representative to whom she provided the package's tracking number. As the secretary later described it, the FedEx representative responded that "the driver's delivery notes stated the driver had tried to deliver but could not because ... he or she could not get to the door for some plausible reason like construction, or some sort of police action (perhaps the representative said the access was blocked off because of a safety threat)." The record does not indicate that the law firm took any further action that day. When the secretary arrived at the firm the next morning, April 23, she saw that she had an email in her inbox confirming that the package had been delivered that morning at 7:35 a.m. Eastern time.

C

On July 29, 2016—more than 15 months after the petitions had been docketed in the Tax Court—the Commissioner filed motions to dismiss both petitions for lack of jurisdiction, arguing that they were received by the Tax Court one day beyond the 90-day time limit set forth in I.R.C. § 6213(a). The Commissioner also argued that Appellants could not take advantage of the I.R.C. provision deeming documents to be filed when mailed or dispatched to a private courier. See id . § 7502(a), (f). According to the Commissioner, that rule applied to a "delivery service provided by a trade or business" only if the particular service is first "designated by the [IRS]" for that purpose, id . § 7502(f)(2), and here, "FedEx First Overnight" was not designated as an approved private delivery service under § 7502(f)(2) until May 6, 2015.

Appellants opposed the respective motions to dismiss, arguing that the petitions should be deemed timely because (1) delivery had been attempted on April 22, but the Tax Court was inaccessible; and (2) Appellants’ use of FedEx First Overnight should be deemed to satisfy § 7502(f) or to substantially comply with that subsection. Organic Cannabis's opposition also argued that the deficiency notice mailed to it omitted the P.O. Box; that therefore the mailing should be deemed to be invalid; and that the 90-day limit should be calculated from Organic Cannabis's actual receipt of the notice on February 3, 2015.⁴ Relatedly, Organic Cannabis filed its own "motion to dismiss for lack of jurisdiction," arguing that, in the event that its petition was deemed untimely, the improperly addressed deficiency notice was invalid and no proceedings could be had based on it. Cf . Napoliello v. Comm'r , 655 F.3d 1060, 1063 (9th Cir. 2011) ("A determination that the Tax Court lacks jurisdiction because of an invalid notice strips the IRS of power to assess taxes based on that notice.").

On July 25, 2017, the Tax...