In the days of the American Civil War, deadlines had consequences–prisoners were shot on sight if they crossed a marked boundary known as the “deadline.” The effect of deadlines in tax law is generally less serious, and can often be mitigated by extensions.
That’s true even of statute of limitations deadlines in the code. These time limits provide finality in tax administration for both the government and taxpayers. For example, under the current tax code, the general statute of limitations for assessments and collections (Section 6501) allows the IRS three years after you file a return to assess tax. However, the IRS can ask you to voluntarily consent to extend the time period.
The terms of a statute extension agreement are spelled out on Form 872, Consent to Extend the Time to Assess Tax. The form is not a contract. However, because it is a signed agreement, contract principles are relevant. In addition, by signing the form, you’re giving up your right to a statute of limitation defense. That means you want to be careful that the completed form properly states your intentions.
In T.C. Memo. 2015-8 (Hartland Management Services, Inc.) the IRS conducted an examination of the taxpayer’s personal return as well as two corporations the taxpayer owned wholly or partially.
The IRS requested a consent extending the assessment time period for the three returns, and the taxpayer agreed, after consultation with his tax lawyer. The IRS completed Forms 872 for all three returns and both the taxpayer and the IRS signed the forms in December 2011.
After lengthy negotiations over the disputed years, the IRS issued a notice of proposed assessment in November 2012 for the 2008 tax year for one of the entities.
The taxpayer disagreed with the assessment, and pointed out that the signed Forms 872 referred to incorrect taxable periods. The tax year in question was 2008, but the forms referred to “tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended February 15, 2012.” The taxpayer said the consent request was applicable to the 2012 tax year, as stated on the forms, and not the year for which the assessment was issued (2008). Since the statute of limitations had run on the assessment year, the assessment was invalid because Forms 872 were incorrect.
The IRS admitted the dates on the forms were the intended period of limitation expiration dates instead of the disputed years, but argued that the incorrect dates were merely a scrivener’s error. The IRS said the parties’ unawareness of the errors showed a mutual mistake, and Forms 872 should be reformed to apply to the disputed years rather than the “erroneous” years.
What would you decide?
THE COURT’S DECISION
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While it is long established that the IRS “takes the risk of any defect in the documents upon which it relies as waivers”, this court nevertheless has the power to reform Form 872 to conform to the intent of the parties.
Reformation is an equitable remedy used to reframe written contracts to reflect the real agreement between the parties when, because of mutual mistake, the writing does not embody the contract intended. Reformation provides a result that both parties agreed to and prevents an unintended and unexpected windfall.
However, to reform Form 872, there must be “clear and convincing evidence” as to the parties’ intent. In this case, the taxpayer’s tax lawyer is presumed to be knowledgeable about federal income tax law and procedure in general. Likewise, with his education and experience—and in the context of the communications between the parties—the lawyer would, or should, have known that the years sought to be extended would be the ones nearing the expiration of their period of limitation.
Lastly, the parties did not intend to extend the period of limitation for tax years ending in 2012. Not only were the 2012 tax years still open at the time the Forms 872 were signed in 2011, but the forms referred to tax years with ending dates that did not match the taxpayers’.
The taxpayer argues there was no mutual mistake and thus implies the intent was to agree to extend the period of limitation for the 2012 tax years. But he presented no case at trial, and there is nothing in the record indicating that his objective intent, contrary to common sense, was to agree to the 2012 tax years. Any unknown or clandestine intent he may have had for agreeing to the 2012 tax years is irrelevant.
The record clearly and convincingly reflects the parties’ overt actions: They signed Forms 872, which have the express purpose of extending periods of limitation that are running.
We conclude the executed forms contained a mutual mistake. As the parties made a mutual mistake, reformation is available as a remedy.
The only question left is whether the taxpayer’s true intent has been identified in these proceedings so that we may properly reform the agreement; in other words, have these proceedings shown what tax years the taxpayer actually meant to agree to, if not 2012? (“Again, we emphasize that we are not changing the actual agreement; we are merely conforming the written document to the actual agreement in circumstances where the writing contains a scrivener’s mistake.”)
The IRS alleges both sides knew the years that were under audit, the years for which the period of limitation was close to expiring, and, ultimately, that the disputed years were intended to be the subject years of the Forms 872. That contention is a reasonable inference from the stipulated facts.
The only rational interpretation is that the Forms 872 were implemented and signed by the parties to cover the years for which assessment was about to be barred without some form of extension.
The taxpayer’s conduct following execution of the forms was consistent with this intent. Not only did he act as if the period of limitation for the 2008 tax year had been extended, but he also negotiated for months and months with the IRS regarding the disputed years and, through counsel, knew the disputed years would be the only logical years for extensions at the time the IRS made the requests.
We conclude the parties’ intent was to extend the period of limitation for the disputed years.
Accordingly, we hold that the IRS has established by clear and convincing evidence that the taxpayer intended to extend the period of limitation for the disputed years and that the Forms 872 may be reformed to conform with the intent of the parties.
As a result, the notices of deficiency are not barred as untimely under the period of limitation.