Procedure & Administration
The Tax Court found that the IRS and the taxpayers made a mutual mistake on Forms 872, Consent to Extend the Time to Assess Tax, regarding the tax years for which the statute of limitation on assessment was being extended and reformed the forms to apply to the years that the IRS and the taxpayers intended to extend.
Background
Craig and Kim Kunkel were married taxpayers who filed jointly. Mr. Kunkel was the sole owner and president of Hartland Management Services Inc. and the majority owner of Integra Engineering Ltd. Hartland operated on a fiscal tax year ending on May 31. Integra operated on a fiscal tax year ending on Nov. 30.
Integra's Form 1120, U.S. Corporation Income Tax Return, for its tax year ended (TYE) Nov. 30, 2008 (Integra's 2007 return), was filed by its due date of Feb. 17, 2009. The Kunkels jointly filed their calendar year 2008 Form 1040, U.S. Individual Income Tax Return, by its due date of April 15, 2009. Hartland's 2008 Form 1120 for its TYE May 31, 2009 (Hartland's 2008 return), was filed by its due date of Aug. 15, 2009.
The IRS selected Integra's 2007 tax year for examination in 2010. The resulting audit expanded to include the Kunkels and Hartland. In late 2011, the IRS prepared three Forms 872 (initial Forms 872), with respect to the Kunkels, Integra, and Hartland (the taxpayers). The Form 872 for Integra stated: "The amount of any Federal Income tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended February 15, 2012 may be assessed at any time on or before December 31, 2012." The Forms 872 for the Kunkels and Hartland contained the same wording except that the "period(s) ended" dates were April 15, 2012, and Aug. 15, 2012, respectively. The taxpayers signed the initial Forms 872 on Dec. 7, 2011, and an IRS area director signed them on Dec. 8, 2011.
On or around Feb. 13, 2012, the IRS sent the taxpayers its final examination reports. In response, the taxpayers exchanged two letters with the IRS stating their intent to submit formal written protests to some or all adjustments made in the proposed examination reports. The letters, dated Feb. 17 and 27, 2012, specifically identified TYE Nov. 30, 2008, for Integra, TYE Dec. 31, 2008, for the Kunkels, and TYE May 31, 2009, for Hartland. Enclosed with the Feb. 27, 2012, letter was the Statement in Support of Disagreement With Proposed Adjustments, signed by their representative and dated Feb. 27, 2012, that also specifically identified the disputed years.
In 2012, the IRS prepared three additional Forms 872 similar to the ones sent to the taxpayers in 2011 except that the "period(s) ended" fields showed "November 30, 2008" for Integra, "December 31, 2008" for the Kunkels, and "May 31, 2009" for Hartland to extend the assessment period for these years to Aug. 31, 2013. The taxpayers received these additional Forms 872 in July 2012 but never signed them. Because the taxpayers refused to agree to the additional extensions, the IRS issued the taxpayers notices of deficiency, covering the years 2007 through 2009 for Integra and 2008 through 2010 for the Kunkels and Hartland.
The Taxpayers' Arguments in Tax Court
The taxpayers filed petitions with the Tax Court challenging the IRS's determinations. While the taxpayers raised multiple issues in the pretrial memorandum to the Tax Court, in their briefs they raised only one argument, that the deficiencies and penalty for Hartland and the Kunkels for tax year 2008 and for Integra for tax year 2007 (the disputed tax years) were barred by the statute of limitation on assessment. The taxpayers neither addressed nor provided any evidence at trial to challenge the IRS's substantive determinations in the notices. However, the taxpayers stated in their petition that they were reserving "all legal rights and remedies available" with respect to the deficiencies for Hartland's and the Kunkels' 2009 and 2010 tax years and Integra's 2008 and 2009 tax years
The Tax Court's Decision
The Tax Court held that the IRS was not barred from assessing the deficiencies against the taxpayers for the disputed years. The court found that although the extensions signed by the taxpayers and the IRS listed the wrong tax years, the IRS had proved that the taxpayers intended to extend the assessment period for the disputed years, so it could reform the extensions to conform with the intent of the parties.
Although the taxpayers stated in their petition that they were reserving "all legal rights and remedies available" with respect to the deficiencies for Hartland's and the Kunkels' 2009 and 2010 tax years and Integra's 2008 and 2009 tax years, the Tax Court determined that any issue not raised in a petition is deemed conceded and consequently found that the taxpayers had conceded all substantive issues regarding the deficiencies for those years. Thus, after concessions, the only issue that remained before the Tax Court was whether the statute of limitation barred assessment of the deficiencies for Hartland's and the Kunkels' 2008 tax year and Integra's 2007 tax year.
The IRS argued that the incorrect dates listed in the Forms 872 were merely a scrivener's error by the IRS, which entered the intended period-of-limitation expiration dates instead of the disputed years.
The IRS claimed that the lack of awareness of these errors by both it and the taxpayers showed a mutual mistake, and, therefore, the Tax Court should reform the initial Forms 872 to apply to the disputed years rather than the "erroneous" years.
The Tax Court explained that while under its precedent it is long established that the IRS takes the risk of any defect in the documents upon which it relies as waivers, the court nevertheless has the power to reform Form 872 to conform to the intent of the parties and prevent one party from receiving an unintended and unexpected windfall. However, to reform Form 872, there must be clear and convincing evidence as to the parties' intent and, if an ambiguity exists in Form 872, the Tax Court may consider extrinsic evidence to clarify the ambiguity and to determine the parties' intent.
The taxpayers argued that there was no mutual mistake, implying that their intent was to agree to extend the period of limitation for the 2012 tax years. But the Tax Court stated that they presented no evidence at trial and there was nothing in the record indicating that the taxpayers' objective intent, contrary to common sense, was to agree to the 2012 tax years and that any unknown or clandestine intent they may have had for agreeing to the 2012 tax years was irrelevant. The court found that the record clearly and convincingly reflected the parties' overt actions: They signed Forms 872, which have the express purpose of extending periods of limitation that are running. Thus, the court concluded that the executed forms contained a mutual mistake.
Having found that there was a mutual mistake in the forms, the Tax Court considered what was the actual intent of the parties so that it could properly reform the agreement between the IRS and the taxpayers. The IRS asserted that 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 initial Forms 872. As proof, the IRS referred to the taxpayers' Feb. 27, 2012, letter wherein they still disputed adjustments for Integra's 2008 tax year even though its limitation period would have expired on Feb. 17, 2012, without some valid statutory extension. The IRS contended that their continued actions regarding Integra's 2008 tax year showed that the taxpayers believed the limitation period was still open for the disputed years and, therefore, that the taxpayers' original intent was to agree to extensions for those years.
The Tax Court found that the IRS's contention was a reasonable inference from the stipulated facts. According to the court, the only rational interpretation is that the initial 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, and the taxpayers' conduct following execution of the forms was consistent with this intent.
Reflections
While the IRS's typical lack of sympathy for most taxpayers when they make an innocent mistake makes its insistence on forbearance for its own mistakes somewhat galling, the Tax Court reaches the correct legal result in this case. This appears to be an example of a real scrivener's error, and the taxpayers were not entitled to the windfall they would have received if the Forms 872 had been enforced as written.
Hartland Management Services, Inc., T.C. Memo. 2015-8
