A consent to extend the limitation period for the assessment for partnership items signed by the tax matters partner of a partnership in his capacity as the tax matters partner of another partnership was valid because the individual had the apparent authority to sign the consent.
Background
Summit Vineyard Holdings (Summit) is a limited liability company with a principal place of business in Seattle. In 2007, Summit SV Holdings, another LLC, was a member of Summit and was also its tax matters partner (TMP) in 2007, the year at issue. Meridian Equity LLC (Meridian) replaced Summit SV Holdings as the TMP of Summit in 2009. Eric Gjelde was the managing member of both Meridian and Summit SV Holdings. Summit's 2007 partnership return, on which Summit SV Holdings was designated Summit's TMP, was deemed filed on April 15, 2008. Gjelde signed the return.
In February 2010, the IRS started an examination of Summit's 2007 return. In March 2010, Gjelde executed Form 2848, Power of Attorney and Declaration of Representation, on behalf of Summit for Summit's partnership tax years 2006, 2007, and 2008, designating Travis Burgess, a CPA, and others, as Summit's representatives. Burgess represented Summit before the IRS in connection with the examination of Summit's 2007 Form 1065, U.S. Return of Partnership Income. The examination was conducted by Revenue Agent Joseph Battaglino, whom Burgess dealt with throughout the process.
In August 2010, Battaglino prepared a Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, for Summit's 2007 tax year and provided it to Burgess. However, Battaglino did not fill out page 2 of Form 872-P to specify the name of the TMP that should sign the form. Burgess sent the form to Gjelde, Gjelde's secretary filled in Meridian's name on page 2 of Form 872-P, and Gjelde signed the form and sent it back to Burgess. Burgess sent Battaglino an email on Dec. 16, 2010, with an electronically scanned copy of the signed Form 872-P for Summit's tax year 2007 attached and sent the original to Battaglino in the mail, which he received on Dec. 20, 2010.
Battaglino and his group manager at the IRS believed that it was a valid Form 872-P because Meridian was Summit's TMP at the time the Form 872-P was signed in 2010. Furthermore, both were fully aware that Summit's TMP had changed between 2007, the year at issue, and 2010.
Eventually, the IRS issued Summit a notice of final partnership administrative adjustment (FPAA) for 2007. Summit SV Holdings, as the TMP of Summit for 2007, petitioned the Tax Court, alleging that the FPAA was untimely because Summit's Form 872-P for 2007 was invalid. In Tax Court, Summit SV Holdings argued that the form was invalid because Meridian was not the TMP of Summit for tax year 2007 and therefore Gjelde did not have authority in his capacity as the managing member of Meridian to execute the Form 872-P for Summit. The IRS asserted that the Form 872-P was valid because Gjelde, as managing member of both Summit SV Holdings and Meridian, had apparent authority to extend the period of limitation for Summit.
The Tax Court's Decision
The Tax Court held that the Form 872-P signed by Gjelde, in his capacity as managing member of Meridian, was valid to extend the period of limitation for Summit. It agreed with the IRS that Gjelde had the apparent authority to execute the consent to extend the limitation period for Summit.
The Tax Court explained that the Ninth Circuit, to which an appeal of the Tax Court's decision would lie, had previously addressed the issue of apparent authority to extend the limitation period in Investment Engineers, Ltd., T.C. Memo. 1994-255, aff'd sub nom., Montelius, 145 F.3d 1339 (9th Cir. 1998). In that case, the sole general partner, Curtis, of a partnership had executed a document purporting to admit another individual, Montelius, to the partnership as a general partner, but the document was not actually sufficient to do so under the applicable state law. Curtis, not realizing this, informed the IRS during an audit of the partnership that Montelius was a general partner, and the IRS accepted as valid consents to extend the limitation period for the partnership signed by Montelius. The Ninth Circuit held that although Montelius did not have the actual authority to act as a general partner of the partnership, he had the apparent authority to do so, and this authority extended to the signing of consents to extend the limitation period. The Tax Court found that Gjelde similarly had the authority to sign the consents for Summit.
The court noted that the Fifth Circuit in Medical & Business Facilities, Ltd., T.C. Memo. 1994-38, rev'd, 60 F.3d 207 (5th Cir. 1995), had held that a general partner did not have apparent authority to sign consents to extend the limitation period where there was no written document vesting the general partner with that authority. The Tax Court distinguished Medical & Business Facilities on the ground that the purported TMP and the actual TMP in that case were two different individuals. In the present case, Gjelde was the proper individual to sign for both Summit SV Holdings and Meridian, and the only problem with the consent was that it was signed in Gjelde's capacity as the managing member of Meridian and not in his capacity as the managing member of Summit SV Holdings.
The Tax Court then observed that it had previously held that the representative named in the power of attorney satisfied the requirements to sign an extension and had further held that the general partner having the authority to do so could extend to a partnership agent the authority to extend the assessment period under Sec. 6229(a) with respect to all partners. However, in the case of Summit, this rule only worked to extend the authority to sign a consent to Burgess. No written document existed that gave Gjelde the power as the managing member of Meridian to sign a consent for Summit. Thus, Gjelde could only validly consent to extend the limitation period if he had apparent authority. Whether apparent authority exists is controlled by the law of the state where a contract is made, which, in Summit's case, is Washington.
Under Washington law, the Tax Court found, apparent authority exists where a third party reasonably interprets the principal's words or conduct as conferring authority on the agent. Burgess, a representative and agent of Summit by virtue of the power of attorney Summit gave the IRS, had the authority to sign a Form 872-P for Summit. Summit, through Burgess's actions, had led the IRS agent Battaglino to believe that Gjelde had the power to execute a consent to extend the period of limitation for Summit, and Gjelde actually had that power, albeit in his capacity as the managing member of Summit rather than his capacity as the managing member of Meridian. Therefore, the IRS's reliance on Summit's representations was not unreasonable, the Form 872-P signed by Gjelde was effective to extend the limitation period for Summit, and, consequently, the FPAA issued to Summit was timely.
Reflections
In this decision, the Tax Court is somewhat generous to the IRS. Whether the form signed by Gjelde in his capacity as the managing member of Meridian was valid was a question of law, not a question of fact. Having received the signed form, the IRS had all the information necessary to determine whether the form was legally valid, and thus, arguably, the court should not have allowed the IRS to rely on the statements or actions of the taxpayer to excuse it from failing to determine that the form was not legally valid.
