In various circumstances, the validity of an act performed by a taxpayer or by an IRS employee may be challenged on the basis that the person who performed the act did not have authority to do so. In many cases, the act is the signing of a document, such as a tax return, a petition to the U.S. Tax Court, or another financial or business document.
Concerns regarding the validity of an act often can be resolved by having an authorized person ratify the act that his or her agent performed. Ratification is defined as the confirmation or affirmation by a person with proper authority of a prior act performed by another person who lacked authority. The Tax Court has described ratification as the acquiescence of, or some act by, a principal that has the legal effect of binding the principal to the otherwise unauthorized prior act by an agent.
As a general rule, ratification is retroactive, relating back to when the agent performed the unauthorized act and is equivalent to original authority. In other words, ratification operates upon the act ratified precisely as though the authorized person had previously given the agent authority to do the act or had performed the act.
Such retroactivity, however, is subject to a qualification that the intervening rights of third persons cannot be defeated by the ratification. For example, if an individual purporting to be the agent of another enters into a contract to sell land belonging to the principal, the latter cannot ratify the contract if, between the contract date and the attempted ratification, the principal had himself or herself disposed of the property. The principal cannot defeat the authorized intermediate sale made by himself or herself and validate the prior unauthorized sale made by the agent because, at the time of the attempted ratification, the principal no longer had power to contract for sale of the land (Cook v. Tullis, 85 U.S. 332 (1873)).
Therefore, the ratifying party must have authority to perform the act both at the time the act was done and at the time of the attempted ratification. In Federal Election Commission v. NRA Political Victory Fund, 513 U.S. 88 (1994), this requirement led the Supreme Court to hold that an "after-the-fact" authorization by the solicitor general did not relate back to the date of an unauthorized filing by the Federal Election Commission (FEC) so as to make it timely. In that case, the FEC had filed in its own name a timely petition for a writ of certiorari. However, the FEC was not authorized by statute to file the petition without the solicitor general's express permission.
In a letter dated after the deadline for filing a timely petition, the solicitor general authorized the petition filed by the FEC. In rejecting this attempted ratification, the Court noted that the solicitor general himself could not have filed a petition for certiorari on the day the authorization letter was issued because the 90-day time period for filing a petition had already expired. The Court stressed that a timely petition was jurisdictional and that an after-the-fact ratification in essence would expand that prescribed period.
However, the Tax Court, without reference to the FEC case, has held that ratification may relate back to the date an original petition was filed if there is clear evidence that the party filing the initial petition reasonably believed he or she had authority to file the petition on behalf of the taxpayer and the taxpayer intended to petition the court at that time.
For example, in Brooks, 63 T.C. 709 (1975), the taxpayer husband, in response to a joint notice of deficiency, sent a letter to the Tax Court captioned in both his and his wife's names but signed only by him, which the court treated as a filed petition. The IRS filed a motion to dismiss for lack of jurisdiction as to the wife on the grounds that the petition was neither executed nor verified by her or on her behalf within the 90-day period for timely filing a petition. The taxpayers then sent the court two notarized documents that they both had signed, indicating that the wife had authorized her husband to file the petition on her behalf. In light of that evidence, the court denied the IRS's motion to dismiss and permitted the taxpayer wife to file an amended petition, adopting the act of the signing spouse.
Similarly, in Montana Sapphire Associates, 95 T.C. 477 (1990), an accountant was believed to be the tax matters partner (TMP) of a TEFRA partnership by himself, the partners, and the partnership's attorney. However, because the accountant was not a partner—i.e., never had a capital or profits interest—he could not be the TMP. A Tax Court petition was filed for the partnership on behalf of the accountant, which the IRS moved to dismiss on the grounds that it was not filed by the TMP. In denying the IRS's motion to dismiss, the Tax Court said it would find jurisdiction if a TMP was later designated and ratified the original petition.
The holdings in Brooks and Montana Sapphire Associates are consistent with the Tax Court's long tradition of treating almost any document sent to the court in response to a notice of deficiency within the 90-day period as a timely imperfect petition and providing the taxpayer an opportunity to file an amended petition to cure the defects, even after the 90-day period has expired.
Ratification also has been used to validate signatures on tax returns (Levitt, T.C. Memo. 1993-294); on a Form 872 agreement extending the period of limitation on assessment (Slawek, T.C. Memo. 1987-438); and on other financial or business documents such as organizational documents (General Counsel Memorandum (GCM) 39461), a purchase contract (Lacefield, T.C. Memo. 1973-34), and a partnership agreement (Arnold, B.T.A. Memo. 1935-182). In most such cases, ratification is accepted by the IRS without objection.
The IRS also has relied on ratification to defend unauthorized acts by its employees. In that regard, numerous delegation-of-authority orders contain the following provision: "To the extent that authority previously exercised consistent with this order may require ratification, it is hereby affirmed and ratified" (see, e.g., Delegation Orders 1-4 and 1-5; Internal Revenue Manual §§126.96.36.199 and 188.8.131.52). However, in Chief Counsel Advice (CCA) 201235009, the Office of Chief Counsel concluded that an IRS manager could not ratify a statute-of-limitation extension agreement signed by an unauthorized revenue agent because the manager's signature did not occur before the assessment period expired. The CCA cited FEC and viewed the taxpayer as a third party who would be adversely or inequitably affected by the ratification.
How Is Ratification Accomplished?
As noted above, ratification generally relates back to the time the unauthorized act was performed by the agent. Therefore, the ratifying party does not redo what the agent has done but instead simply documents that he or she affirms or adopts the act performed as his or her own. This commonly is done by way of a written statement, such as a letter or other document. When the signing of a tax return is being ratified, a written statement can be kept with the taxpayer's retained copy of the return and provided to the IRS if the signature on the return is later questioned. As indicated above, in the case of a Tax Court petition, ratification generally is accomplished by filing an amendment to the defective or imperfect petition.
Finally, ratification by implication may be found to exist when a principal with knowledge of the prior act simply fails to disaffirm the action of an agent within a reasonable time or otherwise acts as if the unauthorized act was in fact valid and authorized (Davenport Recycling Associates, T.C. Memo. 1998-347).
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.
For additional information about these items, contact Ms. Smith at 202-414-1048 or email@example.com.
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.