Consents to Extend the Statute of Limitations: Is the IRS Bound by the Language it Uses? There are two discussions here. The first is a discussion of a specific case -- a very good one -- that sets the stage for the broader discussion of the nature of a consent to extent the statute of limitations.
Ripley v.
Commissioner
The Legal Nature of Consents
In Ripley v. Commissioner, ___ F.3d ___ (4th Cir. 12/18/96), unofficially reported at 1996 DTR 245 d11, reversing 105 T.C. 358 (1995), the Court handed the IRS a defeat based on the IRS's own wording of Form 872. Practitioners normally think of the Form 872 as extending until a date certain. Then, of course, if the IRS issues a notice of deficiency, there are special rules that suspend the running of the statute, with the length of the suspension dependent upon whether the taxpayer petitions the Tax Court. Practitioners routinely calculate the times that the statute will expire, and this is a frequent Tax Procedure examination question. The Form itself, however, provides that the extension expires on the earlier of the indicated date certain (with its suspensions as indicated) or "the assessment date of an increase in the above tax that reflects the final determination of tax and the final administrative appeals consideration." So, the agreement itself, by its terms, contemplates that the statute can end before the date indicated on the extension (with its suspensions).
You have already asked the question: so what? If the assessment is made timely, what difference does it make whether there are more days thereafter in which the IRS could have made the assessment. It made a big difference in Ripley because the IRS sought to go after the transferees for the liability. Under Section 6901, the IRS must move against a transferee within one year after the date that the statute of limitations expires on the transferor. In Ripley, the IRS assessed against the transferor well before the date certain plus the suspended period expired. Accordingly, under the terms of the agreement, the period of limitation for proceeding against the transferees commenced on the date of assessment. The IRS, however, moved against the transferees after one year from the date of assessment but within one year from the date that the date certain plus the suspended period would have lapsed.
The Tax Court held for the IRS, applying a technical analysis of the Code provisions rather than a straightforward interpretation of the Form 872. (This case is ample proof of the old saw that, if you have a technical case, go to the Tax Court but, if you have a case that is not a technical case, seek your justice elsewhere.) The Tax Court judge (Judge Raum) exegeted his way mechanically through the Code sections in a way that would have impressed law students (but would hardly have impressed contract students). Section 6503 suspends the limitations period during the time that the IRS is prohibited from making an assessment. Section 6213 prohibits the IRS from making the assessment upon the issuance of a notice of deficiency for 90 days and, if the taxpayer petitions the Tax Court, for a further period until the Tax Court decision becomes final. Under Sections 7481 and 7483, the Commissioner is thus normally prohibited from making the assessment until 90 days after the Tax Court decision document (the equivalent of a judgment in a district court). Section 6503 then, for good measure, tags on an additional period of 60 days, so that IRS employees do not have to bust their buns on the last day of the 90 day period if the notice of deficiency is issued at the end of the statute period. Since the notice of deficiency was sent 68 days before the date indicated on the Form 872, the IRS had 218 days (90 plus 60 plus 68) after the Tax Court decision. This meant, of course, that the IRS would have been OK if it had made the assessment against the transferor on the last date -- i.e., the 218th day. The IRS felt that its making the assessment earlier should not shorten the time allowed by these statutory provisions. Impressed with its trek through the statutory maze, the Tax Court held for the IRS.
The Fourth Circuit reversed, holding that the language of the Form 872 controlled the result in "plain language" that bound the parties. The Court reasoned that, although the Form 872 was not a contract, it had be interpreted in a contract-like way. The language was plain. The conditions in the contract to the waiver could not be ignored. In other words, the Court applied a straightforward interpretation of the Form.
This decision, plainly correct, raises another issue that we would like to address. This is not just an academic issue, but one that does arise from time to time and a Ripley-like analysis could result in big savings for the taxpayer.
Ripley involved the Form 872 which extends to a date certain. The same genre of issue can arise with respect to Forms 872-A. Form 872-A is an indefinite extension allowing the taxpayer or the IRS to terminate on 90 days notice. A special rule applies, however, if the IRS issues a notice of deficiency and the taxpayer petitions the Tax Court. In the precise language of the form, the extension is:
* * * if a notice of deficiency is sent to the taxpayer, the time for assessing the tax for the period stated in the notice of deficiency will end 60 days after the period during which the making of an assessment was prohibited.
Generally, as noted in the Ripley decisions, the IRS is prohibited from making an assessment during the 90 day period after the notice of deficiency is sent and, if the taxpayer petitions the Tax Court, until the decision becomes final. In all events the prohibition on assessment is lifted 90 days after the Tax Court decision. This means that, if the taxpayer petitions the Tax Court, the IRS will have from the 90th day after the decision until the 150th day after the decision to make the assessment.
At the request of the IRS, Taxpayers frequently agree to a stipulated Tax Court decision that contains a waiver of the prohibition on assessment. Remember, that the IRS must wait 90 days without such a waiver. With the waiver, the IRS can make the assessment immediately upon entry of the Tax Court decision document, free of the normal prohibition on assessment that would continue for another 90 days. Plainly, upon waiver of the prohibition on assessment, the IRS is no longer prohibited from making the assessment. Based on the plain language of Form 872-A, one would think that the IRS has sixty days -- and only 60 days (the same 60 day period, but pushed forward by the waiver of prohibition on assessment) -- in which to make the assessment. But, the Courts addressing this issue have been bedeviled by the Tax Court-like fixation on technical Code analysis rather than the terms of the consent. We think, however, the approach taken by the Fourth Circuit in Ripley should also apply to Forms 872, and if the IRS does not like that result it should change the Form to say what it really means.
We have noted, however, that the very few authorities addressing the Form 872-A issue have rejected the argument that the statute expires 60 days after a Tax Court decision document containing a waiver of restrictions on assessment. Pesko v. United States, 918 F.2d 1581 (Fed. Cir. 1990); Sherry Frontenac, Inc. v. United States, 868 F.2d 420 (11th Cir. 1989). Indeed, the Tax Court in Ripley relied upon those cases in reaching its conclusion. But the Tax Court's elevation of technical wizardry over the plain language of the form has now been rejected by a Court that determined that this is really a straightforward contract (or more precisely in its analysis, contract-like) issue that does not require slogging through the statute for the agreement is clear. The Fourth Circuit's reversal in Ripley should bring new hope to taxpayers litigating this issue in the Form 872-A context, particularly in the Fourth Circuit, and should bring new light to courts in other circuits having to deal with this issue.
What is a Consent - Waiver or Contract?
One of the notions that the courts have cited frequently in their discussions of the nature of the consent to extend the statute of limitations is that the consent is a unilateral waiver of a right ) rather than a contract between two contracting parties. E.g., Bilski v. Commissioner, 69 F.3d 64 (5th Cir, 1995) ("Like every other circuit that has addressed the matter, we have held that "the [872-A] agreement to extend the statute of limitations between the Commissioner and the [taxpayer] is not a contract, but a unilateral waiver of a defense by the taxpayer.'") In mentioning this notion, courts usually are explaining why contract interpretive tools are not applied directly in the interpretation of the consent to extend. (Notice that we don't call it a waiver, because the statute and the Form itself do not call it a waiver.) The Courts then proceed to apply contract-like principles to interpret the consent anyway.
The notion that the Form 872 is not a contract is wrong. We shall state below why it is wrong. We caveat that our difference with the courts on this issue may not be a material difference, since most courts would likely reach the same result in most cases whether the consent is characterized as a waiver or a contract because they interpret the consent in either event in a contract-like way. Nevertheless, we provide the following for whatever use our readers may make of it. We do, however, think that the distinction is important simply because in all legal contexts clear thinking is important.
Section 6501(c)(4), the Code authorization for extensions, allows such extensions only by "agreement" which bespeaks contract rather than unilateral waiver. For a unilateral waiver of some right, another party does not have to agree in order to claim the benefit. For example, the classic case of a waiver with respect to a statute of limitations is a failure to raise the defense timely in litigation. The waiver is complete without any agreement from the party benefitting from the waiver (although he would hardly be expected to complain of the waiver). Unlike a waiver as we normally know it (or as we even know it in the tax law (e.g., Form 870 waiver of restrictions on assessment), the consent to extend requires the signature of both sides (taxpayer and the IRS). Moreover, the notion that only the taxpayer gives up something -- waives something, if you will -- is naive and wrong. At a legal level, the IRS also gives something up -- the statute of limitations on refunds is extended at the same time (Section 6511(c)(1) (extending the statute of limitations on refund until six months after the extended dated under a consent form, an extension that is expressly stated in the Form 872-A). This waiver by the IRS could prove quite valuable. While it is certainly not commonplace that taxpayers receive refunds after executing a Form 872-A, our experience teaches that it is also not uncommon.
Moreover, all other things being equal, the taxpayer would never consent to an extension (except in situations where the taxpayer may be entitled to a refund) since it is not to his benefit to do so unless he thereby obtains something he deems of benefit from the IRS. The usual quid pro quo for such extensions is that the IRS will not act precipitously (and may not act at all) if the taxpayer simply gives a consent to extend the statute of limitations. Hence, we think, there is a contract -- just as the Code bespeaks in the use of the term "agreement" -- in every sense of the word (with more than a peppercorn of consideration), and to continue the notion that consents to extend the statute of limitations are not contracts is nonsense.
The notion that consents to extend the statute of limitations are unilateral waivers rather than contracts with the required peppercorn of mutual consideration has its genesis in Stange v. United States, 282 U.S. 270 (1931), which involved a materially different statutory provision. The taxes in issue in Stange were for 1914 (the infancy of the modern income tax) but the consent was executed in 1922 when the Revenue Act of 1921 controlled the consent. The 1921 Act provided in pertinent part that the IRS must determine and assess additional tax "within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax." The 1921 Act did not have two material features that now apply: (1) a mutuality provision extending the limitations period during which the taxpayer could file a claim for refund and (2) a requirement that the consent be executed during the otherwise applicable period of limitation. The ultimate issue in the case was whether a consent executed after the statute of limitations had otherwise expired permitted the IRS to assess an otherwise time-barred tax.
Given the statute as it found it, the Court viewed the taxpayer's action as a unilateral waiver effective to allow the IRS to assess an otherwise barred tax. In reaching that conclusion, the Court noted the general legal concept that a waiver is not a contract. In general litigation, a waiver of the defense of limitations can be unilateral or by contract (e.g., it can be a negotiated contractual waiver); when it is unilateral, of course, it is a classic waiver. Having determined that the "waiver" in the case before it was unilateral -- presumably in the sense that the Court felt there was no consideration to the taxpayer -- the Court said that the requirement that the document be executed by the IRS "was inserted for purely administrative purposes and not to convert into a contract what is essentially a voluntary, unilateral waiver of a defense by the taxpayer."
Seizing on this language of Stange, courts have thereafter repeated rotely that a consent to extend the statute of limitations is a waiver rather than a contract. There has, however, been a major subsequent development that courts ignore.
In 1942, Congress added a key contract concept -- mutuality -- to the consent, providing that, if the taxpayer agrees to an extension on assessments, the same extension plus six months applies to claims for refund. That requirement is now in Section 6511(c). As the Third Circuit noted in Walsonavich v. United States, 335 F.2d 96 (1964), prior to the amendment, the consent was a one-way street benefiting only the IRS. After the amendment, the court noted, Congress added "mutuality of benefit." And, the Court distinguished the earlier cases as being unilateral waivers whereas, after 1942, the waivers were mutual and thus not waivers unless they are mutual waivers. (This congressional policy of mutuality for consents incorporated in Section 6511(c) has been so strong that, as in Walsonavich, courts will apply it to create extensions for refunds even beyond the reach of Section 6411(c). See also Senger v. United States, 245 F.Supp. 109 (Del. 1965).)
To paraphrase Vincent LaGuardia Gambino, what is it that lawyers call such mutual considerations -- that's right, its a CONTRACT; shout it right out; don't be embarrassed!
Stange thus is not authority for the continuing proposition under the modern income tax that consents are unilateral waivers rather than contracts.
Subsequent Courts have nevertheless cited Stange rotely as meaning that a consent is a unilateral voluntary waiver because a taxpayer need not enter it. E.g., Silverman v. Commissioner, 86 F.3d 260, 262 (1st Cir. 1996). But that is true of all contracts (even those at gunpoint (either literally or figuratively), for a party can still choose not to enter the contract and suffer the consequences). Even first year law students recognize that a contracting party does not have to enter the contract, so that that phenomenon does not negate contract status.
In Centennial Savings Bank FSB v. United States, 887 F.2d 595, 599 (5th Cir. 1989), modified in part not here pertinent, 499 U.S. 573 (1991), the Court read Stange as holding that "the early analogies of Form 872 were waivers instead of contracts." However, the Court immediately thereafter used quintessential contract terminology to reject the taxpayer's argument that a waiver is not an extension as the statute required. The Court said (bold face supplied):
Even if one accepts Centennial's premise that only Congress can "extend" the statute of limitations, nevertheless waiving the ability to raise that defense in effect extends the period of limitations for however long a party contracts not to employ the defense. Whether such an agreement is characterized as a extension or a waiver, Congress has clearly provided for such agreements within the Tax Code.
Similarly, in the Tax Court's leading case on the issue, Piarulle v. Commissioner, 80 T.C. 1035 (1983), again relying significantly on Stange, the Court said (p. 1041, emphasis supplied):
A consent to extend the period for assessment of an income tax is essentially a unilateral waiver of a defense by the taxpayer and is not a contract. Strange (sic.) v. United States, 282 U.S. 270 (1931); Tallal v. Commissioner, 77 T.C. 1291 (1981). Contract principles are significant, however, because section 6501(c)(4) requires that the parties reach a written agreement as to the extension. The term "agreement" means a manifestation of mutual assent. S. Williston, Contracts 6 (3d ed. 1957).
Thus courts do apply contract-like analysis to interpreting consents, all the while denying that they are contracts. In addition, they apply contract-like remedies such as interpreting the document to give a party only the benefit of his bargain (e.g., Silverman). Moreover, courts apply the contract equitable remedy of reformation to interpret the document to mean what the parties meant. Buchine v. Commissioner, 20 F.3d 173 (5th Cir. 1994); petition for reh. denied 26 F.3d 1117 (1994); and Kelley v. Commissioner, 45 F.3d 348 (9th Cir. 1995). And they apply contract defenses in interpreting the Form. Saltzman, IRS Practice and Procedure (Warren, Gorham & Lamont: 1991 ed. (with current supplement), par. 5.03[4][a], p. 5-24. Even while doing so, they repeat rotely that consents are waivers and not contracts. Since these consents now have the mutuality required of contracts and are interpreted and enforced like contracts, they are contracts in every meaningful sense of the term except the "waiver" label that courts feel compelled for some unknown reason to paste onto them.
We cannot honestly say that any court would reach a different result in any particular case whether it viewed the consent as a waiver or a contract. But we think it is important that spurious notions be rejected so that the matter can be set right in the future. Clear thinking on the subject will permit courts, just as the Fourth Circuit in Ripley, to move more quickly to the everyday contract issue of whether the document would be interpreted to mean what it says. If courts will recognize that consent to extend for what it is -- a contract in every sense that the term has come to mean in Anglo American jurisprudence -- they can more clearly focus on the issue of what the language means.
Judge Posner's decision In United States v. National Steel Corp., 75 F.3d 1146 (7th Cir. 1996) deals with this precise notion in a related context of a closing agreement. Like Section 6501(c)(4), the statute refers to a closing agreement in quintessential contract term -- "agreement." Judge Posner strongly rebuked the Government for arguing that a closing agreement is anything less than a contract.
Turning back to Forms 872-A which, as we now know (even if the courts do not) are contracts, Justice Holmes long ago said, the essence of contracts is not that the parties meant the same thing but that they said the same thing. The judicial interpretation process is to determine whether (1) the parties meant the same thing in the language they agreed upon, in which case they will be held to the common meaning (the best of all worlds in contract interpretation) or (2) they did not mean the same thing, in which case the Court will either ignore the contract because there was no agreement as to an essential condition or bind the parties to some interpretation (usually one proffered by one of the parties but not the other) because of the language they objectively used. Ripley (the case that started this whole discussion) reaffirms a central tenet of contract interpretation -- and certainly one that should apply to documents prepared by our Government for entering with its citizenry: taxpayers should be entitled to rely upon the plain meaning of the English language the IRS uses in the agreement. So too, in the example of the Form 872-A, the taxpayer should be able to rely the plain meaning of the language the IRS imposed upon the taxpayer via the Form it insisted the taxpayer use, and that the language of that form could not more clearly limit the IRS to 60 days after the IRS is no longer prohibited from making the assessment. See Mecom v. Commissioner, 101 T.C. 374, 385 (1993) (for an interesting application of this wholly unstartling notion to a Form 872-A in which the taxpayer allegedly secretly harbored an unusual interpretation of the form as a one-way street permitting the taxpayer an extended period for refund but disallowing the IRS an extended period for an additional assessment).
For another subset of this issue of contract interpretation in a tax context, see the related article on settlements.Settlement Errors and Lessons
Disclosure: Larry Jones of Townsend & Jones, L.L.P., unsuccessfully litigated one of the cases involving the Form 872-A issue. Unfortunately, the client in the case decided not to appeal to the Fifth Circuit which might have adopted the Ripley approach.