In the case of Kunkel, et, al v. Commissioner, Case No. 15-2232, the Seventh Circuit affirmed the Tax Court’s decision in the case of Hartland Management Services, et al v. Commissioner, TC Memo 2015-8.
Original Tax Court Case
In the original case, the taxpayer argued that since the IRS put the wrong years on Forms 872, Consent to Extend the Time to Assess Tax, (which the taxpayer signed) the statute of limitations for the real years under examination had expired by the time the IRS actually issued notices of deficiency.
The examination in question involved various entities and individuals with differing year ends. The entities and year ends involved in the examination are noted below:
- Integra Engineering, LTD, Form 1120 for year ended November 30, 2008
- Craig J. Kunkel and Kim M. Kunkel for year ended December 31, 2008
- Hartland Management Services, Inc. Form 1120 for year ended May 31, 2009
(Hartland wasn’t involved in the appeal, which accounts for the name change at the appellate level.) All of the returns were filed by their unextended due dates originally, so each would see the statute for assessment of taxes expire three years after the due dates of the returns in question.
As normally occurs when an exam approaches the date when the statute will expire, the IRS requested that the taxpayers extend the statute of limitations. The IRS drafted Forms 872 for the taxpayers. However, in putting together the forms two errors were made in filling in the forms.
First, the IRS showed the “period ended” dates as not the actual fiscal year month and day, but rather the month and day of the unextended due dates. As well, rather than referencing the years in question, the IRS managed to put the soon to be current year (2012) on those line as well.
So the Forms 872 reflected the following dates:
- Integra Engineering, LTD, Form 1120 for period ended February 15, 2012
- Craig J. Kunkel and Kim M. Kunkel for period ended April 15, 2012
- Hartland Management Services, Inc. Form 1120 for period ended August 15, 2012
Effectively, the IRS entered the dates on which the statute would expire for each entity rather than the original period end dates.
The taxpayers signed and returned each of the forms in December of 2011 and the IRS area director executed the Forms a few days later.
The IRS continued on with the exam and eventually began to run close to the date granted to extend the statute on the original Forms 872. Though the IRS had issued final examination reports before the expiration of the period, the IRS (as normal) sent a request again to extend the statute, though this time showing correct dates.
This time the taxpayers refused to sign the forms. In fact, as the Court notes:
On the additional Forms 872 for Integra and the Kunkels, someone from petitioners’ counsel’s law firm handwrote “Do not sign” on pages 1 and drew a large “X” through the signature pages.
There is no question that the IRS issued its notice of deficiency after the date on which the statute would have expired on its own. Therefore, if the taxpayers had not consented to an extension of the statute, the IRS’s deficiency was issued too late and, therefore, no tax would be due regardless of whether the IRS’s findings justified additional tax.
The taxpayers argued that, in fact, they had never agreed to extend the statute. Not surprisingly they pointed to the literal language on the Forms 872, drafted by the IRS, that provided for an extension of periods other than those under examination.
The IRS argued that this was merely a “scrivener’s error” and argues that the parties unawareness of these errors constitute a “mutual mistake.” That is, the actual intent of the parties when the documents were signed was to extend the statute on years under examination and that the taxpayers did not reasonably believe that they were really extending the literal periods noted on the Form 872.
The Tax Court, while noting that generally the IRS must bear the consequences of any defects in a document it prepares which it plans to use to establish an extension of the statute, nevertheless if there can be shown that the real agreement is different from what the document reflects the Court may reform the document to conform to that intent.
The Court found that evidence suggested strongly that the parties’ intent was to extend the years under exam. The Court noted that the taxpayer’s representative who signed the Form 872:
… as a tax lawyer and a C.P.A., 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--Bastian 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 petitioners' tax years ending in 2012. Not only were the 2012 tax years still open at the time the initial Forms 872 were signed in 2011, but the forms referred to tax years with ending dates that did not match petitioners’. See Atkinson v. Commissioner, T.C. Memo. 1990-37, 58 T.C.M. (CCH) 1257, 1260 (1990) (stating under similar circumstances that where “the period for assessment of tax had not begun, it makes no sense that the parties would seek to extend it”).
Thus, the Court did not find it plausible that he believed he was actually extending the statute for the periods that were shown on the Form 872. Rather, his representation for the years under exam, conversations with the IRS and understanding of the normal course of exams makes it clear he understood the intent of the IRS was to extend the period under exam, not the nonexistent periods mentioned in the Forms 872.
Thus, the Court found, the statute had been extended when the first set of Forms 872 were signed.
As a general rule, if there is an error of this sort that the taxpayer either was aware of or should have reasonably been aware of, the taxpayer (or, in this case, the taxpayer’s representative) cannot ignore the error, execute the document and then, when it is too late for the IRS to correct the drafting, attempt to use that error against the IRS.
Seventh Circuit Opinion
The taxpayer decided to appeal the decision to the Seventh Circuit Court of Appeals. The taxpayers decided to take a slightly different view at this level, not arguing a court could not reform the waiver, but that the evidence did not meet the applicable standard. As the appellate panel notes:
In this court, Taxpayers concede that the Tax Court has authority to reform a waiver, no matter how explicit the form’s language. But they say that the Tax Court may do this only if clear and convincing evidence shows the taxpayer’s true intent — and, since neither Taxpayers nor the IRS offered evidence from the persons who filled in the blanks and signed the forms, it is impossible to meet that standard.
But the panel did not agree, noting:
The Tax Court thought reform of the waivers appropriate because only the 2008 tax year had periods of limitations expiring in spring 2012. The forms could not have served any purpose other than extending the time to file assessments for 2008 — and you can’t beat something with nothing. Taxpayers’ brief speculates that Bastian thought that he was playing a practical joke on the IRS by signing without alerting it to the scrivener’s error. This seems unlikely; the adverse effect on Bastian’s professional reputation could have been substantial. If the IRS came to conclude that Bastian had tried to hoodwink it, he might find his credentials as a tax representative pulled. The best way to understand what happened is the way the Tax Court did: A typist misread the file, entering the dates on which limitations periods would expire rather than the dates on which the tax years ended, and then everyone else missed that error. We see no clear error or abuse of discretion in that conclusion.
Note that the decision contained an “implied threat” that if the CPA/Attorney had really been aware of the wrong date and hope to use this against the IRS. In essence, the Court said it wouldn’t accept that this was what the representative did because it would be clearly wrong, potentially justifying suspension of his right to practice before the IRS.
The opinion concluded:
We are conscious of the irony in allowing the IRS to collect a 20% penalty for the errors in the Kunkels’ 2008 return, when the IRS has made an error of its own. But the Kunkels have not asked us to compare the degrees of fault or to set aside the penalty, if the assessment was timely.