In Uncategorized on 01/12/2015 at 16:36

No, not Felix Mendelssohn’s Fifth, Op. 107. This is an essay by Judge Cohen on Tax Court’s power to reform a couple of Forms 872 that recite what Judge Cohen finds to be mutually mistaken dates for SOL expiry.

The opinion is Hartland Management Services, Inc., et al., 2014 T. C. Memo. 8, filed 1/12/15. The “al”s, by the way, are la famille Kunkel and another Corp. (hereinafter designated collectively as “the crew”). The crew were represented by an attorney/CPA, and IRS was auditing the crew extensively.

IRS prepared 872s for the crew, but got the dates wrong. They meant to extend the SOL for assessments for years under audit and nearing the three-year limit, but put in extending the SOL for the current year, which hadn’t even ended yet, much less was subject to audit.

The issue was the Section 6662(a) chops. The crew gave up on the deficiencies, and they weren’t small. Moreover, the case went up on stipulated facts, and the crew put in no reasonable reliance evidence.

Judge Cohen finds that Tax Court can reform the Forms 872.

First, the party asserting SOL has ultimate burden of persuasion, even though it can shift burden of proof; but if the other side (the non-asserter) can show evidence that SOL hasn’t run, the ball goes back to the asserter.

Here, “Respondent and petitioners chose not to present their cases at trial. As a result, there is no testimony to affirm, contradict, or be weighed as to the intent of the parties. Similarly, there are no relevant documents in the record that clearly state the intended taxable periods. Instead, both parties rely solely on the stipulation of facts and attached exhibits.” 2014 T. C. Memo. 8, at p. 8.

Judge Cohen: “While it is long established that the Commissioner ‘takes the risk of any defect in the documents upon which he relies as waivers’, this Court nevertheless has the power to reform Form 872 to conform to the intent of the parties. Reformation is an equitable remedy used to reframe written contracts to reflect the real agreement between the parties when, because of mutual mistake, the writing does not embody the contract intended.” 2014 T. C. Memo. 8, at p 9. (Citations omitted).

I can hear some of my readers saying “Huh? How come? I thought Tax Court had no general equitable jurisdiction.” And that’s true.

But there’s an out, and a good explanation can be found in Kelley v. Com’r, 45 F.3d 348 (9th Cir., 1995). While Tax Court hasn’t general equitable jurisdiction, so that it can extend the statutory limits of its jurisdiction to bail out someone in need, it can apply equitable principles in a case where it has jurisdiction and need not go outside the statutory stockade to apply those principles.

And here Judge Cohen does so. “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. Petitioners’ conduct following execution of the forms was consistent with this intent. Not only did petitioners act as if the period of limitation… had been extended, but they also had negotiated for months and months with the IRS regarding the disputed years and, through their counsel, knew that the disputed years would be the only logical years for extensions at the time respondent made the requests. We conclude that the parties’ intent was to extend the period of limitation for the disputed years.

“Accordingly, we hold that respondent has established by clear and convincing evidence that petitioners intended to extend the period of limitation for the disputed years and that the initial Forms 872 may be reformed to conform with the intent of the parties. As a result, respondent’s notices of deficiency are not barred as untimely under the period of limitation.” 2014 T. C. Memo. 8, at p. 14.

Notwithstanding that the crew had an attorney/CPA onboard, they put in no reasonable-reliance-on experts defense. I find this strange, but hey, it’s what that great New York scholar Prof. Siegel of Albany Law School called “S.E.C”–Someone Else’s Case.

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