Holof v. C.I.R., 88-1185

• Decision Date: 12 April 1989
• Docket Number: No. 88-1185,88-1185
• Citation: 872 F.2d 50
• Parties: -1138, 57 USLW 2638, 89-1 USTC P 9270 Harry HOLOF and Norma Holof v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 50

872 F.2d 50

63 A.F.T.R.2d 89-1138, 57 USLW 2638, 89-1

USTC P 9270

Harry HOLOF and Norma Holof v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

No. 88-1185.

United States Court of Appeals Third Circuit.

Argued Sept. 7, 1988.

Decided April 12, 1989.

Jane S. Kimball (argued), Richard Farber, and Gary R. Allen, Chief, Appellate Section U.S. Dept. of Justice, Tax Div., Washington, D.C., for appellant.

Andrew P. Fradkin (argued), Edwin Fradkin, Starr, Weinberg & Fradkin, Roseland, N.J., for appellees.

Before BECKER, HUTCHINSON and SCIRICA, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this appeal we must decide whether a defective notice of tax deficiency mailed by the Internal Revenue Service terminates taxpayers' Form 872-A consent to waive the statute of limitations on assessment of tax deficiencies. The Commissioner appeals from the Tax Court's decision upholding the termination of the limitations waiver and barring the IRS from assessing the additional taxes owed.

We hold that: (1) Form 872-A must be read in conjunction with the statutory provisions on tax assessment; (2) Form 872-A contemplates termination only by an effective notice of deficiency; and (3) the defective notice of deficiency sent to the Holofs was not cured by its eventual receipt. We will reverse the decision of the Tax Court.

I.

Taxpayers Harry and Norma Holof filed timely joint federal income tax returns for 1976 and 1977, claiming loss deductions in their partnership interests in two separate tax shelters for each year. The IRS initiated an audit of those returns. Ordinarily, the statute of limitations for assessment of tax deficiencies is three years. I.R.C. Sec. 6501(a) (West Supp.1988). In connection with the audit, however, the Holofs executed a Special Consent to Extend the Time for Assessment of Tax (Form 872-A) for 1976 and a similar Form 872-AR for 1977, ¹ thus extending the limitations period indefinitely. ²

Form 872-A, commonly known as an "open-ended" waiver because it does not expire at a fixed date, specifies the means by which either the taxpayer or the IRS can terminate the limitations waiver. The IRS can terminate it by mailing to the taxpayer either a Notice of Termination of Special Consent to Extend the Time to Assess Tax (Form 872-T) or a "notice of deficiency." In contrast, the taxpayer effectively terminates the waiver only when the IRS office "considering the case" receives a Form 872-T from the taxpayer. Form 872-A also provides that after termination by either party, the IRS has ninety days within which to "assess[ ]" a tax deficiency.

On October 8, 1982, the IRS mailed a notice of deficiency for the taxable years 1976 and 1977, but failed to send it to the Holofs' "last known" address, as required by statute. ³ The Holofs never received the October 1982 notice of deficiency and consequently failed to file a timely petition for redetermination with the Tax Court, a right also secured by statute. ⁴ The IRS then assessed the tax, and in April 1983 sought to collect it. It was these collection attempts that alerted the Holofs that an assessment had been made. On January 5, 1984, they finally received from the IRS a copy of the October 1982 notice of deficiency. Following a series of petitions, the Tax Court granted the parties' joint motion to dismiss the assessment proceedings on the grounds that the October 1982 notice of deficiency was statutorily defective.

On June 28, 1984, the IRS mailed the Holofs a second notice of deficiency for the years 1976 and 1977, this time to their last known address. The Holofs timely filed with the Tax Court a petition asserting that assessment and collection of the deficiencies were now barred by the statute of limitations. The Holofs argued that mailing even an invalid notice of deficiency--in their case the October, 1982 notice--served to terminate the limitations waiver. The Commissioner responded that because the notice of deficiency was defective under the statutory scheme, it was null and void for all purposes.

The Tax Court held that the statute of limitations had expired before the IRS mailed the second notice of deficiency. Holof v. Commissioner, 54 T.C.M. (CCH) 959, 960, 1987 WL49152 (1987). In its decision, the Tax Court relied upon Roszkos v. Commissioner 7 T.C. 1255 (1986), a case with facts similar to Holof.

Focusing on the literal provisions of Form 872-A, and interpreting "doubtful language" against the IRS as the drafting party, Roszkos, 87 T.C. at 1261, the Tax Court in Roszkos held that the IRS terminated the waiver by mailing the defective notice of deficiency. Because Form 872-A does not require that the taxpayer receive actual notice of termination, and, in contrast, makes termination by the taxpayer subject to the IRS's receipt of Form 872-T, the Tax Court determined that the Commissioner had drafted Form 872-A to render irrelevant the accuracy of the taxpayer's address. Id. at 1261. Thus, the Tax Court held that the simple act of mailing on the part of the IRS terminated the agreement.

Next, finding that actual receipt cured defects in a notice of deficiency, the Tax Court in Roszkos held that when the taxpayers became aware that the IRS intended to terminate the waiver agreement, the agreement in fact terminated. Id. at 1261-62. The court concluded that this result was "conceptually analogous to the case law governing the notices of deficiency." Id. at 1262.

Applying this reasoning to the Holofs' circumstances, the Tax Court held that "on or about" January 5, 1984--the time the Holofs "became aware" of the October 1982 notice of deficiency--the Form 872-A consent to extend the statute of limitations was terminated. Holof, 54 T.C.M. (CCH) at 960. Accordingly, the Tax Court held that the June 28, 1984 notice of deficiency was barred by the statute of limitations because it was not mailed within ninety days after the Holofs became aware of the IRS's intentions to terminate.

Subsequent to the Tax Court's decision in Holof, the United States Court of Appeals for the Ninth Circuit reversed the Tax Court's decision in Roszkos. Roszkos v. Commissioner, 850 F.2d 514 (9th Cir.1988). Although we approach the issue somewhat differently, we find persuasive the reasons the Ninth Circuit articulated for reversing the Tax Court.

II.

We review decisions of the Tax Court in the same manner and to the same extent as decisions of the district court in civil actions tried without a jury. 26 U.S.C. Sec. 7482(a) (1983). Although the Supreme Court has expressly held that a consent to extend the period for assessment of income tax is "not a contract ... [but is] essentially a unilateral waiver of a defense by the taxpayer," see Stange v. United States, 282 U.S. 270, 276, 51 S.Ct. 145, 147, 75 L.Ed. 335 (1931) (citing Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453, 466, 50 S.Ct. 215, 219, 74 L.Ed. 542 (1930)), some courts have analyzed taxpayer consents to waive the statute of limitations defense in contractual terms, see, e.g., Roszkos, 850 F.2d at 516; Pursell v. Commissioner, 38 T.C. 263, 278 aff'd, 315 F.2d 629 (3d Cir.1963) (per curiam). We could apply contract principles to this case and reach the same result, but the question before us does not necessarily implicate such principles. At issue here is whether to construe the terms of Form 872-A--a waiver of a statutory defense--in a manner consistent with the statutory framework in which it was designed to operate. This is a question of law, subject to plenary review. See Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981) (review of choice, application and interpretation of legal precepts is plenary). Cf. Caporella v. Commissioner, 817 F.2d 706, 708 (11th Cir.1987) (Tax Court's interpretation of tax forms by comparison of two forms was issue of law subject to de novo review); Kinsey v. Commissioner, 859 F.2d 1361, 1362 (9th Cir.1988) (decision involving how and when Form 872-A waiver is terminated and the scope of waiver is subject to de novo review).

III.

The critical language of a Form 872-A waiver agreement provides:

[T]axpayer(s) ... and the ... Director of Internal Revenue ... consent and agree as follows:

(1) The amount(s) of any Federal Income tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended ... [on the relevant date], may be assessed on or before the 90th (ninetieth) day after: (a) The Internal Revenue Service office considering the case receives Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, from the taxpayer(s); or (b) the Internal Revenue Service mails a Form 872-T to the taxpayer(s); or (c) the Internal Revenue Service mails a notice of deficiency for such period(s). However, if a notice of deficiency is sent to the taxpayer(s), the time for assessing the tax for the period(s) stated in the notice of deficiency will be further extended by the number of days the assessment was previously prohibited, plus 60 days....

Focusing on the literal terms of Form 872-A, the Tax Court found that the act of mailing by the IRS even to an address other than the "last known" one--of either a notice of deficiency or a Form 872-T--would terminate the waiver agreement. The Holofs contend that the issue is not statutory construction but giving "plain meaning" to the written agreement of the parties. The IRS responds that interpreting Form 872-A's termination provisions requires an examination of the statutory framework in which Form 872-A was designed to operate. We agree with the Commissioner. Although Form 872-A appears to enumerate carefully defined procedures for tax assessment, it is not an integrated agreement that encapsulates all rights and obligations of the respective parties. The taxpayer's "plain meaning" argument fails because Form 872-A is an accessory intended to complement a complex statutory scheme.

Form 872-A has legal effect only because the ...