Woods v. Comm'r of Internal Revenue

• Citation: 92 T.C. No. 45,92 T.C. 776
• Decision Date: 11 April 1989
• Docket Number: Docket No. 35566-86.
• Parties: S. DWIGHT WOODS AND MARILYN WOODS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 776

92 T.C. No. 45

S. DWIGHT WOODS AND MARILYN WOODS, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 35566-86.

United States Tax Court

Filed April 11, 1989.

P and R executed a Form 872-A consent to extend the period for making assessments intending that the consent apply only to assessments arising out of a specific subchapter S corporation P had invested in. The restrictive language of the written consent mistakenly referred to a corporation that P had not invested in and which was not the basis of R's deficiency determination. HELD, the Form 872-A was not ambiguous, it contained a mutual mistake. Applying equitable principles, the Form 872-A may be reformed to conform with the parties' actual agreement. The statute of limitations does not bar assessment. HELD FURTHER, Constitution Publishing Co. v. Commissioner, 22 B.T.A. 426 (1931), and Atlas Oil & Refining Corp. v. Commissioner, 22 T.C. 552 (1954), will no longer be followed, to the extent that these cases indicate that a contrary result is required. Howard M. Potts, for the petitioners.

Robert M. Fowler, for the respondent.

OPINION

RUWE, JUDGE:

On May 30, 1986, respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1978 in the amount of $11,023. The substantive adjustments made by respondent in his notice of deficiency are not in dispute. The sole issue for decision is whether respondent issued the notice of deficiency to petitioners after the applicable period set forth in the statute of limitations had expired.

All of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated by this reference.

Petitioners resided in Johnson County, Kansas, when they filed their petition in this case. They timely filed their Federal income tax return for 1978 with the Internal Revenue Service Center at Austin, Texas.

On their 1978 income tax return, petitioners reported a $45,000 loss from Solar Equipment, Inc., a subchapter S corporation. Petitioners reported Solar Equipment, Inc.'s tax identification number as 43-1156106 on their return.

On March 23, 1982, petitioners, at respondent's request, executed a Form 872, ‘Consent to Extend the Time to Assess Tax,‘ for the taxable year 1978. Respondent accepted the Form 872, extending respondent's time to make an assessment for taxable year 1978 to June 30, 1983. The Form 872 extension was restricted to adjustments relating to ‘Solar Equipment, Inc. EIN: 43-1156196.‘ Solar Equipment, Inc.'s correct tax identification number is not revealed by the stipulation and attached exhibits. However, since respondent's opening brief requested a finding that Solar Equipment, Inc.'s correct tax identification number is 43-1156196 and, petitioners' reply brief did not object, we will proceed on the assumption that 43-1156196 is the correct tax identification number.

On December 17, 1982, respondent sent a letter to petitioners offering to settle the Solar Equipment, Inc., issue for the 1978 taxable year. In the letter, respondent asked petitioners to send documentation of their cash investment in Solar Equipment, Inc. In response, petitioners sent a letter to respondent indicating they had not decided whether to settle the case. They enclosed a copy of a check payable to ‘Davis Equities Corp.,‘ in the amount of $12,507 which contained the notation ‘acct/o Solar Equip., Inc.‘ in the bottom left-hand corner.

On February 23, 1983, respondent sent a letter to petitioners asking them to execute a consent further extending the period for making assessments for taxable year 1978. Respondent's letter indicated that this extension was necessary because he was examining an entity identified only by the number 43-1156196 and that adjustments might result which could affect petitioners' 1978 return. The extension form attached to the letter (Form 872-A, ‘Special Consent to Extend the Time to Assess Tax‘) was not restricted to any particular adjustments. Petitioners did not execute this extension form. In response, petitioners wrote to respondent that they had ‘already signed an extension on this. Our copy was returned to us stamped 'received by the Wichita office.’‘

On March 11, 1983, respondent sent a letter and a Form 872-A to petitioners. The letter read in part as follows:

We received your letter advising us that you have previously signed an extension. That is correct. The extension you previously executed expires June 30, 1983. Therefore, since the examination of Solar ENVIRONMENTS, Inc. has not been completed, we need to further extend the statute of limitations. Enclosed are forms 872-A restricted to adjustments from Solar ENVIRONMENTS, Inc. for you to sign and return. [Emphasis added.]

The letter erroneously referred to Solar Environments, Inc. The Form 872-A that accompanied the letter erroneously referred to the taxable year 1979, and contained erroneous restrictive language making the extension applicable only to assessments resulting from adjustments made to ‘Solar ENVIRONMENTS, Inc. #43-1156200.‘ (Emphasis added.) Petitioners signed the Form 872-A and mailed it to respondent. Upon review of the Form 872-A, respondent discovered that the tax period on the consent was erroneously shown as the period ended December 31, 1979, instead of December 31, 1978. To correct this error, respondent sent a new Form 872-A to petitioners containing the proper tax period. Petitioners signed the new Form 872-A on March 29, 1983, and it was accepted by respondent on April 8, 1983. The restrictive language of the new Form 872-A still erroneously referred to ‘Solar ENVIRONMENTS, Inc. #43-1156200.‘ (Emphasis added.)

At the time they executed each extension, petitioners and respondent intended that the extensions would allow respondent additional time to complete his examination of petitioners' 1978 return. During 1978, petitioners had no investments in or affiliation with Solar Environments, Inc. The first extension of the period of limitations was restricted to adjustments relating to ‘Solar Equipment, Inc. EIN: 43-1156196‘ which petitioners had invested in and with respect to which they had taken a deduction on their 1978 return. At the time petitioners executed the second extension, Form 872-A, on March 29, 1983, the statute of limitations barred assessment as to all adjustments except those relating to Solar Equipment, Inc. At the time they executed the Form 872-A in 1983, both parties intended and agreed to extend the period for assessment for adjustments relating to Solar Equipment, Inc. even though the Form 872-A mistakenly referred to Solar Environments, Inc.

Respondent was solely responsible for the preparation of each of the extensions in this case. On April 12, 1984, respondent prepared an examination report reflecting adjustments to petitioners' return with respect to their investment in Solar Equipment, Inc. At that time, respondent first became aware that the extension executed by the parties the previous spring did not refer to Solar Equipment, Inc. EIN: 43-1156196, but rather to Solar Environments, Inc. #43-1156200.

Section 6501(a) ¹ provides that respondent may assess deficiencies in income taxes within 3 years after the due date of a timely filed return. Section 6501(c)(4) allows a taxpayer and respondent to consent in writing to extend the period for assessment.

The bar of the statute of limitations is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proof. Rule 142(a); Adler v. Commissioner, 85 T.C. 535, 540 (1985). A party pleading the statute of limitations as a bar to assessment establishes a prima facie case by showing that the statutory notice was mailed beyond the normally applicable period provided by the statute of limitations. The burden of going forward then shifts to the other side to show that the bar of the statute of limitations is not applicable. Adler v. Commissioner, supra at 540. See Concrete Engineering Co. v. Commissioner, 58 F.2d 566 (8th Cir. 1932), affg. 19 B.T.A. 212 (1930); Stern Bros. & Co. v. Burnet, 51 F.2d 1042 (8th Cir. 1931), affg. 17 B.T.A. 848 (1929).

In this case, petitioners timely filed their joint tax return for 1978, which means that it is deemed to have been filed on April 15, 1979. Sec. 6501(b). Ordinarily, the period within which respondent could effectively issue a notice of deficiency for petitioners' taxable year 1978 would have expired on April 15, 1982. Sec. 6501(a). Respondent must therefore introduce evidence establishing an exception.

It is undisputed that the parties extended the period of limitations on assessment for 1978 adjustments related to Solar Equipment, Inc. to June 30, 1983. Respondent did not issue his statutory notice until May 30, 1986. Therefore, the issue we must decide is whether the Form 872-A which petitioners signed on March 29, 1983, and which respondent accepted on April 8, 1983, was a valid extension with respect to respondent's determination of a deficiency based upon disallowance of petitioners' reported loss from ‘Solar Equipment, Inc.‘ despite the fact that the Form 872-A referred to ‘Solar Environments, Inc.‘

A consent extending respondent's time to assess taxes is not a contract. However, contract principles are significant because section 6501(c)(4) requires that the parties reach a written agreement as to the extension. Piarulle v. Commissioner, 80 T.C. 1035, 1042 (1983). The term agreement means a manifestation of mutual assent. Piarulle v. Commissioner, supra at 1042. It is the objective manifestation of mutual assent as evidenced by the parties' overt acts that determines whether the parties have made an agreement. Kronish v. Commissioner, 90 T.C. 684, 693 (1988).

Neither party has cited a case that is ‘on all fours‘ with the facts in this case, however, both argue that the principles stated in Constitution Publishing Co. v. Commissioner, 22 B.T.A. 426 (1931), should control the...