Unpublished Disposition, 936 F.2d 577 (9th Cir. 1991)

No. 90-70279.

United States Court of Appeals, Ninth Circuit.

Before BRUNETTI and RYMER, Circuit Judges, and ZILLY,^**  District Judge.

MEMORANDUM^*** 

Taxpayers Donald R. Huene and Annette S. Huene appeal from an adverse ruling entered by the United States Tax Court following trial of their petition for redetermination of a tax deficiency. We have jurisdiction pursuant to 26 U.S.C. § 7482, and we affirm.

BACKGROUND

The Internal Revenue Service ("IRS") is required to assess federal income taxes within three years after a return is filed. 26 U.S.C. § 6501(a) (1989). An exception is provided where "both the Secretary and the taxpayer have consented in writing to its assessment" prior to the expiration of the three year limitations period. 26 U.S.C. § 6501(c) (4). A consent form, "Form 872A", has been created for these purposes and is effective when signed by both parties. See 26 C.F.R. Sec. 301.6501(c)-1(d) (1990).

In fall 1981, Dr. Donald Huene, an orthopedic surgeon, and his wife Annette Huene received a Form 872A from the IRS regarding their federal income tax liability for tax year 1978. The Huenes had previously received consent forms relating to prior tax years. The form was unrestricted in scope and open-ended in duration. The Huenes did not return the form. In December 1981, the IRS sent them a second Form 872A with a cover letter directing them to sign, date and return the form. The Huenes knew from their previous experience that if they failed to sign the consent form, the IRS would issue a notice of tax deficiency.

The Huenes did not sign the second consent form. Instead, Dr. Huene prepared his own consent agreement by copying the language, punctuation, spacing and type-style of the Form 872A. Dr. Huene also made two changes which are the subject of this litigation: First, he substituted a "M" for the "A" in the form number at the top of the document. Thus, the consent form signed and returned by the Huenes bore the notation: "Form 872M". Second, he modified one sentence on the first page of the two-page form. The Form 872A sent by the IRS contained the following language:

... 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....

In place of this text Huene inserted the following:

... HOWEVER, WHEN A NOTICE OF DEFICIENCY IS SENT TO THE TAXPAYER(S), THE TOTAL AMOUNT OF DEFICIENCY THAT CAN BE ASSESSED OR COLLECTED FROM TAXPAYER(S) SHALL BE THE AMOUNT OF THE DETERMINED DEFICIENCY OR THE SUM OF FIFTY DOLLARS, WHICHEVER IS THE LESSER AMOUNT....

The Huenes initialed the paragraph containing the substituted language. No similar notation was made next to the altered form number.

The effect of this second change was to limit the Huenes' tax liability to $50. The consent form was reviewed twice before it was signed by the chief examination officer who did so without detecting the substituted language. The changes were only discovered after expiration of the three-year assessment period. The IRS later determined a $171,203 deficiency in the Huenes' joint return for tax year 1978.

The Huenes petitioned the Tax Court for a redetermination of the deficiency. The court ruled that the consent agreement was invalid as a result of the Huenes' fraudulent conduct. The court further ruled that the Huenes were equitably estopped from asserting the statute of limitations as a defense to liability.

DISCUSSION

We review the 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. § 7482(a) (1) (1989); Estate of Heim v. Commissioner, 914 F.2d 1322, 1325 (9th Cir. 1990). We will not disturb the Tax Court's factual determinations unless clearly erroneous. Pomarantz v. Commissioner, 867 F.2d 495, 497 (9th Cir. 1988). A finding by the Tax Court that contains mixed issues of fact and law is reviewable under the clearly erroneous standard if it " 'is essentially a factual determination.' " Enrici v. Commissioner, 813 F.2d 293, 295 (9th Cir. 1987) (quoting Thompson v. Commissioner, 631 F.2d 642, 646 (9th Cir. 1980), cert. denied, 452 U.S. 961, 101 S. Ct. 3110, 69 L. Ed. 2d 972 (1981)).¹ 

A consent to extend the period of limitations on assessment is not a contract; rather, it is essentially a unilateral waiver of a defense by the taxpayer. Stange v. United States, 282 U.S. 270, 276, 51 S. Ct. 145, 147, 75 L. Ed. 335 (1931); Schulman v. Commissioner, 93 T.C. 623, 639 (1989); Kronish v. Commissioner, 90 T.C. 684, 693 (1988); Piarulle v. Commissioner, 80 T.C. 1035, 1042 (1983); Tallal v. Commissioner, 77 T.C. 1291, 1294 (1981), aff'd on other grounds, 778 F.2d 275 (5th Cir. 1985). Nonetheless, 26 U.S.C. § 6501(c) (4) requires that the parties reach a written "agreement" regarding the extension. The section refers only to time and it leaves the parties free to decide for themselves the terms governing the extension. Estate of Taft v. Commissioner, T.C. Memo 1989-427, 57 T.C.M. (CCH) 1291 (1989); Smith v. Commissioner, T.C. Memo 1989-87, 56 T.C.M. (CCH) 1373 (1989). Consequently, contract principles are significant in reviewing a written extension agreement under section 6501(c) (4). Schulman, 93 T.C. at 639; Kronish, 90 T.C. at 693; Piarulle, 80 T.C. at 1042.

Tax courts have uniformly looked to the parties' objective manifestations of mutual assent to determine whether they have made an agreement. See, e.g., Conway v. Commissioner, T.C. Memo 1990-589, 60 T.C.M. (CCH) 1260 (1990); Cannon v. Commissioner, T.C. Memo 1990-410, 60 T.C.M. (CCH) 391 (1990); Schulman, 93 T.C. at 639; Estate of Taft, T.C. Memo 1989-427; Smith T.C. Memo 1989-87; Kronish, 90 T.C. at 693; Piarulle, 80 T.C. at 1042. Mutual assent is determined by examining the parties' overt acts, not their secret intentions. Conway, T.C. Memo 1990-589; Estate of Taft, T.C. Memo 1989-427; Smith, T.C. Memo 1989-87; Kronish, 90 T.C. at 693.

An extension of the limitations period becomes effective only once the consent agreement is signed by both the taxpayer and IRS agent. See 26 C.F.R. Sec. 301.6501(c)-1(d). Kathryn Koehler, Chief of the Examination Support Staff, gave evidence that she was unaware that the consent form submitted by the Huenes had been altered to limit their tax liability to $50 and would not have signed the agreement had she been aware of the restriction. Dr. Huene denies that he intended to deceive the IRS. He contends that his "Form 872M" was a counteroffer to the agency's proposed extension of time.

The Tax Court was unpersuaded. It ruled that the Huenes fraudulently induced the IRS to execute the modified consent agreement. The court specifically found that the taxpayers "intended to deceive all of respondent's agents into believing that restricted 'Form 872M' was actually IRS Form 872A, and thereby induced them into executing Form 872M." T.C. Memo at 19.

It is a matter of basic contract law that assent is not effective if a misrepresentation as to an essential term of the proposed agreement induces the assent by one who neither knows nor has a reasonably opportunity to know of the essential term. See Restatement (Second) of Contracts Sec. 163 (1979). An example cited by the Restatement is instructive:

A and B reach an understanding that they will execute a written contract containing terms on which they have agreed. It is properly prepared and is read by B, but A substitutes a writing containing essential terms that are different from those agreed upon and thereby induces B to sign it in the belief that it is the one he has read. B's apparent manifestation of assent is not effective.

Restatement (Second) of Contracts Sec. 163 comment b, illustration 2, at 444.

We conclude that substantial evidence was presented which supports the Tax Court's finding that Dr. Huene deliberately crafted his "Form 872M" with the intention of deceiving the IRS. He meticulously copied the consent form word for word, line by line, and selected a print type that closely approximated the type used by the IRS on its Form 872A. The top of the document was similarly captioned:

DEPARTMENT OF THE TREASURY--INTERNAL REVENUE SERVICE SPECIAL CONSENT TO EXTEND THE TIME TO ASSESS TAX

Dr. Huene also replicated the document identification number, "121581-0918", despite being unaware of its significance. In a telling display of thoroughness, Dr. Huene even typed "(S)" at the end of the word "TAXPAYER" as found in the Form 872A. Upon this record we cannot conclude that the Tax Court's finding of fraud was clearly erroneous. See Enrici, 813 F.2d at 295.

Before declaring the consent agreement invalid, the Tax Court was obligated to inquire of the IRS' failure to detect the changes made by Dr. Huene. The Tax Court found that "Form 872M looks so much like Form 872A that it would require extensive scrutiny of the entire Form to detect the differences between them." T.C. Memo at 8. The court appropriately noted that though the taxpayers initialed the upper left-hand margin of the paragraph containing the altered sentence, this was not sufficient to put the IRS on notice of the document's modified contents in light of the overwhelming care given to replicating the Form 872A in all other respects. We find nothing in the record that warrants disturbing that determination.

Having concluded that the Tax Court properly determined the consent form was invalid, we must turn our attention to the application of the doctrine equitable estoppel to the facts of this case. "A taxpayer may be estopped to deny the validity of an agreement to extend the period of limitations where the Government reasonably relies upon waivers executed by the taxpayer." Piarulle, 80 T.C. at 1044; see also Smith, T.C. Memo 1989-87; Herschler v. Commissioner, T.C. Memo 1984-569, 48 T.C.M. (CCH) 1475 (1984).

Tax courts generally follow the standard of estoppel defined by the Second Circuit in Lignos v. United States, 439 F.2d 1365, 1368 (2d Cir. 1971), and endorsed by this Circuit in Whitney v. United States, 826 F.2d 896, 989 n. 5 (9th Cir. 1987). The circumstances usually required for the doctrine to apply are: (1) there must be a false representation or wrongful silence; (2) the error must originate in a statement of fact, not in an opinion or a statement of law; (3) the one claiming the benefits of estoppel must not know the true facts; and (4) that same person must be adversely affected by the acts or statements of the one against whom an estoppel is claimed. See Piarulle, 80 T.C. at 1044 (citing Lignos) ; Smith, T.C. Memo 1989-87; Herschler, T.C. Memo 1984-569.² 

The Huenes make two arguments on appeal. First, relying on Schenk v. Commissioner, T.C. Memo 1976-363, 35 T.C.M. (CCH) 1652 (1976), they dispute the Tax Court's finding that Dr. Huene intended to mislead the IRS. That case, which involved a date change by the taxpayer on a consent form supplied by the IRS, is inapposite for the reasons cited by the Tax Court. Specifically, the Schenk court observed that the IRS had failed to plead estoppel or to offer evidence that the taxpayer in any way attempted to mislead the IRS. Had the IRS done so, "the result in this case would probably be otherwise." Schenk, T.C.Memo 1976-363.

We agree with the Tax Court that the facts of this case more closely resemble those in Herschler, T.C. Memo 1984-569, where the court inferred an intent to mislead from the taxpayer's "subtle" alterations of the consent form. Special mention should be made here of the fact that the IRS sent the Huenes a confirmation letter which expressly referenced the Form 872A. That letter unmistakably demonstrated to the Huenes that the IRS was acting under the erroneous belief that the consent form executed by the parties was the one prepared by the agency. Under these circumstances we cannot say that the Tax Court's finding of "wrongful misleading silence" was clearly erroneous.

Second, the Huenes complain that the IRS was negligent in failing to detect the restrictions added by Dr. Huene. This issue has previously been discussed. Nothing has been called to our attention that warrants disturbing the Tax Court's finding in this regard.

CONCLUSION

The findings of the Tax Court were not clearly erroneous. The consent agreement executed by the parties was invalid by reason of the taxpayers' fraudulent conduct. The taxpayers were properly estopped from asserting their statute of limitations defense. The decision of the Tax Court is therefore affirmed.