Buchine v. C.I.R. ( 1994 )

United States Court of Appeals,
Fifth Circuit.
Nos. 93-4977, 93-4990.
Mark BUCHINE, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.
Karen C. BUCHINE, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.
May 9, 1994.
Appeal from a Decision of the United States Tax Court.
Before ALDISERT*, REYNALDO G. GARZA and DUHÉ, Circuit Judges.
REYNALDO G. GARZA, Circuit Judge:
Mark and Karen Buchine appeal a decision from the United
States Tax Court holding them liable for tax deficiencies. We find
that the Tax Court did not go beyond its statutorily prescribed
jurisdiction by applying the equitable principle of reformation.
We further find that the Tax Court did not clearly err in finding
that a written agreement existed between each of the Buchines and
the IRS, and in finding that Karen Buchine was not an innocent
spouse within the meaning of I.R.C. § 6013(e). Therefore, the
decision of the Tax Court is AFFIRMED.
I. FACTS
Mark and Karen Buchine filed their 1981 tax return on July 21,
*
Circuit Judge of the Third Circuit, sitting by designation.
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1982. The IRS, however, did not issue the notice of deficiency
until September 7, 1989.
On September 17, 1984, the Commissioner of the IRS mailed the
Buchines an original and one copy of Form 872-A (Special Consent to
Extend the Time to Assess Tax). The Form 872-A agreements executed
by taxpayers and the IRS are known as open-ended "consents" because
they extend indefinitely the Internal Revenue Code's section 6501
three-year period for assessment of tax deficiencies. The cover
letter (Form 907) that accompanied the consent referred to the 1981
taxable year. Form 872-A, however, referred to the 1984 taxable
year. Along with the consent and the cover letter, the
Commissioner included IRS publication 1035. The front page of
publication 1035 states the Commissioner's policy to identify tax
returns under examination for which the statutory period is about
to expire, and seeks a consent from the taxpayer to extend that
period.
The Commissioner intended to request that the Buchines consent
to extend the time to assess the tax for the 1981 tax year, because
the three-year limitations period for that year was about to
expire. The Buchines received the package of documents from the
IRS and Mark Buchine read both the cover letter and the consent.
The Tax Court held that when he read the documents he knew that the
consent was not intended for the 1984 tax year.
On September 19, 1984, Mark Buchine telephoned the number
provided on the cover letter, and spoke with revenue agent Roy
Fite. At Mr. Fite's request, Mark Buchine provided Mr. Fite with
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his name, the taxable year 1981, and his social security number.
Mr. Fite took notes of his conversation with Mark Buchine. After
the conversation, Mr. Fite wrote the above information on a
telephone contact sheet and discarded his notes.
Before signing the consent, Mark Buchine told his wife to sign
it, and she did. The Buchines knew when they signed the consent
form that they had not yet filed their 1984 income tax return.
II. PROCEDURAL HISTORY
Mark and Karen Buchine petitioned the United States Tax Court
for a redetermination of proposed additional taxes ("deficiencies")
determined by the Commissioner in Mark and his then-wife Karen's
income for 1981, together with the carryback-effect of those
adjustments on their joint tax returns for 1978, 1979, and 1980.
The Tax Court held that it could reform Form 872-A based upon
mutual mistake of the parties, and that clear and convincing
evidence existed that Mark, Karen, and the Commissioner each
intended the Form 872-A to apply to 1981, rather than 1984. The
Tax Court also held that Karen was not an innocent spouse with
regard to these matters.
After computations, on January 31, 1992, the Tax Court entered
its decision setting forth Mark and Karen's tax liability for 1981
and the carryback years. On March 22, 1993, the Tax Court denied
Mark and Karen's motion to reconsider Opinion, and motion to vacate
and revise decision. Mark timely filed his notice of appeal,
however, a question exists as to the timeliness of Karen's appeal
to this court.
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III. DISCUSSION
The Buchines claim the Tax Court: (1) went beyond its
statutorily prescribed jurisdiction by reforming the consent
agreement; and (2) clearly erred in finding that a written
agreement existed between each of them and the IRS.
Karen Buchine argues separately that her notice of appeal was
timely filed and that the district court clearly erred in finding
that she was not an innocent spouse within the meaning of I.R.C. §
6013(e).
We find that the Tax Court did not go beyond its statutorily
prescribed jurisdiction by applying the equitable principle of
reformation. We further find that the Tax Court did not clearly
err in finding that a written agreement existed between each of the
Buchines and the IRS, and in finding that Karen Buchine did not
fall within the meaning of an innocent spouse. Finally, we find
that Karen Buchine's notice of appeal was timely filed.
A. Did the Tax Court go beyond its limited jurisdiction?
Mark and Karen Buchine argue that the Tax Court lacks general
equitable powers to enlarge its jurisdiction beyond that
statutorily prescribed by the Internal Revenue Code.
The Buchines assert that they filed their 1981 tax return on
July 21, 1982, so that any notice of deficiency issued to them
would have to have been mailed by the IRS on or before July 20,
1985, absent a valid written consent extending the three year
statute of limitations. See, I.R.C. § 6501(a). The Buchines also
assert that the consent form prepared by the IRS clearly and
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unambiguously extended the statute of limitations for the 1984 tax
year, not the 1981 tax year. The Buchines further assert that the
Tax Court, based on Woods v. C.I.R., 92 T.C. 776, 1989 WL 32907(1989), reformed the consent form by substituting "1981" for
"1984." In Woods, the Tax Court held that it had jurisdiction to
reform a consent form to accord with the parties' mutual agreement
which had not been expressed in the consent form due to scrivener's
error. Id.The Buchines assert that the Woods, decision is erroneous.
They claim that the Woods court fashioned a slippery distinction
between its jurisdictional grant and contract reformation.
"[T]here is a difference, however, between the application of
equitable principles to decide a matter over which we have
jurisdiction and the exercise of "general equitable powers' to take
jurisdiction over a matter not provided for by statute." Id. at
2971. The Buchines claim this distinction has no support in the
Constitution, legislation or case law.
The Buchines claim that Article I courts do not have general
equitable powers, including the power to reform a contract unless
specifically provided by statute. The Supreme Court has twice
ruled that predecessors to the U.S. Tax Court—the Board of Tax
Appeals and the Tax Court of the U.S.—have no equity jurisdiction.
C.I.R. v. McCoy, 484 U.S. 3, 7, 108 S.Ct. 217, 219, 98 L.Ed.2d 2(1987); C.I.R. v. Gooch Milling & Elevator Co., 320 U.S. 418, 419-
20, 64 S.Ct. 184, 185-86, 88 L.Ed. 139 (1943). The Buchines argue
that the Supreme Court has determined that Article I courts have no
5
jurisdiction to reform a contract absent express authority to do
so. They further argue that since this court has held that
Congress has not issued such statutory authority, the Tax Court in
the instant case had no constitutional authority to apply the
equitable remedy of reformation to create a basis for its
jurisdiction. See, Harvey v. United States, 105 U.S. (15 Otto)
671, 26 L.Ed. 1206 (1881) (Court of claims, which at that time was
an Article I court, did not have the power to reform an
agreement.); Continental Equities, Inc. v. C.I.R., 551 F.2d 74, 79
(5th Cir.1977) (Tax Court, being a court of limited jurisdiction,
did not have equitable power to expand its jurisdiction to
adjudicate a tax refund claim.).
Finally, the Buchines argue that Congress was quite specific
in its directive as to how the statute of limitations could be
extended beyond the basic three years set forth in I.R.C. section
6501(a). Pursuant to I.R.C. section 6501(c)(4), an extension of
the statute of limitations is ineffective unless "both the
[Commissioner] and the taxpayer have consented in writing...."
Thus, I.R.C. Section 6501(c)(4) provides that the writing itself
constitutes the agreement of the parties, rather than being a mere
memorialization of an oral agreement. The Buchines argue that
Congress deliberately chose the phrase "written consent" in
determining when the statute of limitations could be extended.
Application of any equitable principles to determine whether an
agreement existed at all, as well as whether a writing need exist,
are simply inconsistent with the plain language of I.R.C. Section
6
6501(c)(4).
The jurisdiction of the Tax Court to reform a consent form
extending the statute of limitations is a question of law subject
to de novo review. FED.R.CIV.P. 52(a).
In Woods v. C.I.R., 92 T.C. 776, 1989 WL 32907 (1989), the Tax
Court was faced with a fact situation very similar to the case at
bar. In that case, the consent form erroneously named the entity
as "Solar Environments, Inc." rather than "Solar Equipment, Inc."
Id. at 2967. The Tax Court held,
[t]he instant controversy involving the issue of whether the
assessment of tax for a year properly before us is barred by
the statute of limitations, is clearly within the jurisdiction
of the Court. An issue based on the statute of limitations is
a defense and not a plea to the jurisdiction of this Court.
[citation omitted] In deciding this case, we are not
expanding our statutory jurisdiction.
* * * * * *
The parties agree that the correctness of the deficiency, as
determined by [the Commissioner], is dependent upon whether
the period for assessing the deficiency had expired prior to
issuance of the notice of deficiency. This in turn depends
upon whether the written Form 872-A was effective to extend
that period in accordance with what the parties intended. We
clearly have jurisdiction to determine whether a deficiency
exists and, in so doing must determine the efficacy of the
Form 872-A. In so doing, we may apply equitable principles.
Id.
This court has acknowledged the distinction, espoused by the
Tax Court, between exercising "general equitable powers" to take
jurisdiction over a matter not provided for by statute and applying
"equitable principles." In Continental Equities, Inc. v. C.I.R.,
551 F.2d 74 (5th Cir.1977), the question presented was whether the
Tax Court could exercise general equitable powers to assume
7
jurisdiction to review the Commissioner's denial of a refund claim,
and order that a refund be given. This court held that the Tax
Court, being a court of limited jurisdiction, did not have
equitable power to expand its jurisdiction to adjudicate a tax
refund claim. Id. at 79. However, in Mayfair Minerals, Inc. v.
C.I.R., 456 F.2d 622 (5th Cir.1972), this court held that the Tax
Court properly concluded that when the Commissioner allowed the
statute of limitations to run on adjustments of income because of
the taxpayer's misleading returns, the equitable principle of
estoppel prohibited the taxpayer from denying that the deductions
were properly taken. Id. at 623.
At the core of the Buchines' case, as in Woods, is the Tax
Court's determination of whether a tax deficiency exists. This
determination falls clearly within the ambit of the Tax Court's
jurisdiction. The Tax Court in this case simply applied the
equitable principle of reformation to a case over which it had
jurisdiction.
Therefore, we find that the Tax Court appropriately reformed
the consent form and that it did not improperly expand its limited
jurisdiction by doing so.
B. Did the Tax Court clearly err in finding that a written
agreement existed between each of the Buchines and the IRS?
The Buchines argue that when the Commissioner seeks
reformation, he must show by clear and convincing evidence a
manifestation of mutual assent. The Buchines assert that the
Commissioner did not bear his burden of proving by clear and
convincing evidence that the parties reached a mutual agreement,
8
and that the Tax Court's fact finding to the contrary is clearly
erroneous.
The Buchines argue that the Tax Court's decision in the
instant case is inconsistent with its body of law holding that the
Commissioner suffers the risk of any defects in a document on which
he relies as a waiver of the limitations period. United States v.
Grabscheid, 1982 WL 1624, 82-1 U.S.T.C. ¶ 9382 (N.D.Ill.1982);
Schenk v. C.I.R., 35 T.C.M. (CCH) 1652, 1976 WL 3542 (1976).
The Buchines claim that in this case, there was no mutual
mistake. The Buchines both testified that their intent was to
extend the statute of limitations with respect to 1984, as
reflected in the written extension they signed. They made no
representation other than that their intent was to extend the 1984
year. The Buchines further claim that the IRS made a unilateral
mistake, and, as stated in the Restatement of Contracts § 155,
Comment b (1981), the Commissioner's only remedy is avoidance,
which fails to extend the statute of limitations for 1981.
Mark Buchine argues that upon facts much less sympathetic to
the taxpayer, the Tax Court recently held no mutual mistake
existed. In H Graphics/Access, Ltd. Partnership v. C.I.R., 63
T.C.M. (CCH) 3148, 1992 WL 129882 (1992), the IRS mailed a Form
870-P to the taxpayer, stating that the IRS proposed to disallow
1007 of the deductions claimed on a partnership tax return and
requesting the taxpayer to make an offer of settlement on the Form
870-P. The taxpayer redrafted the Form 870-P to show only a 107
disallowance of the deductions, signed it and returned it to the
9
IRS. The IRS did not notice the change and signed the Form 870-P
as submitted, thereby creating a written agreement. The Tax Court
held that the IRS had agreed to only a 107 disallowance of the
deductions. In H Graphics/Access, the plaintiff was a lawyer-CPA,
and former IRS agent with a full-time practice devoted to tax
litigation and tax procedure. Yet, the Tax Court believed his
testimony that he had no knowledge of the Commissioner's procedures
for handling the particular form involved in that case.
Karen Buchine argues that even if the Tax Court correctly
found that an agreement existed between Mark Buchine and the IRS,
the Tax Court clearly erred in finding that there was an agreement
between her and the IRS. She argues that the Tax Court went to
great lengths to look into Mark Buchine's mind. However, no such
examination was undertaken with respect to her. She argues that
Mark Buchine's intent cannot be imputed to her. See, Estate of
Sperling v. C.I.R., 22 T.C.M. (CCH) 1301, 1963 WL 596 (1963);
Ekdahl v. C.I.R., 18 B.T.A. 1230, 1930 WL 855 (1930). She further
argues that both she and Mark Buchine were required to reach an
agreement with the IRS. Finally, she argues that there was
virtually no evidence that she intended Form 872-A to apply to the
1981 tax year, and all the evidence showed that her intent was that
the form apply to 1984.
Review of the Tax Court's fact finding regarding mutual
mistake of the parties can be reversed only if clearly erroneous.
See, I.R.C. § 7482(a)(1); FED.R.CIV.P. 52(a).
The agreement to extend the statute of limitations between
10
the Commissioner and the Buchines is not a contract, but a
unilateral waiver of a defense by the taxpayer. Piarulle v.
C.I.R., 80 T.C. 1035, 1983 WL 14837 (1983). Contract principles
are significant, however, because section 6501(c)(4) requires the
consent to be a written agreement between the parties. Id.The Tax Court found that "[t]here are several extrinsic facts
which we believe show that petitioners expected, intended, and had
every reason to be on notice that Form 872-A signed in 1984 applied
to 1981." The Tax Court concluded that Mark Buchine had a good
working knowledge of many aspects of income tax law and procedure,
and that his knowledge gave the Buchines every reason to know the
consent signed in 1984 applied to 1981. It based that conclusion
on the following facts: (1) he had a degree in accounting; (2) he
worked in public accounting; (3) he prepared income tax returns
for himself and others; (4) he sold tax shelters and was a tax
matters partner or general partner for some of them when he
received the Form 872-A; (5) he was familiar with the TEFRA
partnership and S corporation audit and litigation provisions; and
(6) he knew enough about tax procedures to be aware of the
three-year limitations statute, and that requests to extend it
usually occur near the end of the three-year period.
The Tax Court also concluded that Mark Buchine knew that the
Form 872-A signed in 1984 could not have been an extension for 1984
because the Buchines had not yet filed their income tax return for
1984. The period for assessment of tax does not begin to run until
the tax return for the year is filed. Since in November 1984 the
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period for assessment of tax had not yet begun, it made no sense
that the parties would seek to extend it. The Tax Court was
convinced that Mark Buchine understood this. The Tax Court further
concluded that the cover letter that accompanied Form 872-A
referred to 1981 and that before the Buchines signed Form 872-A,
Mark Buchine was aware that the cover letter stated that Form 872-A
was intended to apply to 1981. Finally, when Mark Buchine called
the IRS telephone number on the cover letter, he identified taxable
year 1981.
We find, based on all of the evidence outlined above, that the
Tax Court did not clearly err in finding that clear and convincing
evidence existed that there was an actual agreement between Mark
Buchine and the IRS, and that the writing contained a "scrivener's
error."
With regard to Karen Buchine, the appellee correctly points
out that the only exception in the Internal Revenue Code to the
imputation of the actions of one spouse to the other spouse, when
a joint return is filed, is the innocent spouse provision, section
6013(e), which is not implicated for purposes of the statute of
limitations. Moreover, as the appellee points out, the cases Karen
Buchine cites for the proposition that Mark Buchine's intent cannot
be imputed to her are easily distinguished by the fact that she
actually signed the consent form.
In Estate of Sperling, the Tax Court held that where the
husband forged the wife's signature on a consent to extend the
statute of limitations without her authority, the consent was not
12
valid as to the wife. Estate of Sperling, 22 T.C.M. (CCH) at 1306,
1963 WL 596. In Ekdahl, the Tax Court held that where the wife
executed a consent, but the husband did not, the consent was not
valid as to the husband. Ekdahl, 18 B.T.A. at 1233, 1930 WL 855.
However, in this case, Karen Buchine admittedly signed all the
relevant documents, and she knew of the erroneous reference to 1984
on the consent form before she signed it.
Therefore, we find that the Tax Court did not clearly err in
finding that there was an agreement between Karen Buchine and the
IRS.
C. Was Karen Buchine's notice of appeal in this case timely filed?
The trial of this case was held on February 25, 1991 and the
Memorandum Opinion was issued on January 16, 1992. The Decision
was entered on January 31, 1992. Karen and Mark Buchine's Motion
to Vacate and Revise Decision, and Motion to Reconsider were
received by the Tax Court on February 18, 1992. The Tax Court
issued its order denying the Motions on March 22, 1993. Karen
Buchine mailed her notice of appeal on June 17, 1993.
Karen Buchine argues that her notice of appeal was timely
filed. She asserts that an appeal of a Tax Court decision
ordinarily requires the filing of a notice of appeal with the Clerk
of the Tax Court within 90 days after the decision is entered.
I.R.C. § 7483. She further asserts that when a timely post-trial
motion is filed within thirty (30) days after the decision is
entered, the time for appeal is terminated as to all parties and
does not begin to run until an order disposing of the motion is
13
entered. Durkin v. C.I.R., 872 F.2d 1271, 1273 (7th Cir.1989),
cert. denied, 493 U.S. 824, 110 S.Ct. 84, 107 L.Ed.2d 50 (1989).
In that event, the time for appeal will commence on, and be
computed from, the latter of the date an order is entered disposing
of such motion or the date of entry of the decision. FED.R.APP.P.
13(a).
Federal Rule of Appellate Procedure Rule 13, which governs
review of decisions of the Tax Court, states in subsection (a) that
the time for filing a notice of appeal is tolled by a motion to
vacate or revise a decision of the Tax Court, and that the time for
appeal commences to run from the entry of an order disposing of
such motion, or from the entry of decision, whichever is later.
Furthermore, subsection (b) states that if notice is delivered to
the clerk by mail and it is received after the last day for filing,
the postmark date shall be deemed to be the date of delivery.
The Buchine's motions were timely filed within 30 days after
entry of the Tax Court's decision on January 31, 1992. The filing
of the motions terminated the running of the time for appeal until
the order denying the Motions was entered on March 22, 1993. Karen
Buchine filed her notice of appeal by mailing it to the Tax Court
on June 17, 1993, 87 days after the entry of such order.
Therefore, Karen Buchine's notice of appeal was timely filed.
D. Did the Tax Court clearly err in finding that Karen Buchine was
not an innocent spouse within the meaning of I.R.C. § 6013(e)?
Karen Buchine argues that the Tax Court clearly erred in
finding that she was not an innocent spouse within the meaning of
I.R.C. section 6013(e). She asserts that she satisfies all of the
14
requirements for innocent spouse relief under section 6013(e).
To obtain relief under section 6013(e), the person asserting
innocent spouse status must prove that: (1) A joint return was
filed for the year; (2) there is a substantial understatement of
tax attributable to grossly erroneous items of the other spouse on
the return; (3) the spouse desiring relief did not know, and had
no reason to know, of the substantial understatement when signing
the return; and (4) taking into account all the facts and
circumstances, it is inequitable to hold the spouse seeking relief
liable for the deficiency. See, I.R.C. § 6013(e)(1).
The Tax Court found that Karen Buchine satisfied the first two
prongs but that she did not meet the last two.
Karen Buchine argues that she neither knew nor had reason to
know of the substantial understatement. She argues that she did
not realize that Mark Buchine had invested in the entities until
their divorce, many years after 1981. She had no knowledge that
there was a possible falsity appearing on the return. Therefore,
she satisfies the "reason to know definition" enunciated in Sanders
v. United States, 509 F.2d 162, 167 (5th Cir.1975).
She also argues that she only derived routine support from her
husband. The tax benefits were utilized to meet normal household
expenses. There were no lavish or unusual expenditures from which
she might have suspected something unusual.
Karen Buchine further argues that it was clearly erroneous for
the Tax Court to hold that it was not inequitable to hold her
liable for the deficiencies. The key factor is whether she
15
significantly benefitted from the erroneous deductions and credits.
She argues that the amount of the deductions and refunds totalling
approximately $13,000 were not substantial. She argues that she
and Mark Buchine did not buy a new car, go on gambling cruises, or
have a condo in the Bahamas. At most, all she received was normal
support at the time, and this is not considered a particularized
benefit. She concludes, therefore, that the "equities" were all in
her favor, but the Tax Court failed to see this.
Review of the Tax Court's factual findings are reviewed under
the clearly erroneous standard of review. See, I.R.C. §
7482(a)(1); FED.R.CIV.P. 52(a).
The Tax Court found that Karen Buchine had actual knowledge
that a substantial understatement existed under section
6013(e)(1)(C). The Tax Court based its finding on the following
facts. Karen Buchine was listed as a shareholder in M. Lenmar,
Ltd., and she was also identified as a partner in Adirondack Group.
She admitted signing the joint 1981 tax return without coercion or
intimidation by her husband. She testified at trial that she was
aware that Mark Buchine was selling tax shelters, and that he told
her the general details of the investments. She stated that she
was unhappy about Mark's solicitations of her friends for tax
shelter purchases because she believed them to be risky.
Significantly, she knew of her potential tax liability arising from
the claimed losses and credits in connection with the tax shelters
prior to the issuance of the deficiency notice. She was so
concerned with this, that her divorce decree required Mark Buchine
16
to indemnify her in the event of any tax liability.
The Tax Court further found Karen Buchine failed to prove that
it would be inequitable to hold her liable for the delinquent
taxes.
The most important factor in determining "inequity" is
whether the taxpayer seeking relief "significantly benefitted" from
the understatement of tax. Belk v. C.I.R., 93 T.C. 434, 1989 WL
112763 (1989). The Tax Court expressly found that aside from her
self-serving testimony, "[Karen] did not provide the Court with any
objective evidence to convince us of her assertion such as values
of specific assets and expenditures or tracing the benefit
received." She offered no evidence with respect to her standard of
living before the tax refunds and after the tax refunds so that a
comparison could be made.
Based on the evidence outlined above, we find that the Tax
Court did not clearly err in finding that Karen Buchine failed to
qualify as an innocent spouse under section 6013(e).
IV. CONCLUSION
We find that the Tax Court did not go beyond its statutorily
prescribed jurisdiction by applying the equitable principle of
reformation. We also find that the Tax Court did not clearly err
in finding that a written agreement existed between each of the
Buchines and the IRS, and in finding that Karen Buchine was not an
innocent spouse within the meaning of I.R.C. section 6013(e).
Therefore, the decision of the Tax Court is AFFIRMED.
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