Tax Court Power to Reform Contract Involving Party Not Before the Court (4/16/20)

In Hoffman Properties II v. Commissioner, 956 F.3d 832  (6th Cir. 4/14/20), CA6 here and GS here, the Court affirmed the Tax Court’s denial of a conservation easement deduction because, as interpreted, the agreement between the taxpayer and the conservation organization failed the perpetuity requirement for somewhat technical reasons.  The taxpayer sought to have the contract interpreted to meet the perpetuity requirement.  The Tax Court and the Sixth Circuit rejected that argument.  Then the Sixth Circuit says (Slip Op. p. 8):

What’s more, the Tax Court refused Hoffman’s request to reform the donation agreement. In the end, it was up to the Tax Court to grant this form of equitable relief. See Woods v. Comm’r, 92 T.C. 776, 782–89 (1989); see also Kelley v. Comm’r, 45 F.3d 348, 351 (9th Cir. 1995) (discussing Woods). And Hoffman hasn’t shown that the court’s refusal to do so was an abuse of discretion. See Greer v. Comm’r, 595 F.3d 338, 344 (6th Cir. 2010); Kelley, 45 F.3d at 352; see also Anchor v. O’Toole, 94 F.3d 1014, 1025 (6th Cir. 1996)  (describing the general standard of review for denials of equitable relief). 

The Sixth Circuit seems to have been laboring under the notion that the Tax Court could have power to reform a contract between the taxpayer and a party not before the Tax Court.  In the cases cited, contracts or quasi-contracts were between the taxpayer and the IRS. The Tax Court may also have been laboring under the notion that, had the taxpayer satisfied the requirements for reformation under Ohio law, it might have equitably reformed the contract.  See e.g., Tax Court Order Dated July 12, 2017, here, Slip Op. 10-11 n. 7 (where the Court discusses the Ohio Law of reformation but concludes that the taxpayer had not met the summary judgment standard for putting the argument in issue).

I question whether the Tax Court has jurisdiction to reform a contract involving a taxpayer and a party not before the Tax Court.  The cases cited by the Sixth Circuit involved contracts or quasi-contract like documents signed by the taxpayer and the IRS and are thus, in my mind, not authority for the power to reform a contract with a party not before the court.

I have just added the following footnote on the issue to the working draft of the Federal Tax Procedure Book (Practitioner Ed.) due in August 2020) to a sentence in the text about the Tax Court's equitable power:

fn. ___ For example, the IRS has jurisdiction to reform documents signed by the IRS and the taxpayer, such as Form 872 extensions of the statute of limitations and Forms 870 waivers on restrictions on assessment.  E.g., Kelley v. Commissioner, 45 F. 3d 348 (9th Cir. 1995); Kunkel v. Commissioner, 821 F. 3d 908 (7th Cir. 2016); and Woods v. Commissioner, 92 T.C. 776 (1989).  All of these cases involved reformation of a contract (or quasi-contract) between the IRS and the taxpayer.  A different issue is presented where the Tax Court has jurisdiction a contract between a taxpayer and a third party, not before the Tax Court, so as to achieve a favorable result for one of the parties before the Tax Court. (I presume that, if viable, the IRS could also seek reformation to achieve a nontaxpayer favorable result.)  In Hoffman Properties II v. Commissioner, ___ F.3d ___ (6th Cir. 2020), the taxpayer requested that the Tax Court reform a contract between the taxpayer and a conservation organization to achieve the benefit of a conservation deduction.  The Court said (p. ___, cleaned up):
What’s more, the Tax Court refused Hoffman’s request to reform the donation agreement. In the end, it was up to the Tax Court to grant this form of equitable relief.  And Hoffman hasn’t shown that the court’s refusal to do so was an abuse of discretion.
    The quote seems to suggest that the Tax Court has that jurisdiction to reform the contract between the taxpayer and a third party.  I doubt that.  I think that the Tax Court would be limited to applying contract interpretation principles in coaxing, if possible, an interpretation of the contract that might permit a taxpayer to overcome language in the contract, but I don’t think it could reform the contract.  (In this regard, there might be a fine line indeed between reformation and interpretation.)  And to extend this argument, I doubt that a district court in a tax refund suit could reform a contract between the taxpayer and a third party (but confess that is probably more hunch than reasoned and researched conclusion).