More on Delegations of Authority, Notices of Deficiency and Consents to Extend (3/18/21)

Yesterday, I posted on a case, Harriss v. Commissioner, T.C. Memo. 2021-31, that led me into a discussion of delegated authority to make deficiency determinations from the Secretary of the Treasury down to employees (by function) in the IRS and related issues, including consents to extend the statute of limitations.  Burden of Persuasion As to Proper Delegated Authority for Statutorily Required IRS Action (Here Notice of Deficiency) (Federal Tax Procedure Blog 3/17/21), here.  A colleague engaged me on a couple of issues from the blog.  I thought I would present the issues here and my cut on the issues.  I have reformulated the issues to better present them here:

Issue 1:  The courts treat the Forms 872 (Consent to Extend the Time to Assess Tax) and its various iterations, such as Form 872-A (Special Consent to Extend the Time to Assess Tax) used for the statute extension authorized by than § 6501(c)(4)(A), here, as unilateral waivers rather than as contracts.

JAT Response to Issue 1:  I again direct readers to the article:  John A. Townsend & Lawrence R. Jones, Jr., Interpreting Consents to Extend the Statute of Limitations, 78 Tax Notes 459 (1998), here.  But the shorter answer is in the statute itself, § 6501(c)(4)(A) (bold-face supplied by JAT):

Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

 The emphasized language requires:

1.        Both the IRS and the taxpayer must sign a consent to reflect the agreement.

2.        Both must sign be before the expiration of the period of limitation (even the aborted writing was after the period of limitation in Stearns, so that the facts of would give the victory to the IRS under the statute as written now)..

3.        The consent is an agreement (see “so agreed” in the statute) which certainly connotes something bilateral rather than just a unilateral waiver.  In the law of waiver, waiver is a unilateral not requiring any agreement by the other party.  (Of course, if the other party asserts waiver as a defense, the party may be said to be agreeing with the waiver but agreement is not thought of as an agreement in the way § 6501(c)(4)(A) written.)  In other words, a waiver is truly unilateral and  in the law of waiver there is no requirement that the other party sign or otherwise agree to a waiver for the waiver  to be effective.  All that is required is that the party waiving do the act necessary to constitute a waiver.

Issue 2: How can a Form 872 be a contract when the benefits flow only one-way – i.e., the IRS gets the benefit but the taxpayer gets nothing of benefit? 

JAT Response to Issue 2:  The easy answer, as I note in the prior blog, is that the taxpayer does get something of value (real or perceived) from the voluntary act of signing a consent.  The statute (§ 6501(c)(4)(B) states:  “The Secretary shall notify the taxpayer of the taxpayer’s right to refuse to extend the period of limitations, or to limit such extension to particular issues or to a particular period of time, on each occasion when the taxpayer is requested to provide such consent.”  The Form 872 says  immediately below the taxpayer’s signature:  “I am aware that I have the right to refuse to sign this consent or to limit the extension to mutually agreed-upon issues and/or period of time as set forth in I.R.C. § 6501(c)(4)(B).”  Further, as noted in a recent article, the IRS also notifies taxpayers of their right not to agree in other ways.  Hale E. Sheppard, Clarifying Misconceptions About Extending Assessment-Periods and “Cooperating” During IRS Audits, J. Tax Prac. & Proc. 57, 58 (Aug-Sept. 2019), here (noting also that refusing to sign a Form 872 does not mean that the taxpayer is not cooperating (at least reasonably so) with the IRS.  So, we can assume that, in most cases, the taxpayer knows that he does not have to sign a Form 872.

Why then does the taxpayer sign a consent?  In every case that I have represented a taxpayer signing a consent, the taxpayer perceived some benefit.  Some examples:  (i) the opportunity for further discussion with the IRS agent facing a statute deadline to talk him out of any adjustment the agent may be considering; (ii) the taxpayer may prefer to go to Appeals at this stage rather than later (e.g., having to file a Tax Court petition first or pursue CDP); and (iii) the taxpayer may wish to limit the issues to "mutually agreed-upon issues."  In any event, the taxpayer just does not sign the consent unless he perceives some benefit that, if consideration is a requirement, would easily pass the mythical peppercorn test we learned in first year contracts law in law school.  See Wikipedia on Peppercorn, here, citing a case where the court said:  “a peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.” 

There was a perceived benefit to the taxpayer in Stearns cited by the Harriss court.  The Stearns Court still called extension a waiver.  But the statute was written differently then.  And, under the statute as it  is now written, the facts of Stearns would be decided for the taxpayer because the IRS did not sign anything on a date within an open statute of limitations.

Moreover, noising about contracts, thus raising the mutual consideration issue, may be a red herring.  The statute does not say contract but uses the agreement construct.  An agreement may be a contract, but I suppose may be just an agreement.  So, what we know, as discussed above is that the agreement, whether a contract with peppercorn of consideration or not, must be in writing and must be signed by the parties while the statute of limitations is still open. 

Issue 3: Is a signed NOD even required?   Or must it be signed by someone with  authority to determine a deficiency?  The Harriss Court said (p. 14-16):

Moreover, as respondent points out, the courts have consistently rejected, in a variety of contexts, challenges to delegated authority to sign and issue notices of deficiency. For instance, the Court of Appeals for the Ninth Circuit rejected an argument that a notice of deficiency was invalid because it was not “properly signed” as required by the IRM; the Court of Appeals explained: (1) “The Internal Revenue Code does not require the notice of deficiency to be signed” and (2) the Commissioner's “compliance with the IRM's requirements is not mandatory.” Urban v. Commissioner, 964 F.2d 888, 889-890 (9th Cir. 1992), aff'g T.C. Memo. 1991-220. Similarly, the Court of Appeals for the Fifth Circuit rejected a taxpayer's argument that a notice of deficiency was invalid because the IRS employee who signed it lacked authority to do so; the Court of Appeals stated: “The existence of a signature or the identity of any IRS official who provides one, is superfluous.” Selgas v. Commissioner, 475 F.3d 697, 699-700 (5th Cir. 2007) (emphasis added); see also Tavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir. 1993) (holding that an unsigned notice of deficiency received by the taxpayer was valid because it “adequately advised him that the Commissioner intended to assess him, notwithstanding that the notice was unsigned”), aff'g T.C. Memo. 1991-237; Commissioner v. Oswego Falls Corp., 71 F.2d 673, 677 (2d Cir. 1934) (holding that an unsigned notice of deficiency was valid and stating that “[t]he statute does not require that it be signed”); Batsch v. Commissioner, T.C. Memo. 2016-140 (rejecting as frivolous the taxpayer's argument that notices of deficiency were invalid because they were signed by IRS employees who lacked proper delegated authority), aff'd sub nom. Hyde v. Commissioner, 695 F. App'x 166 (8th Cir. 2017); Banister v. Commissioner, T.C. Memo. 2015-10, at *9 (rejecting as frivolous the taxpayer's argument that the notice of deficiency was invalid because it was “not signed by an authorized person” and imposing a penalty under section 6673), aff'd, 664 F. App'x 673 (9th Cir. 2016) (imposing an additional penalty under section 6673).

JAT Response to Issue 3:  Section 6212(a) says:  “If the Secretary determines that there is a deficiency…” The Secretary himself must determine the deficiency.  The Secretary may delegate the authority to make the determination which requires, of course, that there  is a delegation.  So, the person determining the deficiency must have delegated authority to determine the deficiency and, without that delegation, there is no deficiency that has been determined as required by § 6212(a).  I suppose one could argue that the NOD is not the required determination, but just notice that the determination was made.  But that does not obviate the requirement that the determination be made by someone with delegated authority to make the determination.  So, where is the determination in writing with delegated authority if the NOD is just notice that it has been made?  (Practice Tip:  As I noted in the prior blog, this type of issue might be fleshed out in discovery, requests for admission (not technically discovery) or requests for stipulations.)

 JAT Further Comments:

1.  I did find an IRS form for an agreement under 6501(c)(4)(A) that is called a waiver -- Form 2750 (Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty), here.  See CCM 200637001 (5/31/06), here (“A Form 2750 waiver executed during the 90 day extension of the assessment period provided by section 6672(b)(3)(A) is a valid and enforceable agreement to extend the period of assessment.”)  Oh well.  We should not necessarily expect complete consistency from the IRS (as they say, consistency is the hobgoblin of small minds (or some such variation).  But the label put on a form does not determine its legal status.