United States Court of Appeals,
Fifth Circuit.
No. 95-60065
Summary Calendar.
Stanley C. BILSKI, Jr., and Connie E. Bilski, Petitioners-
Appellants;
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Nov. 20, 1995.
Appeal from the United States Tax Court.
Before WIENER, PARKER and DENNIS, Circuit Judges:
WIENER, Circuit Judge:
Petitioners-Appellants Stanley and Connie Bilski appeal the
judgment of the United States Tax Court (Tax Court), upholding the
Internal Revenue Service's (IRS's) deficiency determination. The
Bilskis contend that the Tax Court erred by holding that Treasury
Form 872-A, Special Consent to Extend the Time To Assess Tax (872-
A), is a waiver of the statute of limitations, and thus is not
discharged in bankruptcy. They insist that an 872-A is an
executory contract which, absent affirmance, is automatically
rejected 60 days after the bankruptcy petition is filed. As we
conclude that the Bilskis' contention is incorrect, we affirm the
judgment of the Tax Court.
I
FACTS AND PROCEEDINGS
On December 20, 1985, the Bilskis received a Form 872-A
(Extension Agreement) from the IRS, with a notice advising the
1
Bilskis that the IRS needed additional time to determine the
deficiency in their joint income tax liability for 1982. Early in
January of 1986, the Bilskis executed the Extension Agreement and
returned it to the IRS. In June 1988, nearly three years after
executing the Extension Agreement, the Bilskis voluntarily filed
for bankruptcy pursuant to Chapter 7. On October 26, 1988, the
Bilskis received their discharge.1 Approximately a year after the
discharge, in October 1989, the IRS sent the Bilskis a Notice of
Deficiency for the 1982 tax year.
The Bilskis did not pay the deficiency. Instead, they filed
a petition in the Tax Court seeking redetermination of the $17,722
deficiency in and additions to tax for the 1982 claim of a loss
associated with their investment in PSL Enterprises, Ltd. (PSL).
The Bilskis urged that the assessment for 1982 was either
time-barred or had been discharged in bankruptcy. The IRS
responded that the assessment for 1982 was not time-barred because,
prior to the expiration of the period for assessment,2 the Bilskis
1
The Bankruptcy Code provisions governing discharge
recognize the validity of extension agreements. In combination,
section 523(a)(1)(A) and 507(a)(7)(iii) (11 U.S.C.1988 ed.)
except from discharge the tax debts of individuals that are
"assessable, under applicable law or by agreement, after the
commencement of the case." Section 507(a)(7) was recodified as
507(a)(8) by the Bankruptcy Reform Act of 1994, § 304, Pub.L. No.
103-394, 108 Stat. 4132.
2
26 U.S.C. § 6501(a) reads in pertinent part:
SEC. 6501. Limitations On Assessment And Collection
(a) General Rule.—Except as otherwise provided in this
section, the amount of any tax imposed by this
title shall be assessed within 3 years after the
return was filed (whether or not such return was
2
had executed the Extension Agreement, indefinitely extending the
time in which the 1982 tax liability could be assessed.
In August 1993, the Bilskis filed a motion for summary
judgment, reiterating their contention that the assessment of the
1982 tax liability was time-barred. Specifically, they argued that
the Extension Agreement was an executory contract and that their
voluntary bankruptcy petition terminated the Extension Agreement 60
days after that petition was filed.3 The Tax Court rejected that
contention and concluded that the Extension Agreement was a waiver
filed on or after the date prescribed) or, if the
tax is payable by stamp, at any time after such
tax became due and before the expiration of 3
years after the date on which any part of such tax
was paid, and no proceedings in court without
assessment for the collection of such tax shall be
begun after the expiration of such period.
(c) Exceptions.—
(4) Extension by Agreement.—Where, before the
expiration of the time prescribed in this section
for the assessment of any tax imposed by this
title, except the estate tax provided for 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 the
subsequent agreements in writing made before the
expiration of the period previously agreed upon.
3
See 11 U.S.C. § 365(d)(1). This section reads in relevant
part:
§ 365 Executory contracts and unexpired leases
(d)(1) In a case under chapter 7 of this title ... if
the trustee does not assume or reject an executory contract
... within 60 days after the order for relief, or within
such additional time as the court, for cause, with such 60-
day period, fixes, then such contract ... is deemed
rejected.
3
of the statute of limitations, not an executory contract, and
denied the Bilskis' motion. A trial on the merits ensued.
At trial, the Bilskis sought to introduce into evidence a
letter from the IRS to Stanley Bilski (Letter), regarding
settlement negotiations between the IRS and the Videotex Database,
Ltd. Partnership for partnership adjustments for the tax years of
1983 and 1984. The IRS objected, citing Fed.R.Evid. 408 (Rule
408), which precludes the admission of evidence, conduct, or
statements made during settlement negotiations. The Bilskis did
not dispute that the Letter was part of settlement negotiations;
instead, they contended that the document was relevant because it
demonstrated "a set of circumstances in which the two sides sharply
debated." The IRS countered that, in addition to being
inadmissible under Rule 408, the Letter was irrelevant: It
involved 1983 and 1984, not 1982, the year in contention here.
Ultimately, the Tax Court excluded the Letter under Rule 408 and
concluded that, in any event, the Letter was irrelevant.
As for the merits of the Bilskis' claims, the principle issues
of substance were whether the tax deficiency and the addition to
tax under Section 6653(a) of the Internal Revenue Code (IRC) for
negligence associated with that deficiency were proper. Other than
the stipulated evidence, the Bilskis' presented no evidence on
these issues. In September 1994, after trial, the Tax Court issued
an opinion, upholding the IRS deficiency determination and the
imposition of the addition to tax for negligence. The Bilskis
timely appealed.
4
Although the Bilskis' appellate brief proffers a plethora of
issues, we address the only three worthy of discussion: First, did
the Bilskis petition for bankruptcy relief automatically terminate
the Extension Agreement? Second, did the Tax Court abuse its
discretion by excluding the Letter from evidence? Third, did the
Tax Court's decision to uphold the IRS's deficiency assessment and
additions to tax constitute clear error?
II
ANALYSIS
A. STANDARD OF REVIEW
We review the decision of the Tax Court applying the same
standards used in reviewing a decision of the district court:
Questions of law are reviewed de novo; findings of fact are
reviewed for clear error.4 Discretionary rulings of the Tax Court
are examined for abuse of discretion.5
B. EXTENSION AGREEMENT: EXECUTORY CONTRACT OR WAIVER
Ordinarily, under section 6501(a) of the IRC, tax
deficiencies must be assessed against a taxpayer within three years
following the filing of the tax return.6 Section 6501(c)(4) of the
IRC, permits the taxpayer and the Commissioner to enter written
agreements extending the statute of limitations on an assessment to
4
Estate of Hudgins v. C.I.R., 57 F.3d 1393, 1396 (5th
Cir.1995).
5
McKnight v. Commissioner, 7 F.3d 447, 450 (5th Cir.1993).
6
Under Section 6501(b) of the IRC, if the taxpayer files
before the last day prescribed by law, the return shall be
considered as filed on the last day of the period.
5
"any time period prior to the expiration of the period agreed
upon."7
The Bilskis concede that the limitations period was extended
indefinitely by the Extension Agreement, but argue that it was "an
executory contract for the purposes of the bankruptcy code" as a
result of which it is "deemed to be rejected, i.e., terminated,
sixty days following the filing of debtor's Chapter 7 petition,
unless the Chapter 7 trustee assumes the contract pursuant to the
bankruptcy code."8 Unfortunately for the Bilskis, the premise
undergirding their argument contains a structural flaw: An 872-A
is not an executory contract.
Like every other circuit that has addressed the matter, we
have held that "the [872-A] agreement to extend the statute of
limitations between the Commissioner and the [taxpayer] is not a
contract, but a unilateral waiver of a defense by the taxpayer."9
Here, the Extension Agreement was an indefinite waiver of the
statute of limitations. Although this is the first time that we
have considered the nature of an 872-A in the context of
bankruptcy, upon reflection we can discern no reason to depart from
7
26 U.S.C. § 6501(c)(4).
8
See 11 U.S.C. § 365(d)(1).
9
Buchine v. Commissioner, 20 F.3d 173, 179 (5th Cir.1994);
see also Kelley v. Commissioner, 45 F.3d 348, 350 n. 4 (9th
Cir.1995) ("[A]n IRS Form 872-A is not technically a contract,
but an agreement on the part of the taxpayer (consented to by the
IRS) to waive the running of the normal statutory limitations
period."); Holof v. Commissioner, 872 F.2d 50, 53 (3rd Cir.1989)
("[A] consent to extend the period for assessment of income tax
is "not a contract ... [but is] essentially a unilateral waiver
of a defense by the taxpayer....").
6
the general rule or to carve out a bankruptcy exception to it.
Accordingly, we hold that the Extension Agreement was not an
executory contract that terminated automatically 60 days after the
Bilskis filed for bankruptcy. Rather, for purposes of bankruptcy,
as for all other purposes, an 872-A is a waiver of the affirmative
defense of time-bar under the statute of limitations.
As such, the Extension Agreement was still in full force and
effect when the IRS issued the Bilskis' deficiency notice. For a
taxpayer to terminate an 872-A, he must send the IRS a Treasury
Form 872-T, Notice of Termination of Special Consent to Extend the
Time to Assess Tax (872-T). In like manner, for the IRS to
terminate an 872-A, it must send to the taxpayer either a 872-T or
a notice of deficiency in taxes for the relevant period. In this
case, neither the Bilskis nor the IRS took any such terminating
actions. Accordingly, the Extension Agreement was still in effect
when the deficiency notice was issued, and the Tax Court correctly
concluded that the deficiency assessment was not barred by the
statute of limitations.
C. THE IRS LETTER
Although the Bilskis assert that "[t]he Tax Court should have
admitted" the Letter, we need only decide whether excluding it
amounted to an abuse of discretion by the Tax Court.10 The Bilskis
fail to support their conclusionary statements with citations to
10
E.E.O.C. v. Manville Sales Corp., 27 F.3d 1089, 1092-93
(5th Cir.1994) (evidentiary rulings are reviewed for abuse of
discretion), cert. denied, --- U.S. ----, 115 S.Ct. 1252, 131
L.Ed.2d 133 (1995).
7
any case law, statutes, rules, or other reasons why the Tax Court
"should have admitted" the Letter. As it was part and parcel of a
settlement negotiations and did not cover the tax years in
question, the Tax Court did not abuse its discretion in excluding
the Letter.
D. THE NEGLIGENCE PENALTY
The Tax Court's determination that taxpayers failed to meet
their burden of proving that they were not liable for the addition
to tax involves a question of fact, which we review for clear
error.11 As such determinations by the IRS enjoy a presumption of
correctness, the party complaining of the finding bears the burden
of persuasion that the determination is erroneous.12
The IRS imposed an addition to tax for negligence under
Section 6653(a)(1) of the IRC.13 For the purposes of Section
6653(a), negligence is "any failure to reasonably attempt to comply
with the tax code."14 In this case, the additions to tax for
negligence arose from the Bilskis' claim of a loss associated with
their investment in PSL.15 The Tax Court affirmed the additions to
11
Hudgins, 57 F.3d at 1396.
12
See e.g. Freytag v. Commissioner, 904 F.2d 1011, 1017 (5th
Cir.1990), aff'd, 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764
(1991).
13
26 U.S.C. 6653(a)(1). This section imposes an addition to
tax of five percent if any part of an underpayment is due to
negligence or intentional disregard of rules and regulations.
14
McGee v. Commissioner, 979 F.2d 66, 77 (5th Cir.1992).
15
On appeal, the Bilskis do not contest liability for the
principal sum of the deficiency.
8
tax after the Bilskis failed to present any evidence to demonstrate
reasonable attempts to comply. The Bilskis conceded that "[w]e
have presented no evidence to refute the disallowance of the tax
deduction, because we have no records available to us with which to
do that." Additionally, the Tax Court observed that Stanley Bilski
"did not testify regarding his actions in investing in PSL
Enterprises, Limited." Given the deference with which we review
the Tax Court's decision, and the Bilskis' wholesale evidentiary
default, we are unable to identify any error—clear or otherwise.
For the foregoing reasons, the judgment of the Tax Court is,
in all respects,
AFFIRMED.
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