Kunkel v. Commissioner , 821 F.3d 908 ( 2016 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15-2232
CRAIG J. KUNKEL, KIM M. KUNKEL, and INTEGRA ENGINEERING,
LTD.,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
____________________
Appeal from the United States Tax Court.
Nos. 3279-13 et al. — Mary Ann Cohen, Judge.
____________________
ARGUED APRIL 4, 2016 — DECIDED MAY 10, 2016
____________________
Before EASTERBROOK and HAMILTON, Circuit Judges, and
PEPPER, District Judge. *
EASTERBROOK, Circuit Judge. After conducting an audit of
the returns that Integra Engineering and its principal own-
ers, Craig and Kim Kunkel, had filed for 2008, 2009, and
2010, the Internal Revenue Service concluded that they owed
* Of the Eastern District of Wisconsin, sitting by designation.
2 No. 15-2232
more taxes. The Kunkels hired Frank W. Bastian, a lawyer
and CPA, to represent them and the firm in an effort to per-
suade the IRS otherwise. As the statute of limitations for the
2008 tax year approached, the IRS asked Bastian to sign a
waiver that would permit the IRS to delay making its as-
sessment. Taxpayers often agree to such waivers, thinking
that continuing the negotiations may be preferable to forcing
the IRS to make a formal declaration of a deficiency, a step
that commits the IRS to a position adverse to the taxpayer.
The period of limitations is three years from the date the
return was due or was filed, whichever is later. 26 U.S.C.
§6501(a). The parties agreed that for the 2008 tax year, this
meant February 15, 2012, for Integra and April 15, 2012, for
the Kunkels. Someone at the IRS put these dates in a waiver
(IRS Form 872-A) for Bastian to sign, and he did. Negotia-
tions about the amount of taxes owed broke down, however,
and in November 2012 the IRS sent notices of deficiency,
which Integra and the Kunkels contested in the Tax Court.
For tax years 2008 through 2010 combined, the IRS sought
about $456,600 from the Kunkels (who had filed joint re-
turns) and $322,800 from Integra. The amount demanded
from the Kunkels included a 20% penalty under 26 U.S.C.
§6662(a) for filing substantially inaccurate returns.
More negotiations ensued, reducing the amounts the IRS
claimed as due. Integra and the Kunkels (collectively Tax-
payers) decided not to contest the IRS’s revised calculations
of what they owed for 2009 and 2010. But they contended
that they owed nothing for 2008 because the notice in No-
vember 2012 came after the deadline. Taxpayers conceded
that Bastian had signed waivers, that he had actual authority
to do this, and that the waivers gave the IRS until the end of
No. 15-2232 3
December 2012 to assess taxes. But they insisted that these
waivers applied to the 2011 tax year, not the 2008 tax year.
Here is what the critical language for Integra says: “The
amount of any Federal Income tax due on any return(s)
made by or for the above taxpayer(s) for the period(s) ended
February 15, 2012 may be assessed at any time on or before
December 31, 2012.” The date “February 15, 2012” had been
typed into a blank for Integra (and April 15, 2012, for the
Kunkels). But February 15, 2012, and April 15, 2012, did not
designate the “period ended” for any tax year; they desig-
nated the end of the limitations periods for 2008 taxes. Who-
ever filled in the blanks at the IRS had typed the wrong year
(2012 instead of 2009) and missed the fact that Integra’s 2008
tax year ended on November 30, 2008, which was the appro-
priate “period ended” for the purpose of this form. The date
a return is filed affects the statute of limitations but not the
“period ended.” We can be confident that 2012 was the
wrong year because no one thought that the IRS was agree-
ing to a reduction in the time it had to assess taxes for 2011.
The point of this exercise had been to allow the IRS more
time to decide what to do for the 2008 tax year.
According to Taxpayers, it did not matter that the IRS
had asked them to extend the time for the 2008 tax year, and
that Bastian had agreed on their behalf, because all Bastian
had signed was a document relating to the 2011 tax year. But
the IRS asked the Tax Court to reform the document to cure
a mutual mistake, and the court agreed.
The judge observed that Bastian not only is knowledgea-
ble about tax law but also had been dealing with the IRS
about the 2008, 2009, and 2010 tax years; the only conceiva-
ble function of the form was to extend the time to file the as-
4 No. 15-2232
sessment for 2008, the judge thought, since it could not have
been designed to reduce the time available to make an as-
sessment for 2011. The court then entered judgment in favor
of the IRS on the 2008 taxes and penalties as calculated by
the post-assessment negotiations: for the Kunkels $61,514 in
tax plus $12,302.80 in penalty, and for Integra $6,570 in tax.
In this court, Taxpayers concede that the Tax Court has
authority to reform a waiver, no matter how explicit the
form’s language. But they say that the Tax Court may do this
only if clear and convincing evidence shows the taxpayer’s
true intent—and, since neither Taxpayers nor the IRS offered
evidence from the persons who filled in the blanks and
signed the forms, it is impossible to meet that standard.
The “clear and convincing evidence” part of Taxpayers’
submission comes from Woods v. Commissioner, 92 T.C. 776,
789 n.14 (1989), which cites Travelers Indemnity Co. v. Calvert
Fire Insurance Co., 798 F.2d 826, 835 (5th Cir. 1986), which in
turn cites an opinion applying Louisiana law, Lynal, Inc. v.
Patrick Petroleum Co., 593 F. Supp. 1325, 1327 (W.D. La. 1984).
None of these opinions evinces awareness of the Supreme
Court’s decisions holding that, in civil litigation over money,
the appropriate standard is the preponderance of the evi-
dence. See, e.g., Herman & MacLean v. Huddleston, 459 U.S.
375, 387–90 (1983); Grogan v. Garner, 498 U.S. 279, 286 (1991);
Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct.
1749, 1758 (2014). Preponderance of the evidence therefore is
the right standard for reforming a waiver of a statute of limi-
tations in a tax case.
As for “true intent”: The federal law of contract (includ-
ing contractual waivers) is objective, just like state contract
law. See, e.g., Rossetto v. Pabst Brewing Co., 217 F.3d 539 (7th
No. 15-2232 5
Cir. 2000); Grun v. Pneumo Abex Corp., 163 F.3d 411, 421 (7th
Cir. 1998); Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1127
(7th Cir. 1993). This means that the parties’ intents matter on-
ly to the extent that they are expressed to each other. When
considering parol evidence a court looks to documents, and
sometimes to oral exchanges, but never considers either
side’s private thoughts and hopes. So the Tax Court did not
need evidence about what Bastian thought, or about what the
person who filled in the blanks (whoever that was) believed
would occur. Neither side has suggested that there is any ev-
idence about documents or words exchanged between Tax-
payers (or Bastian) and the IRS.
The Tax Court thought reform of the waivers appropriate
because only the 2008 tax year had periods of limitations ex-
piring in spring 2012. The forms could not have served any
purpose other than extending the time to file assessments for
2008—and you can’t beat something with nothing. Taxpay-
ers’ brief speculates that Bastian thought that he was playing
a practical joke on the IRS by signing without alerting it to
the scrivener’s error. This seems unlikely; the adverse effect
on Bastian’s professional reputation could have been sub-
stantial. If the IRS came to conclude that Bastian had tried to
hoodwink it, he might find his credentials as a tax repre-
sentative pulled. The best way to understand what hap-
pened is the way the Tax Court did: A typist misread the file,
entering the dates on which limitations periods would ex-
pire rather than the dates on which the tax years ended, and
then everyone else missed that error. We see no clear error or
abuse of discretion in that conclusion.
We are conscious of the irony in allowing the IRS to col-
lect a 20% penalty for the errors in the Kunkels’ 2008 return,
6 No. 15-2232
when the IRS has made an error of its own. But the Kunkels
have not asked us to compare the degrees of fault or to set
aside the penalty, if the assessment was timely.
AFFIRMED