On Appeal from the United States Tax Court, Washington, D.C., Tax Court No. 33874-84
Becker, Hutchinson and Scirica, Circuit Judges
In this appeal we must decide whether a defective notice of tax deficiency mailed by the Internal Revenue Service terminates taxpayers' Form 872-A consent to waive the statute of limitations on assessment of tax deficiencies. The Commissioner appeals from the Tax Court's decision upholding the termination of the limitations waiver and barring the IRS from assessing the additional taxes owed.
We hold that: (1) Form 872-A must be read in conjunction with the statutory provisions on tax assessment; (2) Form 872-A contemplates termination only by an effective notice of deficiency; and (3) the defective notice of deficiency sent to the Holofs was not cured by its eventual receipt. We will reverse the decision of the Tax Court.
Taxpayers Harry and Norma Holof filed timely joint federal income tax returns for 1976 and 1977, claiming loss deductions in their partnership interests in two separate tax shelters for each year. The IRS initiated an audit of those returns. Ordinarily, the statute of limitations for assessment of tax deficiencies is three years. I.R.C. § 6501(a) (West Supp. 1988). In connection with the audit, however, the Holofs executed a Special Consent to Extend the Time for Assessment of Tax (Form 872-A) for 1976 and a similar Form 872-AR for 1977,*fn1 thus extending the limitations period indefinitely.*fn2
Form 872-A, commonly known as an "open-ended" waiver because it does not expire at a fixed date, specifies the means by which either the taxpayer or the IRS can terminate the limitations waiver. The IRS can terminate it by mailing to the taxpayer either a Notice of Termination of Special Consent to Extend the Time to Assess Tax (Form 872-T) or a "notice of deficiency." In contrast, the taxpayer effectively terminates the waiver only when the IRS office "considering the case" receives a Form 872-T from the taxpayer. Form 872-A also provides that after termination by either party, the IRS has ninety days within which to "assess" a tax deficiency.
On October 8, 1982, the IRS mailed a notice of deficiency for the taxable years 1976 and 1977, but failed to send it to the Holofs' "last known" address, as required by statute.*fn3 The Holofs never received the October 1982 notice of deficiency and consequently failed to file a timely petition for redetermination with the Tax Court, a right also secured by statute.*fn4 The IRS then assessed the tax, and in April 1983 sought to collect it. It was these collection attempts that alerted the Holofs that an assessment had been made. On January 5, 1984, they finally received from the IRS a copy of the October 1982 notice of deficiency. Following a series of petitions, the Tax Court granted the parties' joint motion to dismiss the assessment proceedings on the grounds that the October 1982 notice of deficiency was statutorily defective.
On June 28, 1984, the IRS mailed the Holofs a second notice of deficiency for the years 1976 and 1977, this time to their last known address. The Holofs timely filed with the Tax Court a petition asserting that assessment and collection of the deficiencies were now barred by the statute of limitations. The Holofs argued that mailing even an invalid notice of deficiency -- in their case the October, 1982 notice -- served to terminate the limitations waiver. The Commissioner responded that the because the notice of deficiency was defective under the statutory scheme, it was null and void for all purposes.
The Tax Court held that the statute of limitations had expired before the IRS mailed the second notice of deficiency. Holof v. Commissioner, T.C. Memo 1987-540, 54 T.C.M. (CCH) 959, 960 (1987). In its decision, the Tax Court relied upon Roszkos v. Commissioner, 87 T.C. 1255 (1986) a case with facts similar to Holof.
Focusing on the literal provisions of Form 872-A, and interpreting "doubtful language" against the IRS as the drafting party, Roszkos, 87 T.C. at 1261, the Tax Court in Roszkos held that the IRS terminated the waiver by mailing the defective notice of deficiency. Because Form 872-A does not require that the taxpayer receive actual notice of termination, and, in contrast, makes termination by the taxpayer subject to the IRS's receipt of Form 872-T, the Tax Court determined that the Commissioner had drafted Form 872-A to render irrelevant the accuracy of the taxpayer's address. Id. at 1261. Thus, the Tax Court held that the simple act of mailing on the part of the IRS terminated the agreement.
Next, finding that actual receipt cured defects in a notice of deficiency, the Tax Court in Roszkos held that when the taxpayers became aware that the IRS intended to terminate the waiver agreement, the agreement in fact terminated. Id. at 1261-62. The court concluded that this result was "conceptually ...