1 United States Court of Appeals,

Fifth Circuit.

No. 95-60065

Summary Calendar.

Stanley C. BILSKI, Jr., and Connie E. Bilski, PetitionersAppellants;

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 the1 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 Bilskis that the IRS needed addit ional 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 E nterprises, Ltd. (PSL).

The Bilskis urged that the assessment for 1982 was either

tim e-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 Bilskisfiled 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 had executed the Extension Agreement, indefinitely extend ing 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 cont ract and that their

voluntary bankruptcy petition terminated the Extension Agreement 60

days after that petition was file d

. 3 The Tax Court rejected that

contention and concluded that the Extension Agreement was a waiver4

of the statute of limit ations, 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 p recludes the admission of evidence, conduct, or

statements made during se ttlement negotiations. The Bilskis did

n ot dispute that the Letter was part of settlement negotiatio ns;

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 s tipulated evidence, the Bilskis' presented no evidence on

these issues. In September 1994, after trial, the Tax Court issued

an opinion, upholdi ng the IRS deficiency determination and the

imposition of the addition to tax for negligence. The Bilskis

timely appealed.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 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. S TANDARD OF R EVIEW

We revie w the decision of the Tax Court applying the same

standards used in reviewi ng 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. E XTENSION A GREEMENT : E XECUTORY C ONTRACT OR W AIVER

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 to7 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 "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 d ebtor's Chapter 7 petition,

unless the Chapter 7 trustee assumes the contract pursuant to the

bankrup tcy 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 mat ter, we

have held that "the [872-A] agreement to extend the statute of

limitations b etween the Commissioner and the [taxpayer] is not a

contract, but a un ilateral 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 from10 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 the general r ule 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 th e 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. T HE IRS L ETTER

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 t heir conclusionary statements with citations to11 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 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 negotiatio ns and did not cover the tax years in

question, the Tax Court did not abuse its discretion in excluding

the Letter.

D. T HE N EGLIGENCE P ENALTY

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 to9

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, Limi ted." 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.

* * * * * *

* * * * * *

* * * * * *