Opinion ID: 197520
Heading Depth: 1
Heading Rank: 2

Heading: the putative time bar

Text: The Association claims that the statute of limitations bars the collection of taxes as to some or all of the affected periods. The relevant facts are not in dispute. On August 3, 1992, the Association and the Commissioner, through their authorized representatives, executed a form entitled Consent to Extend the Time to Assess Tax (the Form). The Form, a copy of which is reprinted in the appendix, permitted the Commissioner to assess income tax on or before April 30, 1993, for the contested periods through July 31, 1989. The Commissioner assessed the taxes allegedly due for these periods by issuing a deficiency notice on April 22, 1993. The applicable limitation period is three years. See IRC S 6501(a). If the Form sufficed to extend the limitation period, then the deficiency notice was timely as to all the tax years at issue; if not, the Commissioner's claim for certain periods is probably time-barred. The Association advances a purely linguistic argument on this point. It notes that the text of the Form provides for an extension of the limitation period solely with respect to tax due 4 on any return(s) made by the Association during the periods in question. The only returns so made were information returns, on Form 990, entitled Return of Organization Exempt from Income Tax. By definition, no tax could possibly be due on an information return. Taking this literal view, the Association contends that the Form did not extend the limitation period at all. The Tax Court refused to swallow this slippery syllogism. It impliedly found the language of the Form ambiguous and construed it as broad enough to include not only taxes due on returns made but also taxes due on returns deemed to be made. See Tax Ct. Op. at 589. Ascertaining the ambiguity vel non of a writing requires a court to ask and answer a question of law, and, therefore, we review this conclusion de novo. See IRC S 7482(c)(1); see also RCI Northeast Servs. Div. v. Boston Edison Co. , 822 F.2d 199, 202 (1st Cir. 1987). The Tax Court's rendition withstands scrutiny. Tax forms are rarely models of syntactical clarity, and the Form signed by the parties is no exception. The Tax Court read the phrase return(s) made as encompassing returns deemed to be made. This construction strikes us as reasonable. Words must be read in context. Though a plain vanilla reading of the Form would support an inference that the parties wished to extend the limitation period for assessing taxes due on actual returns filed for the applicable periods, the context casts a different light on the phrase return(s) made. When one takes into account that the only returns made were information returns 5 on which no tax could conceivably be due, and that the signatories to the Form knew as much, the ambiguity of the phrase becomes apparent. Our thinking runs along the following lines. It would be nonsensical to extend the limitation period for assessment of taxes due on a return on which, by operation of law, no tax conceivably could be due. The law, in turn, should be reluctant to insist that courts construe a document in a way that leads to an absurd or nonsensical result. Indeed, the maxim ut res magis valeat quam pereat teaches that a written instrument ordinarily should be given a meaning that will make it legally functional rather than a meaning which will render it legally dysfunctional. See 3 Arthur Linton Corbin, Corbin on Contracts S 532 (1960); see also Blackie v. Maine, 75 F.3d 716, 722 (1st Cir. 1996). Thus, the very implausibility of the Association's proposed construction suggests that the phrase return[s] made must have some other meaning. This conclusion is fortified by the wonted operation of the relevant provisions of the Internal Revenue Code. Specifically, a return relative to the unrelated business taxable income of a normally tax-exempt organization (a so-called 990-T return) is deemed made, for purposes of starting the running of the limitation period, when the information return (a so-called 990 return) is in fact made. See California Thoroughbred Breeders Ass'n v. Commissioner, 47 T.C. 335, 338 (1966) (construing IRC S 6501(g)(2)). Without this rule deeming the Association's 990 return to be a 990-T return, the statute of limitations that the 6 Association seeks to invoke would, presumably, not yet have begun to run. The Association thus seeks to link the two forms for the purposes of starting the limitations period, but would have us decouple the forms in reviewing its agreement to extend that period. Perhaps more important, reading the Form against the backdrop of the California Thoroughbred Breeders rule suggests another (broader) meaning for the phrase return(s) made a meaning which extends to returns deemed made and thus highlights the ambiguity of the Form. That ends the matter. The presence of an ambiguity permits a reviewing court to examine extrinsic evidence in an effort to clarify the intent of the parties. See Smart v. Gillette Co. Long-Term Disability Plan, 70 F.3d 173, 179 (1st Cir. 1995); RCI Northeast, 822 F.2d at 202. Here, the extrinsic evidence is telling: the Association's reading of the Form contradicts what even the Association admits was the parties' mutual intention to extend the limitation period as to any unrelated business income tax that might be due for the affected periods. We need not linger. We resolve contractual ambiguity in The court below suggested that, if it were unable to construe the language in the Form to give effect to the parties' discerned intention, it could reach the same result by reforming the instrument. See Tax Ct. Op. at 589 n.4. In general, reformation is available when a writing is clear on its face (i.e., unambiguous) but nonetheless misstates the parties' intent. See, e.g., United States v. Lumbermens Mut. Cas. Co. , 917 F.2d 654, 658 (1st Cir. 1990); Rocanville Corp. v. Natural Gas Pipeline Co. , 823 F.2d 92, 94 (5th Cir. 1987); see also Restatement (Second) of Contracts S 155 (1979). The doctrine can be applied in tax cases. See, e.g., Woods v. Commissioner, 92 T.C. 776, 782-83 (1989). However, because we uphold the Tax Court's implicit finding that 7 favor of effectiveness, accept the discerned intent of the parties, endorse the Tax Court's interpretation of the phrase return[s] made, and hold that the Form extended the limitation period as to the assessment of unrelated business income tax. The notice of deficiency was, therefore, timely as to all the contested tax years.