Considerations When ExecutingWaivers

by Jonathan A. Feldman, Kathryn E. Pittman, and Maria M. Todorova

Jonathan A. Feldman Kathryn E. Pittman Maria M. Todorova

Taxpayers routinely enter into agreements withtaxing authorities to extend the applicable statute oflimitations for which tax can be assessed — alsoknown as waiver agreements. Sutherland’s Stateand Local Tax Practice has frequently written aboutthe issues associated with those agreements. Inprevious installments of this column, we exploredthe increasing use of jeopardy assessments by staterevenue agencies to coerce taxpayers into signingwaivers and examined practical considerations forextending statutes of limitations.1 In this install-mentofAPinchofSALT,wefurtherexploreconsidera-tions that taxpayers should pay attention to beforeentering into any waiver agreement with state rev-enue agencies, with reference to some less publicizedrecent decisions.

IntroductionThe period by which a state revenue agency can

issue a tax assessment to a taxpayer who has filed atax return is limited by the applicable statute oflimitations. State statute of limitations periods aremost often three or four years from the date a returnwas filed, but may be extended in cases of fraud orsubstantial understatement.

Waivers are agreements, explicitly authorized bystate statute, between taxpayers and taxing au-thorities that extend the expiration of the applicablestatute of limitations for an agreed-on period.2 Inother words, the waiver extends the time withinwhich the taxing authority may issue a timelyassessment and, in theory, the time within whichtaxpayers may file amended returns or refundclaims. Standard statutory waiver language is asfollows:

Where, before the expiration of the time pre-scribed in this section for the assessment oftax, both the tax commission and the taxpayerhave consented in writing to its assessmentafter such time, the tax may be assessed at anytime prior to the expiration of the periodagreed upon.3

Waivers can provide a mutual benefit to thetaxpayer and taxing authority by easing the strainand time pressure of an audit. Taxpayers oftenreluctantly agree to sign a waiver as part of anagreement to extend the time that they have tocomply with information requests or, when thewaiver is requested by an auditor, to maintainfavorable relationships with the auditor and thestate revenue agency. From a state revenue agency’sperspective, the execution of the waiver provides thestate additional time to thoroughly review a tax-payer’s books and, it is hoped, to arrive at anaccurate liability determination.

However, taxpayers should not be caught offguard regarding the proper execution, length, andconsequences of signing waivers. Taxpayers shouldapproach audits, including the execution of waivers,aware of the potential hazards associated with thoseactivities. Taxpayers should ensure that waivers areproperly executed and should fully understand thelength of the waiver extension.

1Eric S. Tresh and Madison J. Barnett, ‘‘State AuditGuessing Games: When Can States Issue Estimated Assess-ments?’’ State Tax Notes, Mar. 5, 2012, p. 803; Jeffrey A.Friedman and Michael L. Colavito Jr., ‘‘Waive or Walk:Considerations for Extending the Statute of Limitations,’’State Tax Notes, Nov. 1, 2010, p. 349.

2See, e.g., Calif. Revenue and Taxation Code section 19067;N.Y. Tax. Law section 1083(c)(2); Texas Tax Code section111.203.

3N.Y. Tax. Law section 1083(c)(2).

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Execution of Waivers

Questions frequently arise regarding whetherboth parties’ signatures are required to validly ex-ecute a waiver. In most jurisdictions, state waiverstatutes generally require an agreement, in writing,between the taxpayer and the relevant taxing au-thority, such as the commissioner or revenue depart-ment.4 For example, Georgia law requires that ‘‘boththe commissioner and the person subject to assess-ment have consented in writing to its assessmentafter such time.’’5 In other jurisdictions, however,there is no such statutory requirement that thetaxpayer and the state revenue department actuallyexecute the written agreement.6 California law re-quires only that ‘‘the taxpayer consents in writing toan assessment after that time.’’7

Taxpayers should not be caughtoff guard regarding the properexecution, length, andconsequences of signing waivers.

Courts consistently treat a consent agreement,such as a waiver, as a voluntary waiver of a defenseby the taxpayer or the revenue agency rather thanas a contract between the taxing authority and thetaxpayer.8 Although courts generally apply prin-ciples of contract law when analyzing and interpret-ing the terms of waivers, contract principles wouldnot necessarily apply to the actual execution of thewaiver.9 Accordingly, state revenue agencies may berequired to sign the waiver only when required bystatute.

For example, in Banbury Equipment Corp. v.Department of Revenue, the Kentucky Board of TaxAppeals found that if a taxpayer validly signed awaiver, a signature from the DOR was not required

for the waiver to be valid.10 Based on the conceptthat such an agreement a voluntary waiver of de-fenses, the board held that the agreement did notrequire the DOR’s signiture because the taxpayer‘‘had unilaterally agreed to waive the statute oflimitations.’’11

However, that treatment is not uniform across allstates and is generally based on particular states’statutory waiver provisions. In Knauf Fiber GlassGMBH, Inc. v. Ala. Dep’t of Rev., the administrativelaw judge held that a waiver was invalid because ithad been signed only by the taxpayer and not theDOR.12 The ALJ held that the DOR’s signature wasnecessary because of the relevant Alabama statute,which required the taxpayer and the DOR to ‘‘agreein writing’’ to extend the statute of limitations.

Authority to Sign Waivers

When statutory authority requires that thewaiver be countersigned by the commissioner oranother representative of the state revenue agency,a relevant inquiry could be who is authorized to signa waiver on behalf of the commissioner or therevenue agency. The commissioner rarely actuallysigns waivers themselves. Do all auditors have theauthority to sign? That concept is not unique towaivers but could also apply to other written agree-ments, such as settlement closing agreements. Insome jurisdictions, state statutes specifically autho-rize the commissioner to delegate authority to signthe waiver.13 But how do taxpayers know to whomthe authority is delegated? To relieve that concern, itwould be helpful for state revenue agencies to con-sider promulgating a regulation identifying who hasauthority to bind the commissioner or the revenueagency. Alternatively, state revenue agencies couldpublish a standing delegation order containing thatinformation.

Similarly, another question arising regardingwaivers is identifying who has the authority andpower to bind a taxpayer when the taxpayer is alegal entity and not an individual. Generally, likepowers of attorney, only officers of a legal entity4See, e.g., 35 ILCS 5/905(f); La. Rev. Stat. section

47:1580(B); N.Y. Tax Law section 1083; Ohio Rev. Code Ann.section 5733.11(A); and Texas Tax Code section 111.203(a).

5Ga. Code Ann. section 48-2-49(d).6See, e.g., Calif. Revenue and Taxation Code section 19067.7Id.8See, e.g., Stange v. United States, 282 U.S. 270, 276

(1931); Florsheim Bros. Drygoods Co. v. United States, 280U.S. 453, 466 (1930); Buchine v. Comm’r, 20 F.3d 173, 179 (5thCir. 1994); Feldman v. Comm’r, 20 F.3d 1128, 1132 (11th Cir.1994); Russian Recovery Fund Ltd., Russian Recovery Advi-sors, L.L.C. v. United States, 101 Fed. Cl. 498, 510 (2011); andKronish v. Comm’r, 90 T.C. 684, 693 (1988).

9See, e.g., Buchine v. Comm’r, 20 F.3d at 179; Feldman, 20F.3d at 1132; Holof v. Comm’r, 872 F.2d 50, 52 (3d Cir. 1989);Ripley v. Comm’r, 103 F.3d 332, 337 (4th Cir. 1996); andKronish, 90 T.C. at 693.

10K73-R-15 (Ky. Bd. Tax App. 1974). See also MinneapolisStar Tribune v. Comm’r of Tax., 177 N.W.2d 33 (Minn. 1970)(holding that the consent of the commissioner is not requiredfor a valid waiver).

11Banbury Equipment Corp. v. Dep’t of Rev., K73-R-15 (Ky.Bd. Tax App. 1974).

12Knauf Fiber Glass GMBH, Inc. v. Ala. Dep’t of Rev., Corp.05-970 (Mar. 6, 2006).

13See, e.g., La. Rev. Stat. section 14:1501;47:1503.; OhioRev. Code Ann. section 5703.05; 20 NYCRR 1-2.3. But seeTexas Tax Code section 111.003(a) (defining ‘‘comptroller’’without mentioning the delegation of authority to authorizedrepresentatives).

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typically have proper legal authority.14 A Louisianacourt recently examined the question of what type ofauthority is required to bind a corporation. InBridges v. Hertz Equipment Rental Corp., the tax-payer was under audit for sales and use tax pur-poses.15 During the course of the audit, the tax-payer’s director of audits signed a waiver extendingthe statute of limitations on behalf of the corpora-tion. At issue in that case was whether the directorof audits had the authority to bind the corporation.16

Affirming the lower court decision, the appeals courtheld that an employee must have express authorityas granted in the corporate bylaws or by resolutionof the board of directors in order to bind a corpora-tion.17 In this case, the director of audits may havehad apparent or implied authority, but that wasinsufficient to bind the taxpayer in the case of thewaiver, which requires express authority. Therefore,the waiver was not valid.

Expiration of Waiver Period

Taxpayers may reasonably assume that the expi-ration of the extension period specified in a waivermeans that no assessment can be made by the staterevenue agency after that expiration. Surprisingly,that may not always be a safe assumption, as ataxpayer recently learned in Florida. In VerizonBusiness Purchasing v. Florida, the taxpayer andthe Department of Revenue signed multiple waiversextending the limitations period for assessmentsuntil March 31, 2011, for the January 2004 throughDecember 2006 sales tax periods.18 On February 28,2011, the DOR sent the taxpayer a notice of pro-posed audit assessment that, by its terms, becamefinal on April 11, 2011, after the waiver period hadexpired.19 The taxpayer contended that the assess-ment was not made within the waiver period andwas thus untimely and invalid.

The DOR argued, and the Florida circuit courtagreed, that only the first month of the assessment,that is January 2004, was untimely. The court foundthat the most reasonable interpretation of thewaiver was that only the very first month of thewaiver period (January 2004) expired on March 31,

2011.20 Each later tax period covered by the waiverexpired at the end of the next month. Accordingly,the next month covered by the waiver, February2004, would expire on April 30, 2011, and so forth.Thus, the statute of limitations for the December2006 tax period would not expire until February2014.

It would be helpful for staterevenue agencies to considerpromulgating a regulationidentifying who has authority tobind the commissioner or theDOR.

The court reasoned that the first waiver signed(for the January 2004-December 2006 tax periods)extended the limitation period only until December2008. Under Florida’s standard three-year statute oflimitations,21 the taxpayer’s interpretation of theapplication of the waiver would mean that thelimitations period for the December 2006 tax periodwould have been only two years.22 The court con-cluded that the DOR had no statutory authority toshorten the standard limitations period.23 Further-more, the court said that ‘‘in the case of multipletaxing periods, the best approach is to consistentlyconstrue Extension Agreements . . . to refer to thefirst month of the taxing periods at issue only.’’24

Thus, the same interpretation was required for thewaiver until March 31, 2011, even though the origi-nal period for all months under audit would haveexpired, if no waivers had been executed by thatdate.25

This case is interesting because it appears to be aunique interpretation of the waiver extension andseemingly contradictory to the agreement made be-tween the taxpayer and the DOR. It is unclear fromthis case whether this presents a new standard forthe interpretation of the extension of waiver periodsor whether the unique ruling is limited to theparticular facts of this case.

As a matter of fairness, we believe that waiversshould be ‘‘double-sided,’’ meaning that the signingof a waiver extends the statute of limitations forboth assessments by the state revenue agency andfor refund claims by the taxpayer. To the sameextent that waivers act as a voluntary waiver of a

14See, e.g., House of Lloyd v. Dir. of Rev., Dkts. R-80-0053,T-80-0054 (Mo. Admin. Hear. Comm. 1982) (holding that abookkeeper had neither apparent nor actual authority to bindthe corporation in the waiver agreement); Rock Island To-bacco & Specialty Co. v. Ill. Dep’t. Rev., Dkt. 80-29 (Ill. App.Ct. 3d 1980) (finding that the secretary of the corporation hadauthority to bind the corporation).

1547 So. 3d 519, 520 (La. Ct. App. 2010).16Id. at 522.17Id. at 523.18Case No. 2011 CA 1498, Order Granting Defendant’s

Motion for Summary Judgment (Fla. Cir. Ct. June 7, 2012).19Id.

20Id.21See Fla. Stat. Ann. section 95.091(3).22Case No. 2011 CA 1498, Order Granting Defendant’s

Motion for Summary Judgment (Fla. Cir. Ct. June 7, 2012).23Id.24Id.25Id.

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defense by the taxpayer for assessments issuedbeyond the standard statutory limitations period,waivers should also act as a voluntary waiver of adefense by the state revenue agency for refundsclaim beyond the standard statutory limitationsperiod.

During the course of an audit, taxpayers may beable to offset audit assessments with a refund claim.However, taxpayers may be barred from recoveringa net refund (underpayment in excess of any assess-ment) if the refund period is deemed to have expiredbefore the filing of the refund claim. And without awaiver, once the standard statutory periods for re-funds expires, it may be closed for good.

Equitable TollingAlthough the expiration of the statute of limita-

tions generally is a strict bar against both a taxassessment and the recovery of refunds, taxpayershave had some success in claiming equitable tollingto avoid the unintended unfavorable consequencesrelated to waivers. Equitable tolling is a commonlaw legal theory in which the expiration of thestatute of limitations may not prevent a plaintifffrom being burdened by a closed statute of limita-tions if it did not (or could not) discover the injuryuntil after the expiration of the period.26

Recently, the Nevada Supreme Court applied equi-table tolling and held that even though a refundclaim may have been time-barred, the result wasinequitable given the particular nature of the case.27

During an audit, it was discovered that the taxpayerhad been remitting sales tax instead of remittinguse tax.28 As a result of differing tax bases, thetaxpayer was entitled to a refund.29 Because of thecomplexity of the audit, the taxpayer and the TaxCommission entered into a series of waivers, withthe auditor agreeing that the waivers would alsoapply to refund claims and that the refund would bedealt with in the context of the audit.30 Because ofthe extension of the period to file refund claims, thetaxpayer did not file a formal refund claim withinthe standard statutory period.

While the waiver period was still open, the auditwas completed, but the taxpayer was not notifiedthat the auditor was no longer employed by the TaxCommission. Realizing that the waiver was about toexpire, the taxpayer made several calls to the TaxCommission regarding the refund, none of whichwere returned. The taxpayer was not contacted bythe new auditor until after the waiver had expired,

at which time the new auditor indicated that therefund claim was being denied as untimely since norefund claim was filed before the expiration of thewaiver.

In its decision, the court noted that, per statute,taxpayers are required to file a formal refund claimwithin three years of the overpayment. However, thecourt invoked equitable tolling to suspend the stat-ute of limitations ‘‘when the only bar to a timely filedcomplaint is a procedural technicality.’’31 The courtdetermined that principles of equity required thatthe limitations period be tolled because there was nodanger of prejudice to the Tax Commission as it wason notice of the taxpayer’s intent to claim a refund.32

Courts generally do not allowtaxing authorities to applyequitable tolling as a basis toassess tax after the expiration ofthe statute of limitations.

Importantly, courts generally do not allow taxingauthorities to apply equitable tolling as a basis toassess tax after the expiration of the statute oflimitations.33 In In the Matter of the Petition of PaineWebber Group, Inc., the New York City Tax AppealsTribunal rejected the New York City Department ofTax and Revenue’s claim for equitable tolling whenit had mailed a notice of assessment a day late.34 Inthat case, the taxpayer signed a series of waivers toextend the assessment period, but declined to signmore waivers as the period ended. Three days beforethe end of the period, the department issued a noticeof consent determination for the tax deficiencies forthe audit period.35 One day after the expiration ofthe period, the taxpayer was sent a letter indicatingthat the notice of consent determination was theincorrect form, and a notice of determination wasissued.36 The Tax Appeals Tribunal held that thisnotice of determination was untimely and rejectedthe department’s equitable tolling argument.37 Thetribunal said that the equitable tolling doctrine’sapplication in tax matters was limited and that thedepartment failed to assert that the taxpayer hadmisled or otherwise prevented the department fromissuing a timely notice of determination.38

26Black’s Law Dictionary, 579 (8th ed. 2004).27State of Nevada Dep’t of Taxation v. Masco Builder

Cabinet Group, 265 P.3d 666 (Nev. 2011).28Id. at 667-668.29Id. at 668.30Id. at 668.

31Id. at 671.32Id. at 671-672.33See In the Matter of the Petition of Paine Webber Group,

Inc., Dkt. No. TAT(H)95-42(GC) (N.Y.C. Tax. App. Trib. 1996).34Id.35Id.36Id.37Id.38Id.

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Conclusion

Given the continuing economic climate, taxingauthorities are unlikely to cease requesting waiversin lieu of jeopardy assessments and are unlikely tostop aggressively interpreting their waiver lan-guage. If, after careful consideration, taxpayers de-cide to execute a waiver, they must be sure tounderstand all the legal implications of the waiver.Because a waiver is a mutual agreement betweenthe parties, taxpayers should feel comfortable nego-tiating terms of the agreement. Sutherland willcontinue to monitor the ongoing developments inthis area. ✰

Jonathan A. Feldman is a partner and Kathryn E.Pittman and Maria M. Todorova are associates with Suth-erland Asbill & Brennan LLP’s State and Local TaxPractice. Sutherland’s SALT Practice is composed of morethan 25 attorneys who focus on planning and controversyassociated with income, franchise, sales and use, and prop-erty tax matters, as well as unclaimed property matters.Sutherland’s SALT Practice also monitors and commentson state legislative and political efforts.

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