Statute of Limitations Extension Agreements: Taxpayers Beware!
On July 19, 2021, the Court of Appeals of Tennessee held that a company was barred by the statute of limitations from bringing a lawsuit to challenge a deemed denial of its tax refund claim finding that the one year statutory period for challenging a deemed denial had run notwithstanding that the taxpayer and the Tennessee Department of Revenue (“Department”) executed extension agreements extending the statutory period for the Department to assess additional tax or refund overpayments. Zimmer US, Inc. v. David Gerregano, 2021 Tenn. App. LEXIS 285, *1(Tenn. Ct. App. July 19, 2021). This case is a reminder that when entering into statute of limitations extension agreements, especially agreements drafted by state taxing authorities, taxpayers should exercise great caution and ensure that the agreements expressly provide for all necessary taxpayer rights and protections.
Facts: In December 2015, the company filed sales and use tax refund claims for the 2012 through 2015 tax years. The parties entered into three extension agreements over the next three years, with the final agreement extending the period for assessment and refund to December 31, 2018. The extension agreements each stated that “any tax liability . . . may be assessed at any time on or before the new expiration date” and that “any overpayment . . . may be refunded if, by the new expiration date, the Commissioner is in possession of proper proof and facts showing a refund is due.” Id. at *3. After the parties conducted two “exit conferences” in late 2018 in an attempt to resolve their differences, the company filed a complaint in Davidson County Chancery Court challenging the Department’s deemed denial of the company’s refund claim. The Department argued, and the Chancery Court agreed, that the extension agreements had not extended the statutory one-year period (commencing from when the refund claim was filed) for challenging a deemed refund claim denial in court and the company’s lawsuit was therefore time-barred.
The Decision: The Court of Appeals affirmed the Chancery Court’s decision and held that the extension agreements did not evidence the Department’s consent for the company to file a lawsuit beyond the one-year statutory period. Focusing on the “plain language” of the extension agreements, the Court of Appeals found that the extension agreements “include[ed] no reference to the statute of limitations for filing suit to challenge a denial or deemed denial of a refund claim.” Id. at *8. The Court of Appeals further rejected the company’s argument that the result reached by the Chancery Court was inequitable because the company believed that the extension agreements had extended the period in which the company could bring a lawsuit if the Department ultimately denied its refund claim. According to the Court of Appeals, “[w]hen interpreting a contract, we do not attempt to ascertain the parties’ state of mind at the time of execution, but instead must seek to ascertain the parties’ intention as embodied and expressed in the contract as written.” Id. at 10 (internal quotations omitted).
The Court of Appeals’ decision is appealable to the Tennessee Supreme Court, though it is not known as of this writing whether an appeal with be taken. Stay tuned for further developments.
This article is one in a series of articles written for the August 2021 edition of The BR State + Local Tax Spotlight.