Kelley

In these consolidated appeals we are called upon to determine whether the United States Tax Court (“Tax Court”) possesses the equitable power to reform consent-to-extend agreements entered into between taxpayers and the revenue collecting arm of the federal government. For the reasons which follow, we conclude that the Tax Court has a limited equitable power to reform such agreements, so long as they are properly before the Tax Court in the exercise of its subject matter jurisdiction.

FACTS AND PRIOR PROCEEDINGS

David M. Kelley (“Kelley”) and his former wife, Nancy, filed joint federal income tax returns for 1976 and 1977. Following Nancy’s death, Kelley filed an individual federal income tax return for 1978 as a qualifying widower. For 1979 and 1980, Kelley and his new wife, Mary (“Taxpayers”), filed joint federal income tax returns. The Internal Revenue Service (“IRS”) audited Kelley’s and Taxpayers’ returns for tax years 1976 through 1980. During the course of this audit, Kelley and the IRS executed various standard form agreements which extended the normal running of the three-year statutory limitations period for assessing and collecting unpaid taxes. See 26 U.S.C. §§ 6501…