Page 2 - Is It Really Over? Closing Agreements with the IRS

[P]ractitioners should make an effort to think through the closing agreement and its various consequences before recommending that their clients finalize an agreement.
tAx CoNtroVersY CorNer
closing agreement is ambiguous.10 Oral agreements and representations that are not memorialized in the agreement will not be considered.11 In addition, the parties to a closing agreement are bound only to the matters agreed upon in the agreement.12 For example, in R.S. Lamson,13 the taxpay- ers reached an agreement through a Form 906 concerning specific tax issues, but which did not address additions to tax. After the Closing Agreement was finalized, the IRS later came back and assessed delinquency penalties under Code Sec. 6651. The Tax Court was not sympathetic to the taxpayers, stating that “[t]he parties’ closing agreement was silent concerning the applicability, or the nonapplicability, of the addition to tax for late filing. Such silence, however, does not mean that respondent should be deemed to have conceded the addition to tax. Rather, such silence means only that the parties chose not to resolve the addition to tax in the context of their closing agreement.”14
Not surprisingly, courts have not been persuaded by argu- ments that a taxpayer did not read or understand the terms of a closing agreement before signing. These types of claims will not “alter the binding effect” of a closing agreement.21 Rather, “a taxpayer has a duty to ‘ensure that the closing agreements accurately reflect the settlement between the parties.’”22
The IRS’s Breach of the Closing Agreement in Davis
In the Davis case, it is the taxpayer, and not the IRS, that is seeking to enforce the terms of the closing agreement. The named plaintiff was the late Al Davis, a former NFL Player and inductee into the Professional Football Hall of Fame. After retiring from football as a player, coach and general manager, he was a principal owner of the Oakland/Los An- geles Raiders.23 Davis had the largest interest in the Oakland Raiders, a California limited partnership (the “Partnership”), a TEFRA24 Partnership, and Davis also was the president of A.D. Football, Inc., the sole general partner and tax matters partner (TMP)25 of the Partnership.26 In 2005, after years of litigation,27 the IRS and the Partnership reached a settlement agreement over the 1988–2004 tax years. Davis, as president of the TMP, signed the Form 886-Z Closing Agreement. The Closing Agreement stated that the IRS was required to pro- pose “computational adjustments” that would apply to each partner’s individual tax liability under Code Sec. 6231(a)(6). Paragraph Q of the Closing Agreement also provided that each partner would have 90 days to review and comment on the proposed computational adjustments, and that if the IRS then revised the computational adjustments, the partners would have another 60 days to review those adjustments prior to the tax being assessed.28 The Closing Agreement was incorporated into the stipulations approved by the Tax Court.29
After the Tax Court entered the stipulations, the IRS waited over a year to send out the proposed computational adjustments, and Davis responded promptly, but when the IRS provided the revised computations for review, the statute of limitations for assessment was about to expire, and the IRS thus issued assessments against Davis before he had an opportunity to review the revised assessments. The IRS then collected the tax by applying refunds from earlier years.30
Davis filed an administrative refund claim arguing that the assessments were invalid because the IRS had breached the Closing Agreement. The IRS denied the claim, and Davis brought a refund action in the District Court for the Northern District of California. The district court granted Davis’s motion for summary judgment and held that the IRS’s breach of the Closing Agreement invalidated the assess- ments. The district court explained that “[i]t is unfortunate
As noted above, once a closing agreement has been final- ized, it will be enforced except upon a showing of fraud or malfeasance, or misrepresentation of a material fact. A closing agreement will not be set aside on the grounds of misrepresentation of fact unless the misrepresentation “goes to the essence of the agreement.”15 A mistake of fact, “whether unilateral or mutual, no matter how material, is not a misrepresentation.”16 For example, in W.C. Kercheval,17 the IRS and the taxpayer entered into a closing agreement that provided that the taxpayer’s IRA rollover would not be tax-free and settled his tax liabilities. Later, the IRS changed course and determined that similar rollovers would be tax- free, and the taxpayer sought to have his closing agreement set aside.18 Because at the time the agreement was executed, the closing agreement reflected a reasonable interpretation of the law, as it then existed, the court declined to provide the taxpayer with any relief, explaining that “[a]n error of the sort at issue in the present case is not a misrepresenta- tion, as contemplated under §7121(b).”19 On the question of whether the IRS committed fraud or malfeasance by not advising the taxpayer that the IRS might reconsider its position, the court also noted that the IRS has no duty to provide taxpayers with legal advice, and that the taxpayer did not have to settle, but could have litigated the issue.20
60 Journal of Passthrough EntitiEs
sEPtEmbEr–octobEr 2016