Transcript IRS Closing Agreements: Negotiating, Structuring and Pitfalls

IRS Closing Agreements:
Negotiating, Structuring and Pitfalls
Rob Mintz
Hank Vanderhage
What is a Closing Agreement?
 A final and conclusive written agreement in respect of any
internal revenue tax for any taxable period ending before or after
the date of the agreement.
 There are only two agreements authorized by the Code that are
binding between the IRS and taxpayers:
– closing agreements authorized by Section 7121.
– compromise agreements authorized by Section 7122.
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Form 870, Form 870-AD, private letter rulings, determination
letters, etc., are not closing agreements.
Statute
 § 7121 Closing agreements.
(a) Authorization. –The Secretary is authorized to enter into
an agreement in writing with any person relating to the liability
of such person (or of the person or estate for whom he acts) in
respect of any internal revenue tax for any taxable period.
 Finality. Generally, except as discussed below, the agreement is
final and will not be reopened, annulled, modified, set aside, or
disregarded by the government or the courts. § 7121(b).
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Purpose
 Provide a final and conclusive resolution of a tax matter.
 Prevent the reopening of the matter at a later date.
 Determine an item that will affect a tax liability in a later tax year.
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Types
 Form 866, Agreement as to Final Determination of Liability.
 Form 906, Closing Agreement on Final Determination Covering
Specific Matters.
 Combined Agreement (IRM 8.13.1.2.3; IRM Ex. 8.13.1-4).
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When May the IRS Allow a Closing
Agreement
Treas. Reg. 301.7121-1:
 A closing agreement may be entered into in any case in which there appears to
be an advantage in having the case permanently and conclusively closed, or if
good and sufficient reasons are shown by the taxpayer for desiring a closing
agreement and it is determined by the Commissioner that the United States will
sustain no disadvantage through consummation of such an agreement.
Rev. Proc. 68-16:
 Whether or not an agreement will be entered into is a matter within the
Commissioner's discretion.
 Taxpayer must show good reasons for requesting the agreement and furnish
necessary facts and documentation.
 Government will suffer no disadvantage from the closing agreement.
 Should not be denied solely because granting the request would result in no
apparent advantage to the Government.
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Examples of Tax Liability Closing
Agreements
IRM 8.13.1.1.2 and Rev. Proc. 68-16, sec. 4
 The taxpayer wishes to definitely establish its tax liability in order that a
transaction may be facilitated.
 The fiduciary of a trust or a receivership desires a final determination before a
distribution is made.
 A corporation in the process of liquidation or dissolution desires a closing
agreement in order to wind up its affairs.
 A taxpayer wishes to fulfill creditors' demands for authentic evidence of the
status of its tax liability.
 A taxpayer wants to be assured that a controversy between it and the Service
is disposed of with finality. As an alternative, a taxpayer may be satisfied that
the reopening of his or her case is unlikely if the practice of the Service not to
reopen cases is explained.
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Examples of Specific Matters
Closing Agreements
IRM 8.13.1.1.2 and Rev. Proc. 68-16, sec. 4
 Determine cost, fair market value, or adjusted basis as of a given date.
 Determine gross income, the amount of income from a transaction, the
amounts of deductions for losses, depreciation, depletion, etc., or the year of
includability or deductibility.
 Determine the amount of net operating loss, tax credit, or capital loss.
 Dispose of change of accounting method issues.
 Determine a fraud penalty reflecting complete or partial concession in cases
where the statute of limitations is otherwise barred.
 Provide determinations for disposition of cases involving mitigation (sections
1311 to 1314).
 Prevent loss of revenue from “whipsaw” situations.
 Establish the effect on future years when an issue is disposed of on an
intermediate basis and the issue is recurring (providing later tax treatment will
not depend on factual circumstances of later years).
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IRS Authority to Execute
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Caveat Emptor – Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 384-388 (1947):
”…[A]nyone entering into an arrangement with the Government takes the risk of having accurately
ascertained that he who purports to act for the Government stays within the bounds of his authority. …
And this is so even though, as here, the agent himself may have been unaware of the limitations upon
his authority.” (citations omitted).
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The Secretary’s Closing Agreement authority under section 7121 was delegated to the Commissioner
pursuant to Treasury Order No. 150-07 (November 18, 1953) and the Commissioner’s authority was
delegated to specific subordinates by Delegation Order No. 97 (rev. 34, August 18, 1997). Examples:
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
For tax periods ended prior to the date of the agreement and related to specific items affecting
other periods (not including the authority to set aside any closing agreement) authority has been
delegated, and redelegated to, among other persons, service center directors; district directors;
regional directors of appeals; assistant regional directors of appeals; chiefs and associate chiefs
of appeals offices....
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If related to prospective or completed transactions where the request for a determination or
ruling was made before the affected returns have been filed (not including the authority to set
aside any closing agreement), authority has been delegated to the Chief Counsel in cases
under his/her jurisdiction and may be redelegated no lower than Deputy Associate Chief
Counsels.
Controversies Under Court
Jurisdiction
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If the tax liability is under court jurisdiction, the closing agreement may require
court approval.
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A closing agreement cannot determine the amount of tax liability (or deficiency
or overpayments) where the Tax Court has jurisdiction over the tax year.
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If a closing agreement is for specific matters under Tax Court jurisdiction, IRS
counsel will require the taxpayer to execute stipulations and a closing
agreement. The closing agreement will be conditioned on the Court’s
acceptance of the stipulations.
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Contract Principles Apply
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A closing agreement is a contract, and ordinary principles of contract law
govern its interpretation. Hempel v. United States, 14 F.3d 572 (11th Cir.
1994).
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Closing agreements are not governed by state contract law, but rather by
federal common law contract principles. National Steel Corp., 75 F.3d at 1150
(7th Cir. 1996). Federal contract law principles often track common law of
contracts applicable under state law.
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As a matter of contract interpretation, unless the terms of a closing agreement
are ambiguous, the meaning of such closing agreement lies within its four
corners. See Rink v. Commissioner, 47 F.3d 168, 171 (6th Cir. 1995).
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Binding Nature of Agreement

A closing agreement is a binding agreement as to matters that are agreed
upon, and those matters cannot be set aside except for fraud, malfeasance or
misrepresentation of material fact on the part of the Government or the
taxpayer.
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Fraud must involve matters on which the agreement and its determinations are
based.
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Misrepresentation requires more than a mere misstatement of fact or law. It
requires intentional deceit. See Aetna Life Insurance Co. v. Eaton, 43 F.2d
711, 713-14 (9th Cir. 1930).
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Binding Nature of Agreement
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Matters that are not set forth as agreed matters or determinations in the agreement are
not binding on the parties. Marathon Oil Company, 42 Fed. Cl. 267, 274 (Fed. Cl. 1998),
aff’d, 215 F.3d 1343 (Fed. Cir. 1999).
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TAM 200424001 (12/8/2003) (holding that a closing agreement did not address like-kind
exchanges of railroad track under Section 1031, only an unrelated track maintenance
allowance method of accounting for capitalizing or expensing track related costs).
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TAM 9831002 (3/31/1998) (holding that a closing agreement did not preclude taxpayer
from seeking to change its subsidiary's method of accounting for points on loans
originated prior to a certain date under Rev. Proc. 94-30 where there was no evidence,
either within or outside of the agreement's four corners, that the parties had agreed that
taxpayer would no longer seek to change its method of accounting; the word "agrees"
was insufficient on its own to bind taxpayer to such a result).
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See National Steel, below.
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Retroactive Legislation

The application of subsequent legislation or published guidance to a tax year covered by
a closing agreement will depend on the existence of a term in the closing agreement that
is in conflict with the later enacted law or published guidance. If there is no direct
conflict, retroactivity has been held to apply.
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Typically, an agreement will state that no subsequent change or modification of
applicable statutes will render the agreement ineffective. This will apply even if a court
renders a provision unconstitutional or changes an interpretation of existing law. See
Rev. Rul. 56-322, 1956-2 C.B. 963 (stating that a closing agreement which has become
final and conclusive, within the meaning of Section 7121 of the Code, is not affected by
subsequent legislation retroactively applicable to the taxable period to which such
agreement relates where such legislation is silent as to its effect on closing agreements).

A closing agreement that relates to a taxable period ending subsequent to the date of the
agreement, however, is subject to any change in, or modification of, the law enacted
subsequent to the date of the agreement and made applicable to such later taxable
period, and each closing agreement shall so recite. Treas. Reg. §301.7121-1(c).
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National Steel and Bethlehem Steel
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In National Steel Corp., the Seventh Circuit, affirming a summary judgment in
favor of the IRS, held that a closing agreement between a steel corporation
and the IRS -- which permitted the taxpayer to receive an anticipated refund
prior to the filing of its return -- did not preclude the United States from going
beyond the terms of the closing agreement and suing to recover a portion of
the refund based on subsequent legislation. The decision was based on the
fact that the closing agreement at issue did not address the matters reflected in
the subsequent legislation. In that case, the IRS argued for, and won, on the
issue of retroactivity. United States v. National Steel Corp., 75 F.3d 1146 (7th
Cir. 1996).
National Steel and Bethlehem Steel
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Bethlehem Steel Corp. v. Comm'r, 108 F.Supp.2d 449 (E.D. Pa. 2000),
(holding that retroactive Code amendment may affect closing agreement
despite anti-retroactivity clause if term not negotiated, and substance of
amendment does not conflict with agreement's terms or goals), aff'd, 270 F.3d
135 (3d Cir. 2001) (holding that IRS could recalculate refund pursuant to later
legislation because the amount of the refund and the method for refund
calculation were not terms of the closing agreement, whose substantive
provisions only discussed the timeline for issuing, reinvesting, and challenging
taxpayer's refund, and the manner of reinvestment of the refund).
Practical Tips for Closing
Agreements
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Why do you want a closing agreement as opposed to some other form of
settling a case?
Can you persuade the government to enter into a closing the agreement?
Precisely define the matters you wish to agree.
Make sure your agreement describes those terms with particularity
Address retroactive legislation.
Do not include extraneous matters that could later be viewed as part of the
agreed matters and binding.
Question & Answer Session
The End
Thank you!
Rob Mintz
(303) 295-8301
[email protected]
Hank Vanderhage
(303) 295-8027
[email protected]
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