Setting aside the closing agreement, however, does not authorize assessment for a barred year. If litigated, the burden of proof for setting aside the agreement has been held to be upon the party desiring to do so. See Ingram v. Commissioner, 32 B.T.A. 1063 (1935), aff’d., 87 F. 2d 915 (3d Cir. 1937), and Holmes & Janes, Inc. v. Commissioner, 30 B.T.A. 74 (1934). The latter case contains a statement on the authority of the Tax Court to review setting aside of a closing agreement. (See IRC 7206 and IRC 7207 for possible criminal penalties.) Giving required effect to Code provisions listed above or provisions enacted after the agreement was signed is not a setting aside, modifying, annulling, disregarding or reopening contemplated by IRM 8.13.1.6(2) or IRC 7121(b). See IRM 8.13.1.6.1.2(1). If circumstances indicate reasons for modifying or setting aside a closing agreement, local Counsel should be consulted and Headquarters should be notified before taking any action.

Since there is considerable material available defining fraud, a definition of the term is unnecessary here. However, three facets of the fraud question do require comment:

The term "malfeasance" means violation of a public trust, or guilt with respect to some form of official act.

The term "misrepresentation," when used as a ground for setting aside a closing agreement, connotes intentional deceit. It does not refer to a mere mistake of fact or law, whether unilateral or mutual, no matter how material. In Ingram the Board of Tax Appeals stated at p. 1066:

See Rev. Rul. 72-437, 1972-2 C.B. 660, and Rev. Rul. 96-13, 1996-1 C.B. 616, for the impact of tax treaty provisions on previously executed closing agreements, which may be substantial.

When the tax liability in a Compliance case involving the setting aside of a final closing agreement is considered by an Appeals office and a settlement is reached, the taxpayer will be requested to sign an appropriate waiver of restrictions on assessment and collection containing special provisions. See IRM 8.13.1.6.2.1.3. The Appeals office will endeavor also to obtain a check in payment of the liability, and will be responsible for the preparation of the memorandum, in triplicate. See Exhibit 8.13.1-25. The case file, including the memorandum, the original, if available, or triplicate copy of the closing agreement and accompanying explanatory memorandum or report, will then be transmitted by memorandum to the Chief, Appeals. After action by Headquarters (by the Commissioner if the agreement is set aside), the file will be returned using certified mail by the Chief, Appeals to the Appeals office for necessary action, including notifying the taxpayer unless the agreement was signed in Headquarters. See Exhibit 8.13.1-26.

If the Appeals office sustains the position of the Compliance Operating Division field official, in part or in full, but is unable to effect an agreed-upon disposition of the case, the Appeals office will be responsible for the preparation of the memorandum referred to in the preceding paragraph and will transmit the memorandum and the file to the Chief, Appeals. Upon receipt of advice by Headquarters that the closing agreement has been set aside, the Appeals office will issue any necessary notice of deficiency and will proceed with the case in accordance with applicable procedure, including notifying the taxpayer by certified mail unless the agreement was signed in Headquarters. See Exhibit 8.13.1-21.

After the Compliance Operating Division field official determines that there are sufficient facts to justify reopening a case and setting aside a closing agreement, or after a finding that further investigation should be made to determine whether the agreement should be set aside, and the closing agreement was obtained while the case was under jurisdiction of an Appeals office, the Appeals office that handled the case must be apprised by memorandum of the Compliance Operating Division field official’s views on the matter before any further contact is made with the taxpayer with regard to the possible reopening of the closing agreement and before a request is made for issuance of a notice under IRC 7605(b). See IRM 8.13.1.6.2.1.

If the Appeals office concurs, it will request permission to reopen the case from the Chief, Appeals (pursuant to Policy Statement P-8-3 and IRM 8.6.1.5, New Issues and Reopening Closed Issues), forwarding a copy of the Compliance Operating Division field official’s memorandum. Such request must also reflect the concurring recommendation of the appropriate Appeals Director, Field Operations. The Chief, Appeals, will inform the Appeals Area Director of his or her decision. The latter will forward a copy of the decision to the Compliance Operating Division field official.

If the Appeals office believes the facts do not warrant proceeding toward the setting aside of the closing agreement or reopening the case previously closed by Appeals, it will apprise the Compliance Operating Division field official by memorandum. (See IRM 4.13.1, Audit Reconsideration, and IRM 8.6.1.5, New Issues and Reopening Closed Issues, as to possible reopening of prior Appeals case for issues not considered by Appeals where prior Appeals disposition was not based on mutual concessions.) If the Compliance Operating Division field official disagrees with the Appeals office’s conclusion, he or she will submit a memorandum to that effect to the Appeals Area Director and forward a copy to the appropriate Compliance Operating Division official. The Appeals Area Director will forward the two memoranda from the Compliance Operating Division field official and a copy of the memorandum to the Compliance Operating Division field official by a cover memorandum, to the appropriate Appeals Director, Field Operations. The appropriate Compliance Operating Division official and the appropriate Appeals Director, Field Operations will attempt to resolve the problem. If a decision is made to recommend reopening the case and setting aside the closing agreement, the appropriate Appeals Director, Field Operations will request permission of the Chief, Appeals to reopen the case (forwarding copies of the aforementioned memoranda and of the closing agreement). The Chief, Appeals will inform the appropriate Appeals Director, Field Operations of that decision. The latter will transmit one copy to appropriate Compliance Operating Division official and one copy to the Compliance Operating Division field official.

If permission is given by the Chief, Appeals to reopen the case, the issuance of the preliminary letter and the determination of civil liability will be made by the Appeals office subsequent to:

See IRM 8.13.1.6.2.1.

The Compliance Operating Division field office will assist the Appeals office in the determination of civil liability by conducting such investigation as the Appeals office requests in order to make an informed disposition of the case. After the Appeals determination of liability is made, and the taxpayer’s agreement (by execution of a waiver of restrictions) or disagreement with the determination is ascertained (and payment requested if agreed to), the memorandum referenced to in IRM 8.13.1.6.3(1) should be prepared and forwarded in accordance with that subsection (unless the agreement was previously set aside while criminal aspects were under consideration). See Exhibit 8.13.1-25.

If information pertaining to a taxable year over which Appeals has jurisdiction is discovered that indicates that a closing agreement should be set aside, or that further investigation should be made to determine whether a closing agreement should be set aside, procedures similar to the foregoing will be employed. The Appeals office must, however, make the initial decision as to whether the facts at hand justify asking permission of the Chief, Appeals to reopen the case. The Appeals office will determine the civil liability. See IRM 8.13.1.6.3.

Questions regarding the setting aside of a closing agreement covering specific matters that was processed in the Office of Chief Counsel should be submitted to that office, with a full statement of facts and a recommendation. See IRM 8.13.1.8. A decision in the matter will be made by the Office of Chief Counsel.

The case will thereafter be handled in accordance with the applicable general procedure.

When a notice of deficiency (90-day letter) is issued to a taxpayer covering a taxable year or years for which a closing agreement has been set aside, the statement attached to the notice should contain the following paragraph:

If the recommendation to set aside a closing agreement is not concurred with by the Chief, Appeals, and the recommending offices have no further information to submit that might change the decision, the closing agreement must be adhered to in subsequent action.

Adjustments not inconsistent with the closing agreement or adjustments required by statute may be handled under established procedures.

The matter of whether or not a closing agreement determining tax liability for barred years is effective and enforceable is not clearly covered by the statute, regulations or judicial precedent. Existing authority indicates that such an agreement is valid. See Dubinsky v. Becker, 64 F. 2d 601 (8th Cir. 1933), agg'g 15 A.F.T.R. 691 (E.D. Mo. 1931). On point is the language of the lower court, which may be found at 15 A.F.T.R. at 695. "The statute clearly points out the instances in which the agreement may be questioned. They are for fraud, malfeasance and misrepresentation. It does not say that such an agreement may be overturned upon a showing that a part, or all, of the taxes paid were assessed after they were barred by limitation. If it had been so intended the legislature would have said it. It didn’t. So there can be no recovery unless the agreement is vulnerable for one or more of the above reasons."

While a literal reading of IRC 6401 might indicate to the contrary, payment of tax pursuant to a closing agreement determining tax liability executed after the expiration of the statutory period of limitations on assessment is not ordinarily considered to be refundable upon filing a claim for credit or refund that is timely with respect to the date of payment. A closing agreement only determines the matters contained therein, and the statute of limitations issue must be resolved in the agreement itself. Otherwise, a taxpayer could challenge the timeliness of the assessment even though it would be precluded by the closing agreement from challenging the amount.

If tax liability is at issue for a year barred (or arguably barred) by expiration of the statutory period of limitations, an agreed upon disposition of the year involving a deficiency without application of the fraud penalty should be finalized by use of a closing agreement determining tax liability for such year.

The closing agreement should also expressly determine agreed penalties and the applicability (if determinable, the amount) of interest liability pertaining to the specified type of liability. In instances of partial payment, interest liability to date may be shown and the agreement may provide for additional interest and possible nonpayment penalty to the extent determined amounts remain unpaid after the specified date.

If, for any reason, it would appear that it will take more than 30 days to have the closing agreement approved, an unqualified waiver may be taken (received or accepted before the date of approval of the closing agreement) that will suspend interest for a period beginning 30 days after receipt of the waiver if notice and demand has not been made. See IRM 8.13.1.4.3 IRM 8.13.1.5.2.1 Both of these subsections discuss waivers in closing agreement cases. It is uncertain whether interest on deficiencies for barred years can be assessed and collected where only tax liability and penalties for such years are determined by closing agreement. See Exhibit 8.13.1-5. This exhibit covers barred year agreements.

While assessment and collection of a deficiency resulting from a determination of tax liability by a Form 866 closing agreement for a barred year can be made upon authority of the closing agreement without a waiver of restrictions from the taxpayer and without issuing a notice of deficiency, it is preferable to obtain payment of the unpaid tax, penalty, and interest from the taxpayer before execution of the closing agreement for the Commissioner. A transcript of account should be secured after payment is obtained to ensure the payment is properly applied. If collection of the deficiency and interest in advance cannot be obtained, a closing agreement may nevertheless be entered into and assessment and collection made. It is important that the closing agreement recite the underlying circumstances to ensure that the taxpayer is aware of the legal consequences of his or her act in entering into a closing agreement.

If, for an indisputably barred year, the taxpayer voluntarily makes payment of additional tax liability, there being no material evidence to support an assessment of such liability having been made by the Government, the taxpayer will not ordinarily be requested to sign a closing agreement. In a barred year, because the taxpayer is not compelled to pay the tax, a closing agreement is not necessary.

The availability of the closing agreement procedure does not in any way alter the lack of authority to make refunds or credits for years for which all statutes for refund or credit have clearly expired.

Technical advice or technical assistance may be requested on problems involving potentially barred years, including those with possible competent authority implications.

In the broad sense, the term "tax liability" includes interest and penalties. However, it is ordinarily undesirable to determine the entire tax liability for a period in such fashion as to preclude any further assessment of any type of tax. Therefore, generally only liabilities for specific types of taxes and specific applicable penalties are determined. See IRM 8.13.1.7.1. For these reasons, Form 866, Agreement as to Final Determination of Tax Liability, narrows the extent of the determination to those specific types of taxes and penalties (and, in unusual cases, applicable interest) specifically stated therein.

A closing agreement determining tax liability should reflect the total corrected tax liability, separately stating penalties (including additions to tax and additional amounts under Subchapter A of Chapter 68 of the Code) and interest if the latter is at issue or if a barred year or transferee interest is involved. See other sections with regard to penalties and interest. Consider information on barred years. See Exhibit 8.13.1-5.. The corrected tax liability is that resulting from the types of tax and taxable periods or returns covered in the agreement, after reduction for all applicable credits other than those representing payment of such liability. In other words, the closing agreement reflects liability after application of credits reducing liability but before application of credits discharging liability.

A closing agreement establishing final determination of tax liability for a prior taxable period is valid and binding upon the parties concerned and cannot be set aside in the absence of a showing of fraud, malfeasance, or misrepresentation of material fact. See IRM 8.13.1.6.1.1. See IRM 8.13.1.6.1.2. Insofar as they relate to taxable periods ending at or before the date of the agreement, determinations in the agreement are not affected by subsequent legislation retroactively applicable to the taxable period to which the agreement relates where the legislation is silent as to its effect on closing agreements. Insofar as closing agreement determinations relate to periods ending subsequent to the date of the agreement, they are subject to statutory changes enacted subsequent to that date applicable to such periods. On the other hand, should the Supreme Court declare a statutory provision unconstitutional after liability is based thereon has been determined by a closing agreement, the agreement stands. See Rev. Rul. 56-322, 1956-2 C.B. 963, for authority and cases on point.

It should be noted that in some respects closing agreements are more final than accepted offers in compromise under IRC 7122 and in other respects less final. A number of Code sections that are to be given effect notwithstanding any law or rule of law (thus overcoming the statute of limitations) nevertheless specifically exempt compromise cases from their provisions but fail to mention cases disposed of by closing agreement. Yet accepted offers in compromise involving collateral agreements to make future payments may be withdrawn by the Commissioner should the taxpayer fail to comply with the terms of the compromise. Compromises are less likely to withstand challenge under the general law of contracts than closing agreements. The former may be set aside pursuant to stipulations on Form 656, Offer in Compromise (see IRC 7206 for criminal penalties expressly applicable to both offers in compromise and closing agreements). If a tax liability is compromised by acceptance of an offer based on doubt as to liability and concurrently determined by closing agreement, maximum finality would be achieved. In such a situation extreme caution would have to be exercised as to the effect upon any latent carrybacks and carryovers that might subsequently arise.

If acceptance of an offer in compromise requires an enforceable agreement covering additional matters affecting the computation of unassessed tax liabilities, such additional matters should be covered in a specific matter closing agreement.

Circumstances arise where it appears desirable to attempt to bind possible successors in interest to prevent circumvention of closing agreement determinations. However, there is uncertainty as to the effectiveness of purporting to bind devisees, legatees, heirs, assigns and other presently unidentifiable related or controlled successors in interest who are not parties to the agreement. For example, there is some question as to the effectiveness of a closing agreement provision determining the applicable tax treatment with respect to a transaction of the taxpayer-corporation and any successor in interest controlled directly or indirectly by it (or by its controlling stockholders) where such successor is unidentified and not a party to the closing agreement. Judicial and regulatory interpretation on the precise point are extremely limited. See however, Phillips v. Commissioner, 178 F.2d 270 (3rd Cir. 1949), aff’g per curiam 11 T.C. 652 (1948), which supports the position that strangers to the closing agreement are not bound by it and cannot take advantage of it. The presence of Code provisions prescribing rules for successors in interest under specified circumstances (as in subchapter C of the Internal Revenue Code) may imply that in the absence of specific Code provisions a successor in interest is to be given independent treatment and that the Commissioner lacks authority to create successor rules by closing agreements (assuming the successors are not parties to the agreement).

Despite uncertainty as to legal effect, provisions of closing agreements purporting to bind controlled or related successors in interest do not affect the validity of the agreements and may motivate compliance.

If the circumstance of the case fits, an agreement closely modeled after the applicable pattern should be acceptable and effective. See IRM 8.13.1.4.2. See IRM 8.13.1.5.2.2.

If a reviewer finds that an issue is giving rise to or incorporated in a number of closing agreements with circumstances that this is likely to be the case in other offices of the country, the reviewer should consider whether or not use of a pattern agreement or pattern clauses would be desirable. Unless a pattern agreement or pattern clauses appear impractical, a memorandum should be prepared to the appropriate Compliance Operating Division official, or the Chief, Appeals, fully describing the recurring issue and the need for a pattern clause or pattern agreement. The reviewer should prepare as an attachment to the memorandum, pattern clauses or a recommended pattern agreement to fit circumstances. If consideration by the Headquarters indicates a need for it, a pattern agreement or pattern clause will be incorporated in this handbook. Such a recommendation may also be made in the form of an employee suggestion. Similarly, if the user of an existing pattern agreement identifies a problem with the language contained therein, the appropriate Compliance Operating Division official or the Chief, Appeals, should be notified via memorandum.

Pattern agreements must be carefully considered in light of the circumstances in the case. Modification of a pattern agreement is permissible and frequently necessary. Therefore, in discussing a draft closing agreement following one of the pattern agreements, the examiner or Appeals Officer should not represent the draft as following a pattern prescribed by Headquarters. The taxpayer’s representative may discover some valid objection to the use of some provisions of the pattern agreement. Alternatively, the taxpayer may request that a published pattern agreement be followed in circumstances where the examiner or Appeals Officer does not agree. If so, Section 11.01 of Rev. Proc. 68-16, 1968-1 C.B. 770, 791, may be referred to as affirming the Service practice to revise or depart from most recently issued patterns where necessary. Variations from pattern and instructions in this handbook should be explained in Compliance field reports (workpaper, where no transmittal letter) and Appeals Case Memoranda.

Those closing agreements not coming within the authority and jurisdiction of the Chief Counsel, as discussed in, and not coming within the signing authority of Compliance Operating Division field officials or the Director, International, are reviewed and signed in the office of the Director, Compliance (Small Business/Self-Employed, Wage and Investment); Industry Director (Large and Mid-Size Business); the Director, Employee Plans; the Director, Exempt Organizations or the Director, Government Entities. See IRM 8.13.1.8. Each agreement or each related group of agreements forwarded for review and signature should be accompanied by a memorandum addressed to the appropriate official and signed by the recommending official. The memorandum should explain the recommendation for execution of the proposed closing agreement. The affected returns, workpapers, reports, and entire administrative file should be forwarded with the proposed closing agreement.

IRC 4371 generally imposes an excise tax on premiums paid with respect to each policy of insurance or reinsurance issued by any foreign insurer or reinsurer with respect to a risk wholly or partly within the United States, unless the premiums paid are taxed as income effectively connected with the conduct of a U.S. trade or business of the foreign insurer or reinsurer. The rate of tax is four cents on each dollar of premium paid for life insurance, sickness, accident policies, and annuity contracts. In addition, there is an excise tax imposed at a rate of one cent on each dollar of reinsurance relating to these policies. Income tax treaties between the U.S. and foreign countries provide for an exemption from the tax imposed under IRC 4371. A foreign insurer or reinsurer that consider its premiums to be tax under a treaty is strongly encouraged to into a closing agreement substantially in the form set forth in Rev. Proc. 2003-78, 2003-2 C.B. 1029. Closing agreements under IRC 4371 are processed by the Director, International. Please contact the Director, International, if you have any questions regarding closing agreements under IRC 4371. Absent a closing agreement, U.S. persons who pay insurance or reinsurance premiums to foreign insurers or reinsurers are liable for any excise tax due with respect to the premiums they have paid to the foreign insurer or reinsurer.

The section 953(d) election allows certain controlled foreign corporations engaged in the insurance business to elect to be treated as United States corporations for all purposes of the IRC. The procedures for making the election are outlined in Rev. Proc. 2003-47, 2003-2 C.B. 55. For further information concerning the execution of a closing agreement pursuant to this election, contact the Director, International.

In Compliance or Appeals cases involving offset relief, the field office and the taxpayer will agree upon all closing agreement determination clauses except those providing offset relief, subject to changes in amounts flowing automatically from later revisions of the expected amount of offset relief. The field office should specify either that it wishes the Director, International, to clear with it all changes to the non-offset provisions of the proposed closing agreement or that it has no objection to such changes if they are of the "automatic" variety flowing from adjustments to the requested offset relief made by the Director. The transmitting memorandum will explain the reasons for variance between the closing agreement paragraphs specified therein and the paragraphs contained in the pattern agreement.

In Joint Committee cases involving offset or combined relief, the file is forwarded from the Compliance field or Appeals Office to the Director, International. If the latter tentatively approves the closing agreement, the transmitting office is advised by a memorandum or other transmittal. A copy of the proposed closing agreement is attached to the report to the Joint Committee. The closing agreement is retained by the Director, International until, in accordance with IRC 6405, the tentative resolution has been submitted to, and the timely views of the Joint Committee have been considered. When compliance with IRC 6405 is complete, the Director, International, signs the agreement, retains the original and forwards a copy to the taxpayer and the transmitting office. The transmittal document should indicate that returns affected be marked and, when applicable, a follow-up control be maintained on the agreement. See IRM 8.13.1.5.2.3.

IRC 995(b) treats a portion of a DISC’s taxable income for each taxable year as a deemed distribution to its shareholder, which is taxable to the shareholder as a dividend. Under IRC 996(a)(3), actual distributions by a DISC out of previously taxed income(PTI), which consist of amounts taxed to a DISC’s shareholder under IRC 995(b), are excluded from the shareholder’s gross income. Actual distributions by a DISC out of its accumulated DISC income (ADI) or other earnings or profits (not constituting either PTI or ADI) are taxable to the DISC’s shareholder as ordinary dividends. Redeterminations by the Service of intercompany prices or commissions determined under IRC 994(a pricing rules generally have the effect of reducing a DISC’s PTI and ADI for the taxable year of the redetermination. As a result of such reduction in PTI, a portion of any nontaxable distribution previously made by a DISC out of PTI as originally computed by the parties is reclassified as a taxable distribution out of ADI or other earnings and profits.

Relief under Section 3 of Rev. Proc. 64-54 , 1964-2 C.B. 1008, Rev. Proc. 69-13 , 1969-1 C.B. 402, and Rev. Proc. 65-17 , 1965-1 C.B. 833 necessitates the use of a closing agreement. The Deputy Commissioner, LMSB (International), is authorized to secure and approve closing agreements that contain provisions for relief under those Revenue Procedures and Rev. Proc. 99-32 (or its predecessor, Rev. Proc. 65-17, as the case may be). To avoid added complications in the handling of Compliance or Appeals cases, the relief feature of Rev. Proc. 64-54 and Rev. Proc. 65-17, or Rev. Proc. 69-13 and Rev. Proc. 99-32 should generally be embodied in one closing agreement and matters not necessary to such relief, but warranting disposition by closing agreement, embodied in a separate subsequent agreement. See Exhibit 8.13.1-22.

In Compliance or Appeals cases involving offset relief, the field office and the taxpayer will agree upon all closing agreement determination clauses except those providing offset relief, subject to changes in amounts flowing automatically from later revisions of the expected amount of offset relief. The field office should specify either that it wishes the Director, International to clear with it all changes to the non-offset provisions of the proposed closing agreement or that it has no objection to such changes if they are of the "automatic" variety flowing from adjustments to the requested offset relief made by the Director. The transmitting memorandum will explain the reasons for variance between the closing agreement paragraphs specified therein and the paragraphs contained in the pattern agreement.

In Joint Committee cases involving offset or combined relief, the file is forwarded from the Compliance field or Appeals Office to the Director, International. If the latter tentatively approves the closing agreement, the transmitting office is advised by a memorandum or other transmittal. A copy of the proposed closing agreement is attached to the report to the Joint Committee. The closing agreement is retained by the Director, International until notified that the Joint Committee Staff has cleared the case. Upon notification of clearance, the Director, International signs the agreement, retains the original and forwards a copy to the taxpayer and the transmitting office. The transmittal document should indicate that returns affected be marked as discussed previously and, when applicable, a follow-up control be maintained on the agreement. See IRM 8.13.1.5.2.3.

IRC 995(b) treats a portion of a DISC’s taxable income for each taxable year as a deemed distribution to its shareholder, which is taxable to the shareholder as a dividend. Under IRC 996(a)(3), actual distributions by a DISC out of previously taxed income(PTI), which consist of amounts taxed to a DISC’s shareholder under IRC 995(b) are excluded from the shareholder’s gross income. Actual distributions by a DISC out of its accumulated DISC income (ADI) or other earnings or profits (not constituting either PTI or ADI) are taxable to the DISC’s shareholder as ordinary dividends. Redeterminations by the Service of intercompany prices or commissions determined under IRC 994(a) pricing rules generally have the effect of reducing a DISC’s PTI and ADI for the taxable year of the redetermination. As a result of such reduction in PTI, a portion of any nontaxable distribution previously made by a DISC out of PTI as originally computed by the parties is reclassified as a taxable distribution out of ADI or other earnings and profits.