8.13.1  Processing Closing Agreements in Appeals

Manual Transmittal

August 20, 2012

Purpose

(1) This transmits revised IRM 8.13.1, Closing Agreements.

Material Changes

(1) Revised IRM to reflect new organizational titles resulting from the Appeals 2012 Alignment Project.

(2) Corrected references to former Large and Mid-Size Business (LMSB) to Large Business and International (LB&I).

Effect on Other Documents

This supersedes IRM 8.13.1 dated June 03, 2008.

Audience

All Operating Divisions (LB&I, SB/SE, TE/GE, W&I) and Appeals personnel who handle closing agreements under IRC 7121.

Effective Date

(10-01-2012)

Signed by
Susan L. Latham
Director, Policy, Quality and Case Support

8.13.1.1  (10-01-2012)
Introduction to Closing Agreements

  1. Procedures are provided for Service personnel handling closing agreements entered into under IRC 7121. This includes employees in the Wage and Investment (W&I), Small Business/Self-Employed (SB/SE), Large Business and International (LB&I), Tax Exempt and Government Entities (TE/GE) Operating Divisions, and the Appeals Functional Unit.

  2. Procedures relating to closing agreements processed by the Office of Chief Counsel are contained in CCDM 32.3.4, Closing Agreements Covering Specific Matters.

  3. Pattern letters and other helpful information are shown in the exhibits. The closing agreement exhibits merely provide sample/pattern language for specific issues and not the complete document.

    Note:

    A complete blank Form 866 and Form 906 are available from the Publishing web site.

  4. The information contained in this IRM pertaining to the interpretation and application of IRC 7121 is advisory only and is not to be cited or relied upon as authority in disposing of issues. Such material is presented merely as a guide for applying IRC 7121 to help Service personnel reach uniform results in those areas not expressly covered by regulations and court decisions.

  5. Unless otherwise indicated, the words "agreement" or "agreements" refer to "closing agreement" or "closing agreements," respectively. References to Code sections (IRC) apply to the Internal Revenue Code of 1986 (unless otherwise indicated). In this handbook, reference to "executing," "signing," "accepting," "approving," or "entering into" (or derivatives of these terms) closing agreements by Service officials are intended to be synonymous with the act of exercising their delegated authority to "enter into and approve" these agreements.

  6. "Generally," "ordinarily," "usually," "may," and similar words are permissive. Practices and procedures containing these words will be followed in most instances. The purpose in prescribing a procedure or practice with a permissive word is not only to promote uniformity but also to permit deviation for unusual situations. Reasons for deviating from normal procedures should be explained in the report transmittal (if none, workpapers) or Appeals Case Memorandum (ACM).

    Caution:

    Position titles utilized throughout IRM 8.13.1 attempt to reflect the results of the IRS reorganization. To the extent possible, an effort has been made to identify successor positions to those previously designated to perform certain acts relating to closing agreements. Users are cautioned, however, to consult the latest revision of Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability (or any succeeding delegation of authority) or seek advice from their managers if questions of authority arise.

8.13.1.1.1  (11-09-2007)
General Characteristics of Closing Agreements

  1. A closing agreement under IRC 7121 is an agreement authorized under that statute. While exhibiting some of the attributes of a contract, it is not strictly subject to the law of contracts. For example, legal consideration is not required. Nevertheless, court decisions have held that closing agreements are interpreted using ordinary contract law principles. The greatest disparity between the ordinary contract and a closing agreement is the finality accorded the latter by the terms of the statute. See IRM 8.13.1.6.

    Note:

    Because of their finality, closing agreements must be drafted with great caution. If a closing agreement contains an ambiguity, the ambiguity is resolved against the drafter of the agreement.

  2. Treas. Reg. 301.7121-1(a) provides that: "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." Subject to the guidelines provided by the regulations, whether or not an agreement will be entered into is a matter within the Commissioner’s discretion and therefore, within the discretion of those to whom the Commissioner has delegated the authority to enter into and approve such agreements. In practice, if the taxpayer shows good reasons for requesting the agreement and furnishes necessary facts and documentation, and the government will sustain no disadvantage, a closing agreement will ordinarily be entered into so long as the content of the agreement can be agreed upon.

  3. IRC 7121 states that such an agreement may be entered into with "any person," rather than "any taxpayer." There need be no tax liability with respect to the period to which the closing agreement relates. The words "in respect to any internal revenue tax" in the Code section requires some connection between the determination agreed upon and some tax liability, past or future, or, in appropriate cases, the lack of tax liability. The term "taxpayer" in this handbook will ordinarily have the same meaning as the word "person" in the Code section.

  4. The term "tax liability" in the Code section requires that any adjustment to the taxpayer’s liability be at least arguably consistent with the federal taxing statutes. Any closing agreement that results in an additional assessment of taxes but is based upon adjustments clearly contrary to the taxing statutes could be challenged as not being "in respect of any internal revenue tax." In Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1917), the United States Supreme Court stated, "[T]he United States is neither bound nor estopped by acts of its officers or agents in entering into an arrangement or agreement to do or cause to be done what the law does not sanction or permit." However, the statutory language does not require that the matter be clearly consistent with the applicable Code provision, since closing agreements are intended to dispose of debatable matters. Once a closing agreement is entered into determining a debatable matter, later inconsistent interpretative clarification of the applicable statute by the courts will not affect the matter determined.

  5. Agreements with respect to taxable periods ended prior to the date of the agreement determine either total tax liability of the taxpayer with respect to one or more types of tax for such periods or one or more separate items affecting such liability or both. Agreements may be entered into with respect to specific matters related to such periods and affecting future periods. Agreements having the foregoing characteristics are the types that will be entered into under paragraphs 2 through 7 of Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, as revised. Amplification of jurisdictional instructions are covered below. See IRM 8.13.1.1.4. Closing agreements may be entered into by certain designated Service officials with respect to prospective transactions or completed transactions affecting returns to be filed.

  6. There may be more than one closing agreement relating to the tax liability for a single period, although no such closing agreement may modify any matter previously determined by closing agreement, except as provided by statute. Such closing agreements may provide determinations under IRC 1313 or may be the vehicle for allowing a deficiency dividend deduction under IRC 547. See, however, IRC 547(c)(3), IRC 1313(a)(4) and related regulations for information as to other types of determinations for those cases. See IRM 8.13.1.5.1. Also see IRM 8.7.1, Personal Holding Company - Deficiency Dividend.

  7. A closing agreement with respect to a taxable period ending subsequent to the date of the agreement is subject to any change in or modification of the law enacted subsequent to the date of the agreement and applicable to such taxable period, and each such closing agreement determining specific matters should state this. A subsequent "change in the law" does not refer to a subsequent interpretation and clarification of the law by a court decision. Information with respect to the effect of later legislation is discussed later in this section. See IRM 8.13.1.7.3.

  8. A closing agreement may be entered into at any time before the tax period comes within the jurisdiction of an appropriate court and may thereafter be entered into in appropriate circumstances when authorized by the court (e.g., certain bankruptcy situations). A closing agreement must not determine the amount of tax liability (or deficiency or overpayment) for any taxable period over which the United States Tax Court has jurisdiction since the liability for such docketed years is determined by the Tax Court.

  9. Closing agreements may arise from matters originating in the tax year in litigation. In these situations, these closing agreements are limited to "related specific items" affecting other non-docketed taxable periods. This type of closing agreement makes a determination for a year before the court, and that determination affects other years. Assuming it is proper to enter into this type of closing agreement, it is important to use a stipulation of settled issues along with a closing agreement that includes a condition precedent. Generally, the condition precedent will provide that the determinations in the closing agreement do not become effective until the corresponding stipulation of settled issues is accepted by the court. Basically, an agreement for a year before the court is a stipulation of settled issues, but a court is not required to accept a stipulation of settled issues of the parties. Consequently, a closing agreement should not purport to determine a matter if the resolution of the matter cannot be final until accepted by a court. Generally, it is better to execute the closing agreement and the corresponding stipulation at the same time. Otherwise, the government could be at risk that a taxpayer could rescind the offer to enter into a closing agreement before it is signed by the Service.

  10. Closing agreements may be reflected on Form 866, Agreement As to Final Determination of tax Liability; Form 906, Closing Agreement on Final Determination Covering Specific Matters ; or the agreement may be drafted electronically utilizing the pattern language of Form 866 or Form 906. In addition, a combined agreement may be drafted that determines both tax liability and specific matters. See IRM 8.13.1.2.

  11. Treas. Reg. 301.7121-1(d)(2) provides that a deficiency or overpayment determined pursuant to a closing agreement shall be assessed and collected or credited and refunded in accordance with applicable provisions of the law. A discussion of interest and waivers is covered later in this section. See IRM 8.13.1.2.18. See IRM 8.13.1.4.3.

8.13.1.1.2  (11-09-2007)
Examples of Use of Closing Agreements

  1. Tax liability closing agreements may be entered into when it is advantageous to have the matter permanently and conclusively closed, or when a taxpayer can show that there are good reasons for an agreement and that making the agreement will not prejudice the interests of the government. The following represent examples of acceptable reasons for entering into a determination of tax liability by closing agreement:

    1. The taxpayer wishes to definitely establish its tax liability in order that a transaction may be facilitated, such as a sale of its stock.

    2. The fiduciary of an estate desires a closing agreement so he or she can be discharged by the court.

    3. The fiduciary of a trust or a receivership desires a final determination before a distribution is made.

    4. A corporation in the process of liquidation or dissolution desires a closing agreement in order to wind up its affairs.

    5. A taxpayer wishes to fulfill creditors’ demands for authentic evidence of the status of its tax liability.

    6. Where proposed assessments are contested on the theory that the years are barred and the taxpayer wishes to agree to some portion or all of the assessments. See IRM 8.13.1.7.1.

    7. 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 (see Rev. Proc. 2005-32, 2005-1 C.B. 1206, Policy Statements P-4-3 and P-8-3 (formerly P-8-50), and IRM 8.6.1.4, New Issues and Reopening Closed Issues). Use of special agreement forms in Appeals cases may also be satisfactory to the taxpayer.

    8. To determine personal holding company tax in order to permit deficiency dividends under IRC 547.

    9. To reflect a competent authority determination.

  2. At the request of the taxpayer or the government, a determination of one or more specific matters may be accomplished by entering into a closing agreement for good reasons. However, a closing agreement should not be entered into where there is a disadvantage to the government. A few examples of circumstances that may merit entering into such closing agreements follow:

    1. Determine cost, fair market value, or adjusted basis as of a given date. For example, it may be desirable to have both an estate and its legatees or devisees (or both donors and donees) sign such agreements. See Exhibit 8.13.1-3.

    2. Dispose of certain IRC 482 cases pursuant to Rev. Proc. 99-32, 1999-2 C.B. 296.

    3. Ensure finality and consistency in disposing of cases involving divisions of community property between spouse incident to divorce.

    4. Dispose of change of accounting method issues in Appeals cases involving principles similar to those applied in Rev. Proc.97-27, 1997-1 C.B. 680, as modified by Rev. Proc. 2002-54, 2002-2 C.B. 432. See Exhibit 8.13.1-6.

    5. Determine a fraud penalty reflecting complete or partial concession in cases where the statute of limitations is otherwise barred. See IRM 8.11.1.10, Processing Fraud Penalty Cases.

    6. Determine the amount of net operating loss, tax credit, or capital loss.

    7. Provide determinations for disposition of cases involving mitigation ( IRC 1311 to IRC 1314).

    8. Determine an alternative method of adjusting basis as a result of receipt of income from cancellation of indebtedness under IRC 108(a).

    9. Prevent loss of revenue from "whipsaw" situations. A closing agreement will prevent a related taxpayer from contesting an issue previously settled with another taxpayer by filing a claim to seek further tax benefits after the statutory period of limitations has expired with respect to the settling party. Once the Service resolves the dispute between the taxpayer and a related party, a closing agreement will bar the related party from attempting to create inconsistency in tax treatment for the matter(s) addressed in the closing agreement.

    10. Provide finality to those agreed upon issues involving mutual concessions in Appeals cases where partial settlements are effected.

    11. Determine the consequences of deferred intercompany transactions of domestic consolidated groups.

    12. 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.

    13. 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).

    14. Close cases involving failure to withhold income tax on payments such as taxable reimbursements of moving expenses.

    15. Resolve cases involving the settlement of employment tax controversies. See Exhibit 8.13.1-9.

    16. Resolve issues involving qualification of employee retirement plans. See IRM Part 7, Rulings and Agreements, on determinations relating to employee retirement plans.

    17. Reflect competent authority determinations under Rev. Proc. 2002-52, 2002-2 C.B. 242 .

    18. Resolve an issue in Coordinated Industry Cases (CIC) and Industry Cases (IC) audits under Rev. Proc. 94-67, 1994-2 C.B. 800.

    19. Finalize an agreement for an early referral issue under Rev. Proc. 99-28, 1999-2 C.B. 109.

    20. To address a mass error that affects a higher volume of information returns but involves a de minimus amount of understated reported income for select information returns.

8.13.1.1.3  (11-09-2007)
Collateral Agreements Distinguished

  1. Collateral agreements are utilized in compromise cases, estate tax cases and related income tax valuations, gift tax cases, and in other Appeals cases under appropriate circumstances. This subsection applies to all of the above categories of collateral agreements except those involving offers in compromise. Collateral agreements refer to statements secured from, and signed by or for, taxpayers or related parties to clarify, or obtain a commitment relative to, some related matter other than the amount of assessment or overassessment involved in the case disposition.

  2. Collateral agreements have often been used to commit related taxpayers where there is privity of interest (mutual or successive relationship to the same rights of property) and legal consideration involved. For example, collateral agreements have been frequently obtained from trustees or beneficiaries who have received or will receive assets from an estate. The signing of a collateral agreement may commit a trustee or beneficiary to use the same valuation for income tax purposes as was used for estate tax purposes.

  3. One important distinction between collateral agreements and closing agreements is that the former do not purport to bind the Service. They are one-sided commitments. The Service does not enter into and sign these agreements.

  4. The most significant distinction between collateral agreements and closing agreements is that the former are administrative devices not expressly provided for by the Code while the latter are authorized by IRC 7121. Courts have pointed out that the Code provides two methods of disposing of tax matters by agreement with finality and that those methods are by offer in compromise under IRC 7122 and by closing agreement under IRC 7121. Therefore, if large amounts are involved and the government is potentially subject to a substantial loss of revenue if a taxpayer or related party should fail to comply with a contemplated disposition, a closing agreement should be secured instead of a collateral agreement.

8.13.1.1.4  (11-09-2007)
Basic Delegation

  1. IRC 7121 empowers the Secretary of the Treasury to enter into closing agreements. Treasury Order No. 150-07, dated November 18, 1953, transferred all of the Secretary’s closing agreement functions to the Commissioner of Internal Revenue.

8.13.1.1.4.1  (10-01-2012)
Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, as Revised

  1. In Treas. Reg. 301.7121(a), the Commissioner has been delegated authority to enter into and approve closing agreements. See Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, as revised. The Delegation Order does not redelegate the Commissioner’s authority to set aside closing agreements. See IRM 8.13.1.6.

  2. Part of the Commissioner’s authority to enter into and approve closing agreements has been redelegated by the Order to certain field officials. The practical result is that most closing agreements are entered into by such field officials. Those agreements which field officials cannot sign are signed by the appropriate headquarters official. Included in the category of agreements not signed by field officials are those arising from:

    1. Competent authority determinations under tax treaties.

    2. Cases being litigated by the Department of Justice.

    3. Docketed cases where Appeals has released jurisdiction, unless requested by Chief Counsel or his or her delegate.

  3. It should be noted that the authorities conferred upon the Chief Counsel and upon the Deputy Chief Counsels, the Operating Division Counsels and the Operating Division Commissioners are not mutually exclusive.

    1. If a taxable period has ended before the date of the agreement, the Chief Counsel may enter into an agreement with respect to a completed transaction affecting a return to be filed for that period. Under the same circumstances, the Deputy Chief Counsels, the Operating Division Counsels and the Operating Division Commissioners may enter into a closing agreement as to liability or as to specific matters (including transactions) affecting such taxable period.

    2. Closing agreements with respect to completed transactions affecting returns to be filed are considered by the Office of Chief Counsel where a request for a ruling is involved.

  4. There are two general limitations on the closing agreement authority of Operating Division officials and other field officials. The first is that the agreements must be with respect to cases under their jurisdiction. The second is that such agreements must pertain to taxable periods ended before the dates of such agreements or to specific items related to such periods and affecting other taxable periods. In practice, it is contemplated that closing agreements will be signed by the designated officials of Appeals offices or Compliance field offices. Operating Division officials may sign agreements within their signing authority that field officials under their authority are not authorized to sign.

  5. Operating Division officials and other field officials are not authorized to sign closing agreements pertaining to prospective transactions. Such agreements are handled by Headquarters.

  6. LB&I Team Managers have the authority to accept settlement offers and execute closing agreements on any issues in a CIC case under their jurisdiction where a settlement (including a hazards settlement) has been effected by Appeals with respect to the same issue in a previous, subsequent or same tax period. (See Delegation Order 236, Settlement Offers and Closing Agreements in CEP Cases Where Appeals has Effected a Settlement). They also have the same authority on coordinated issues in the Technical Advisor Program (formerly the Industry Specialization Program (ISP) and the International Field Assistance Specialization Program (IFASP)) where Appeals in combination with LB&I as appropriate, has issued settlement guidelines or positions (See Delegation Order 4-25, Settlement Offers, Closing Agreements and Settlement Agreements Under Section 6224(c) in Cases with Technical Advisor (TA) Program Issues and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues. This authority may not be re-delegated.

8.13.1.1.5  (11-09-2007)
Litigation and Other Matters

  1. The statement of Procedural Rules at Treas. Reg. 601.202(b) provides "A request for a closing agreement which determines tax liability may be submitted and entered into at any time before the determination of such liability becomes a matter within the province of a court of competent jurisdiction and may thereafter be entered into in appropriate circumstances when authorized by the court (e.g. in certain bankruptcy situations.)"

    1. Where the case is docketed in the Tax Court and is still under the jurisdiction of the Appeals office, a closing agreement must not be entered into by an Appeals official with respect to the docketed taxable period. An Appeals official may only enter into a closing agreement that is limited to "related specific items" affecting other non-docketed taxable periods. Such a closing agreement should not be executed for the Commissioner until an agreed decision for the docketed year is entered or a decision in a tried case becomes final.

    2. If a case is being litigated by the Department of Justice, a closing agreement requested by them to give effect to an agreed upon disposition of part of the matters in issue in such taxable period in litigation (even though it may directly apply only to periods or a related cases not in litigation) must be forwarded to the Office of the Chief Counsel. The closing agreement should be routed through the Chief, Appeals (if secured by Appeals) or the Operating Division Commissioner (if secured by the field office) for signature (or to the Director, International) if that official has signing authority.

  2. If a closing agreement originating in a case under the jurisdiction of a Compliance field or Appeals office affects a year for which tax liability is being litigated or to matters related to those being so litigated (e.g., a recurring issue), an expression of acquiescence (or a lack of objection) to the securing of the closing agreement must be obtained from Counsel before the agreement is executed. See IRM 8.13.1.3.2.

8.13.1.1.6  (11-09-2007)
Statutory Authority

  1. IRC 7121 states that the "Secretary" may enter into closing agreements. Treas. Reg. 301.7121-1 defines the Commissioner’s authority relating to closing agreements. Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, contains the Commissioner’s primary re-delegation of that authority to various offices within the IRS and the Office of Chief Counsel.

  2. The following list of authorities is not intended to be an exclusive listing nor to limit the use of closing agreements in other appropriate situations.

    1. Treas. Reg. 1.547-2(b)(1)(iv) explains date of determination where a closing agreement, pursuant to IRC 547(c)(2) , determines personal holding company tax.

    2. Treas. Reg. 1.1313(a)-2 explains authority provided in IRC 1313(a)(2) for use of closing agreements as determinations in cases involving mitigation of effect of limitations.

    3. Treas. Reg. 1.1502-13(j) states circumstances under which a closing agreement may be entered into with a domestic regulated public utility to determine the consequences of deferred intercompany transactions or matters related to or affected by such transactions.

    4. Treas. Reg. 1.1502-77 discusses the authority of a parent corporation to sign closing agreements covering members of affiliated groups.

    5. The regulations pertaining to IRC 7121 are found at Treas. Reg. 301.7121-1.

  3. The statement of Procedural Rules, at Treas. Reg. 601.202 contains published procedural instructions with respect to closing agreements.

  4. There have been court cases dealing with some of the aspects of closing agreements. A discussion of some of these aspects is covered later in this section. See IRM 8.13.1.6 and IRM 8.13.1.7.. Technical advice, technical information, or technical assistance may be requested to help resolve these problems. See IRM 8.13.1.4.7 and IRM 8.13.1.5.2.4.

8.13.1.1.7  (11-09-2007)
Revenue Rulings

  1. Rev. Rul. 56-322, 1956-2 C.B. 963, discusses the Service position that "A valid closing agreement establishing final determination of Federal tax liability for a prior taxable period is not affected by subsequent legislation retroactively applicable to the taxable period to which such closing agreement relates where such legislation is silent as to its effect on closing agreements."

  2. Rev. Rul. 57-305, 1957-2 C.B. 856, states that once a closing agreement (determining tax liability) has been executed by both the taxpayer and the Commissioner, the restrictions upon assessment which IRC 6213(a) imposes are no longer applicable and any waiver filed after that date is meaningless.

  3. Rev. Rul. 60-287, 1960-2 C.B. 188, states: "A determination of a taxpayer’s liability for personal holding company tax made in an informal agreement entered into between the taxpayer and the Commissioner of Internal Revenue, as described in section 547(c)(3) of the Internal Revenue Code of 1954, does not have the effect of a final closing agreement under section 7121 of the Code."

  4. Rev. Rul. 72-486, 1972-2 C.B. 644, states that a closing agreement between a corporation and the IRS may not be set aside because of fraud committed by an officer against the corporation.

  5. Rev. Rul. 72-487, 1972-2 C.B. 645, states that the right to examine the taxpayer’s books is not affected by the execution and approval of a closing agreement and that an investigation may be made at any time to determine whether there is any fraud, malfeasance, or misrepresentation of material fact in connection with the execution of the agreement.

  6. Rev. Rul. 73-459, 1973-2 C.B. 415, holds that a Revenue Agent’s unintentional mistake in failing to include certain deductions in arriving at the result upon which a closing agreement was based does not constitute a misrepresentation of a material fact for which the agreement may be set aside.

  7. Rev. Rul. 73-514, 1973-2 C.B. 416, holds that the taxpayer’s filing of a claim for refund on the basis that an adjustment to the taxpayer’s return was erroneous, and the sending of a letter to the Commissioner to the same effect, subsequent to the payment of a deficiency and the execution and submission of a closing agreement based on such adjustment but prior to the Commissioner’s approval of the agreement, constitute implied revocations of the offer to enter into the closing agreement.

8.13.1.1.8  (11-09-2007)
Revenue Procedures

  1. Rev. Proc. 65-17, 1965-1 C.B. 833, and Amendment 1, 1966-2 C.B. 1211, state Service position and procedure governing the adjustment of accounts and the transfer of funds as the result of allocations of income or deductions made pursuant to IRC 482. The procedure provides relief, conditioned upon the execution of a closing agreement for taxpayers who wish to receive payment from the related entity from, or to whom the Service made the allocation without further federal income tax consequences. For further information see Rev. Proc. 99-32, 1999-2 C.B. 296.

  2. Rev. Proc. 68-16, 1968-1 C.B. 770, as modified by Rev. Proc. 94-67 , 1994-2 C.B. 800, is a comprehensive explanation of procedures applicable to closing agreements other than those originating in and involving rulings prepared by the Office of Chief Counsel.

  3. Rev. Proc. 78-15, 1978-2 C.B. 488, provides the procedure to be followed by a taxpayer who has requested an advance ruling seeking a variation from the general rule of Treas. Reg. 1.1017-1 relating to the adjustment to basis of property resulting from a discharge of indebtedness, and who desires to enter into a closing agreement pursuant to Treas. Reg. 1.1017-2(b) because the property of the taxpayer consists solely of stock of other corporations.

  4. Rev. Proc. 85-44, 1985-2 C.B. 504, provides the procedure to be followed by a taxpayer who has requested an advance ruling seeking a variation from the general rule of Treas. Reg. 1.1017-1 , relating to the adjustment to basis of depreciable property resulting from a discharge of indebtedness, and who desires to enter into a closing agreement pursuant to Treas. Reg. 1.1017-2(b) because the taxpayer has a substantial number of depreciable properties.

  5. Rev. Proc. 94-67, 1994-2 C.B. 800, explains when and how a taxpayer, subject to a CIC or IC audit, requests an Accelerated Issue Resolution (AIR) agreement (which is a closing agreement under IRC 7121) from Compliance.

  6. In general, Rev. Proc. 99-32, 1999-2 C.B. 296 supersedes Rev. Proc. 65-17, 1965-1 C.B. 833, for taxable years beginning after August 23, 1999. Rev. Proc. 99-32 states the Service position and provides procedures for the adjustment of accounts and the transfer of funds in connection with allocations of income or deductions pursuant to IRC 482 (primary adjustments), including certain taxpayer-initiated adjustments for purposes of reporting an arm's length result under the IRC 482 regulations. The revenue procedure applies to corporate taxpayers that enter into closing agreements with the Service. The revenue procedure permits the taxpayer to receive payment from, or make payment to, a controlled party after a Service-initiated primary adjustment, without being subject to federal income tax consequences that would otherwise follow from the secondary adjustment.

  7. Rev. Proc. 2002-52, 2002-2 C.B. 242, explains the procedures to be used by the IRS and taxpayers in certain cases of double taxation that are governed by income tax treaties of the United States. The cases covered by this revenue procedure concern the allocation of income and deductions between a United States taxpayer and a related person (including a branch office) subject to the taxing jurisdiction of a country ("treaty country" ) that has entered into an income tax treaty with the United States.

  8. Generally, a revenue procedure is issued annually which updates and restates the general procedures of the IRS in issuing rulings, determination, opinion, notification, and information letters to taxpayers and in entering into closing agreements on specific issues as to the interpretation or application of the federal tax laws.

8.13.1.2  (11-09-2007)
Matters of Form

  1. Instructions are provided describing types of closing agreements and how to prepare and assemble the files.

  2. There are two closing agreement forms:

    1. Form 866, Agreement as to Final Determination of Liability

    2. Form 906, Closing Agreement on Final Determination Covering Specific Matters

  3. In addition, this section discusses combined agreements that determine both tax liability and specific matters.

  4. IRM 7.2.1, TE/GE Closing Agreements, provides additional information on closing agreements relating to employee plans and exempt organization matters.

8.13.1.2.1  (11-09-2007)
Form 866, Agreement as to Final Determination of Liability

  1. Final determinations of tax liability pursuant to IRC 7121 are ordinarily reflected on Form 866, Agreement as to Final Determination of Tax Liability. In those cases where space on the form is insufficient to indicate all the periods, taxes, and liabilities covered by the agreement, insert "See Attachment" in that space and put the information on a separate sheet in the same format indicated on the form. Any separate sheets should be clearly identified at the top as: "Closing Agreement with (name of taxpayer)." See IRM 8.13.1.2.4.2.

  2. A determination of tax liability should reflect the total corrected tax liability for each period and the type of tax covered in the agreement, after application of credits reducing liability but before application of payments or prepayment credits. Special care should be taken when preparing closing agreements where earned income tax credits or other refundable credits are involved. See IRM 8.13.1.7.2.

  3. Where any matter in addition to tax liabilities is to be finally determined by the agreement, a combination agreement should be used. See IRM 8.13.1.2.3.

  4. Qualified liability determinations should be avoided whether determined on a Form 866 or in a combined agreement.

  5. Generally, closing agreements determining self-employment tax liability should be avoided. A later disagreement between the IRS and the Social Security Administration on the incidence of self-employment tax may arise as a result of an application for Social Security benefits and may be referred to the Department of Justice for resolution. It is possible that a determination on self-employment tax liability by closing agreement may not be consistent with the final decision on the incidence of such tax and the resulting Social Security benefits. If the final disposition is inconsistent with the closing agreement, the taxpayer may have overpaid tax that cannot be refunded or may owe additional tax that cannot be collected.

8.13.1.2.2  (11-09-2007)
Form 906, Closing Agreement on Final Determination Covering Specific Matters

  1. Final determinations of specific matters pursuant to IRC 7121 are ordinarily reflected on Form 906, Closing Agreement on Final Determination Covering Specific Matters.

    1. Where Form 906 is used and the space provided on the form is insufficient for the content, a portion of the content may be reflected on additional pages (but not on the reverse side) inserted between the pages of the form. See IRM 8.13.1.2.4.2.

    2. If Form 906 is not used, the entire agreement may be drafted electronically using the pattern language of the form.

  2. Typed agreements (i.e., where no form is used) should contain all of the printed clauses reflected on Form 906. The form number should not be reflected on the agreement where the form has not been used.

  3. In a specific matter closing agreement, the signature page should contain at least some portion of the last determination clause.

8.13.1.2.3  (11-09-2007)
Combined Agreements

  1. Neither Form 866 nor Form 906 is specifically designed for closing agreements which determine both tax liability and specific matters. Instead, a combined agreement should be prepared in accordance with the format and standard language reflected in Exhibit 8.13.1-4.

  2. The principal necessity for combined agreements is that a determination of liability alone does not determine the amount of any item of income or deduction (or any other related matter) that may have been considered in arriving at that liability. This becomes important where the amount of one or more such items affects or could affect the computation of taxable income for another year.

    Example:

    The computation of taxable income for the year for which a closing agreement is being entered into by the parties may take into account the parties’ resolution of the issue of the fair market value of a charitable contribution. The use of a combined agreement in this situation is desirable to set forth the fair market value of the charitable contribution for purposes of determining the excess charitable contribution carryover. By setting forth the fair market value of the charitable contribution in a combined agreement, the parties will be precluded from taking an inconsistent position with respect to valuation in subsequent years affected by the carryover. Exhibit 8.13.1-4.

  3. Another situation where the use of a combined agreement may be appropriate is where the parties are resolving an issue with respect to the basis of depreciable property.

  4. See IRM 8.13.1.7.1. This section discusses the use of combined agreements for barred years.

8.13.1.2.4  (11-09-2007)
Guidelines for Preparing Closing Agreements

  1. Instructions are provided for proper format and language to use when preparing closing agreements.

8.13.1.2.4.1  (11-09-2007)
Identification of Parties

  1. The names of all taxpayer parties to the closing agreement should be accurately set forth at the beginning of the agreement and in the signatures. Where any tax returns involved do not reflect the correct name, this fact should be noted in the introductory portion of the agreement. Each taxpayer’s identification number should be shown at the beginning of the agreement.

  2. Where the taxpayer’s name has changed since the beginning of the first taxable period affected by the closing agreement, this change should be explained in one of the introductory clauses of the agreement. Similarly, important relationships should be explained. See IRM 8.13.1.2.5.1.

    Example:

    An appropriate opening paragraph for an agreement entered into by a parent corporation on behalf of all members of a consolidated group is: "Under section 7121 of the Internal Revenue Code, (Parent’s Name), EIN xx-xxxxxx, Main Street, Any City, Any State, xxxxx, on behalf of itself and as agent for the (Name of the Consolidated Group), and the Commissioner of Internal Revenue Service make the following agreement...."

  3. If shortened versions of proper names or other designations such as "taxpayer," "other party," "other entity," and "second other party" are to be used in the body of the agreement, the introductory portion of the agreement should explain this usage. Different parties should not be similarly identified (e.g., "taxpayer" ) unless all provisions using such designation in lieu of names are applicable to all parties so identified.

8.13.1.2.4.2  (11-09-2007)
Arrangement of Content

  1. As reflected in the exhibits, closing agreements follow a standard format. They begin with the standard caption at the top, which states the nature of the document. Thereafter, the parties to the agreement should be identified. Provisions of an agreement should not be reflected on the reverse side of a page. The following instructions, except as otherwise noted, apply primarily to closing agreements determining specific matters.

  2. The identification of the parties is followed by one or more WHEREAS clauses which serve to introduce the subject matter of the agreement and states premises upon which it is based. These clauses should be brief, as demonstrated in the exhibits.

  3. It is important to distinguish between matters that are merely informative and explanatory, and matters that are agreed upon. The former should be segregated from the latter and should be reflected in the WHEREAS clauses mentioned in (2) above. To emphasize the transition from recitals to matters being determined and agreed upon, the latter should be separated from and follow the WHEREAS clauses and should be preceded by the caption "NOW IT IS HEREBY DETERMINED AND AGREED ," usually followed by the qualification "for Federal __tax purposes that...." .

  4. For clarity, the matters being agreed upon should be logically grouped in separate numbered determination clauses. Each clause should be drafted with the view that it is a continuation of the statement "NOW IT IS HEREBY DETERMINED AND AGREED for Federal ...tax purposes that..." . These determination clauses should be consistent with the WHEREAS clauses and should be clearly stated.

    1. A determination of a net operating or capital loss carryover should state the year in which the loss was sustained and the amount being carried over from that year.

    2. State the date as of which basis is determined.

    3. Where possible, use dollar amounts rather than formulas or percentages.

    4. Determination clauses should not be stated as executory clauses or as promises made by taxpayers. Do not determine that "Taxpayer will report gain of $1,000 on the above-described sale of real estate as ordinary income in the tax return to be filed for the year ending December 31, 1997." Instead, determine "Gain of $1,000 on the above-described sale of real estate is includible in taxpayer’s gross income as ordinary income for the taxable year ended December 31, 1997." Another example — Do not determine "Taxpayer will not claim alimony deduction for taxable year ending December 31, 1997." Instead determine "No deduction is allowable for alimony for the taxable year ending December 31, 1997."

    5. State precisely any agreed-upon ramifications of the closing agreement on subsequent taxable periods.

  5. An agreement determining only tax liability should end with provisions identical to those printed in the concluding portions of Form 866. Combined agreements or agreements determining specific matters should end with provisions identical to those printed in the concluding portion of Form 906. These standard provisions should be followed by the dated signatures of the parties. Information pertaining to execution and attachments are covered later in this section. See IRM 8.13.1.2.5 and IRM 8.13.1.2.16.

  6. When the agreement is more than one page in length, it is preferable to number the pages as "Page 1 of 4," "Page 2 of 4" , etc. Also, each page after the first page should be identified as: "Closing Agreement With (name of taxpayer)." Where there are several parties to an agreement, the name of the first named party in the agreement plus "et al." may be used to identify the additional pages. See IRM 8.13.1.2.16. Agreements submitted with pages not identified in accordance with the preceding instructions or properly numbered may nevertheless be accepted. Service personnel must not add such identification and numbering or make any changes whatsoever in the agreement after it has been signed and submitted by the taxpayer, with an exception. See IRM 8.13.1.2.17. If necessary, draw a diagonal line across the page following the last item in the body of the agreement before the agreement is mailed to the taxpayer, in order to prevent any unauthorized additions. Additional requirements pertaining to closing agreements covering specific matters were previously discussed. See IRM 8.13.1.2.2.

  7. References in the agreement to other provisions of the agreement should be precise. For example, acceptable references would be "..subject to the provisions of determination clauses numbered 3 and 7 herein..." or ". . .subject to the provisions of determination clause (a), preceding, and determination clause (d) succeeding,..." It is preferable to avoid use of "above" and "below" in this context when drafting the agreement since references may be to provisions that will not be on the same page as the reference when the document is in final form. A reference should be clear that it pertains to another provision of the agreement, rather than to a provision of some other document. An adequate reference for this purpose could be ". . .as provided in Attachment 1 of this agreement...."

8.13.1.2.4.3  (11-09-2007)
Dating

  1. The date the agreement is signed by an official on behalf of the Commissioner is the date the agreement becomes effective.

    1. The date the agreement is signed on behalf of the Commissioner must be shown.

    2. Stamp the date received from the taxpayer on the reverse side of all copies of the agreement.

  2. The taxpayer’s signature to the agreement constitutes an offer which should be acted upon within a reasonable time.

    1. The date of the taxpayer’s signature should be shown.

    2. If a taxpayer fails to date the signature and the file contains a letter or some other indication of the date the agreement was submitted, it is not necessary to return the agreement to the taxpayer solely for the purposes of inserting the date.

    3. Do not insert a date of signature for the taxpayer.

8.13.1.2.5  (11-09-2007)
Execution By Taxpayer

  1. Closing agreements must always be signed by the taxpayer before they are signed for the Commissioner. The taxpayer’s signature constitutes an offer to agree and the signature for the Commissioner constitutes an acceptance and approval of the offer. All copies should be signed by or for all parties, with an exception. See IRM 8.13.1.2.5.2.

  2. The signature lines are at the end of the agreement or, where there are attachments, at the end of the main body of the agreement. See IRM 8.13.1.2.16. The signatures should not be on a page by themselves.

    1. In a specific matter closing agreement, the signature page should contain at least some portion of the last determination clause.

    2. Attachments and pages other than the signature page should not be signed and ordinarily need not be initialed but there is no objection to the initialing of such pages by the taxpayer. Erasures and alternations are discussed later in this section. See IRM 8.13.1.2.17. Also, signatures of receiving and reviewing officers are discussed later. See IRM 8.13.1.2.14 and IRM 8.13.1.5.2.

    3. The signature of a corporate officer on behalf of a corporation should be preceded by the name of the corporation and followed by the officer’s title.

    4. Signatures of trustees and executors should, similarly, reflect the name of the taxpayer, the signature and fiduciary capacity of the signer. Information on joint returns is discussed later in this section. See IRM 8.13.1.2.17.2.

8.13.1.2.5.1  (11-09-2007)
Consolidated Returns

  1. Treas. Reg. 1.1502-77 provides, in general, that the common parent may act as agent for other members of the affiliated group. The common parent, signing for the members, should state that it is signing as agent for the group. See IRM 8.13.1.2.4.1.

    Note:

    The alternative agent provision of Treas. Reg. 1.1502-77A is not applicable to determining who is the proper party to sign a closing agreement for a consolidated group. Please contact Counsel if there is any question concerning the proper party to sign the closing agreement.

  2. Information pertaining to a closing agreement that relates to a TEFRA partnership when the partner was a subsidiary of a consolidated group is discussed below. See IRM 8.13.1.2.6.

8.13.1.2.5.2  (11-09-2007)
Power of Attorney Holder

  1. General instructions with respect to powers of attorney are contained in the Statement of Procedural Rules, at 26 CFR 601.501 to 509 inclusive. A power of attorney is required when a taxpayer wishes to authorize a representative to execute a closing agreement on behalf of the taxpayer (see 26 CFR 601.504(a)(4)). Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose.

    1. A representative acting under the authority of a valid Form 2848 may execute a closing agreement on behalf of the taxpayer with respect to the taxable periods listed on the Form 2848, assuming the taxpayer has not eliminated the representative’s authority to sign closing agreements by specific deletion of that authority in paragraph 5 of Part 1 of the Form 2848.

    2. If the closing agreement is signed by a power of attorney holder and Form 2848 is not used, the power should be examined to make sure it properly authorizes the signing of the agreement.

    3. If a closing agreement purports to bind the taxpayer beyond those stated in the power of attorney, then the taxpayer’s’ signature is required on the agreement.

    4. If counsel of record in a case being litigated wishes to sign a closing agreement for the litigant, counsel must submit a power of attorney authorizing him or her to do so.

    5. If a closing agreement is signed pursuant to a power of attorney a copy of the power should be attached to all copies of the agreement.

  2. The following illustrates an acceptable form of signature by a power of attorney holder:

    Example:

    The Blank Corporation
    By (signature of attorney or agent) Attorney (Agent)

  3. On occasion the signature on a closing agreement may not be legible as the name shown on the power of attorney. One solution is to request that the signer’s name be typed (or printed or stamped) in by the signer just below the signature.

8.13.1.2.5.3  (11-09-2007)
Decedents and Their Estates

  1. A closing agreement for a decedent or an estate should be executed by an executor or administrator, if one has been appointed and is acting and responsible for disposition of the matter. An attested copy of the letters testamentary or the order of the court vesting such person with authority to so act, and a recent certificate to the effect that such authority remains in full force and effect, should be submitted with the agreement.

  2. In the event that a trustee under a will (or a trustee of a lifetime trust that becomes irrevocable on the decedent’s death) is acting with respect to the matter agreed upon, the agreement should be executed by the trustee. If both the executor and the trustee are functioning and the matter affects both, the agreement should be signed by both. The file should include appropriate evidence of the authority of the trustee to act (ordinarily including Form 56, Notice Concerning Fiduciary Relationship).

  3. If no executor, administrator, or trustee under a will is currently responsible for disposition of the matter, and the estate has been distributed to the residuary legatees, then the agreement should be executed by the residuary legatees. Where feasible under the circumstances, the file should contain a statement from a court of competent jurisdiction certifying that no executor, administrator, or trustee under a will is acting or responsible for disposition of the matter, naming the residuary legatees, and indicating the proper share to which each is entitled. Alternatively, copies of court orders containing such information may suffice. In the event that a decedent died intestate and the administrator has been discharged and is not responsible for disposition of the matter, or none was ever appointed, the agreement must be executed by the distributees. Where applicable, the file should include evidence of the discharge of the administrator (if one had been appointed). It should also include statements made under the penalties of perjury concerning the relationship of the deceased signatories to the agreement and the right of each of them to the respective shares claimed under the applicable law.

  4. If appointment of a fiduciary is imminent, it may be preferable to defer execution of the agreement until the appointment is made.

  5. Where there is more than one executor or administrator, all should sign the closing agreement unless it is shown that less than all have the authority to act. In the latter event, the Revenue Agent's Report (RAR) or Appeals Case Memorandum (ACM) should explain the matter and the file should contain appropriate supporting evidence.

8.13.1.2.5.4  (11-09-2007)
Trusts

  1. A closing agreement in which a trust is a party should be signed by the trustee or trustees. In cases where more than one trustee has been appointed, all should sign the agreement unless it is shown that less than all have authority to act. In the later event, the report or appeals case memorandum should explain the matter. The file should contain adequate documentary evidence of the authority of the trustees to act (ordinarily including Form 56 , Notice Concerning Fiduciary Relationship). Such evidence may be either a copy of the trust instrument (possibly a will), properly certified, or a certified copy of extracts from the trust instrument (or will) showing:

    1. Date of instrument,

    2. That it is or is not of record in any court,

    3. The beneficiaries,

    4. The appointment of the trustee, the authority granted, and such other information as may be necessary to show that such authority extends to Federal tax matters, and

    5. That the trust has not been terminated, and that the trustee appointed therein is still acting.

  2. In the event that the trustee appointed in the original trust instrument is no longer acting and has been replaced by another trustee, adequate documentary evidence of the appointment of the new trustee should be submitted.

8.13.1.2.5.5  (11-09-2007)
Dissolved Corporations

  1. If a liquidating trustee is appointed, or if a trustee or other fiduciary derives authority over the corporation under a state statute, the agreement should be signed by the trustee. If there is more than one trustee, all must sign unless it is established that less than all have authority to act in the matter. The file should contain a copy of the instrument under which the trustee derives the authority to act, properly authenticated, and evidence that such authority remains in full force and effect (ordinarily submitted with Form 56).

  2. If a trustee’s authority is based on a state statute, the trustee should submit a statement indicating the pertinent statutory authority, as well as a statement made under the penalties of perjury that (1) the facts required by statute as a condition precedent to the vesting of the authority in the trustee have been met and (2) the trustee’s authority has not been terminated. Any court orders concerning the trustee’s authority to enter into the agreement must be submitted.

  3. If it involves an involuntary dissolution prior to the appointment of a trustee, the agreement must be signed by shareholders representing a majority of voting stock of the corporation at the date of dissolution or at a prior date when substantially all the distributions in liquidation were made. The RAR or ACM should show the total number of outstanding shares of voting stock at the date of dissolution and should contain an indication of why it is believed that no trustee exists. The file should reflect the amount of any distributions to the principal stockholders.

  4. If a corporation executes a closing agreement prior to dissolution, the agreement may be valid under state law despite the fact that the Commissioner signed and approved the agreement after the dissolution. See, e.g., Parish & Bingham Corp. vs. United States, 44 F2d. 993 (Ct.CI. 1930).

8.13.1.2.5.6  (11-09-2007)
Partnerships

  1. This discussion pertains to all non-TEFRA partnerships. Closing agreements for TEFRA partnerships are discussed in a subsequent section. See IRM 8.13.1.2.6. Closing agreements for Electing Large Partnerships as defined in IRC 775 are discussed later in this section. See IRM 8.13.1.2.6.2.

  2. Closing agreements relating to non-TEFRA partnerships should be entered into only with the individual partners and not the partnership. This is because a closing agreement with the partnership will not be binding on the partners.

    Note:

    A closing agreement with a non-TEFRA partnership may be sought to encourage the partnership to the subsequent year returns in a specified manner. The agreement will not bind the individual partners. Separate closing agreements should be sought from each partner.

  3. If a separate determination is to be made concerning one of the partners’ individual tax matters, a separate closing agreement should be entered into with that partner.

  4. A closing agreement with a dissolved partnership should be signed by each of the former partners.

    1. If any of the partners are deceased, their legal representatives should sign. See IRM 8.13.1.2.5.3.

    2. If, however, under the laws of a particular state, surviving partners at the time of the execution of the agreement have the exclusive right to the control and possession of the firm’s assets for the purpose of winding up its affairs, their signatures alone may be sufficient.

    3. If only the surviving partners sign the agreement, the file should contain a citation to and extract from the pertinent provisions of the state law under which they claim authority exclusive of the legal representatives of any deceased partners.

8.13.1.2.6  (10-01-2012)
TEFRA Partnerships

  1. This discussion pertains to TEFRA partnerships. Closing agreements entered with respect to non-TEFRA partnerships are discussed in the previous section. See IRM 8.13.1.2.5.6. Closing agreements entered with respect to Electing Large Partnerships are discussed below. See IRM 8.13.1.2.6.2.

  2. A closing agreement for a partner of a TEFRA partnership is made under the authority of IRC 6224(c) and IRC 7121. Both sections should be cited in the initial paragraph of the closing agreement. An appropriate opening paragraph for an agreement made with a partner in a TEFRA partnership follows:

    Example:

    "Under Sections 6224(c) and 7121 of the Internal Revenue Code of 1986, (Taxpayer’s name, address, and social security number) ("the taxpayers" ) and the Commissioner of Internal Revenue make the following closing agreement.... "

  3. Agreements to partnership items are generally made as settlement agreements on Form 870-P, Form 870-P(AD), Form 870-L, Form 870-L(AD), Form 870-PT, Form 870-PT(AD) , Form 870-LT, and Form 870-LT(AD). IRC 6224(c)(1) provides that the IRS and the partner are bound by the settlement agreement, in the absence of fraud, malfeasance, or misrepresentation of fact. Because of the binding nature of the settlement agreement, closing agreements will not provide greater certainty than the partnership settlement agreement forms. Closing agreements in TEFRA partnerships should be used only in unusual circumstances.

  4. A closing agreement with a partner in a TEFRA partnership constitutes a settlement agreement under IRC 6224(c).

    1. A settlement agreement may be made for all partnership items or only for selected issues. If the agreement only addresses selected issues, it is a partial agreement. The phrase "Partial Agreement" should be typed in bold at the top of each page. Appropriate language to be included in the determination section is discussed in (7) below.

    2. Except for partial agreements, the Service will have one year from the date the agreement is countersigned to make any resultant assessments. See IRC 6229(f)(1). For partial agreements, the one year statute does not apply, and the statute of limitation is calculated as if the partial agreement had not been entered into. See IRC 6229(f)(2). The closing agreement should be processed in the same manner as the TEFRA agreement forms. This includes sending copies of the closing agreements to the Campus TEFRA Function (if the case was linked on the partnership Control System) in accordance with IRM 4.31.2.6.6.2, Conversion to Nonpartnership Items by Execution of Form 906 Closing Agreement, and IRM 8.19.5.11, Appeals Office Receipts. The closing agreement will act as a settlement under IRC 6224(c) for all years covered by the agreement, even if the partnership return for the year in question has not been examined.

    3. The consistent settlement rules of IRC 6224(c)(2) apply to closing agreements. The terms of the closing agreement must be offered to any other partner who so requests. The time and manner of the request is described in section 301.6224(c)-3T(c) of the Regulations on Procedure and Administration. See also Greenberg Brothers Partnership #4 v. Commissioner, 111 T. C. 198 (1998).

    4. Tax Court Rule 248(b) governs the actions to be taken if all participating partners enter into a settlement agreement in a docketed case or do not object to entry of decision. Tax Court Rule 248(c) governs the actions to be taken if one or more partners make a settlement agreement in a docketed case, but at least one participating partner remains as a party to the action.

    5. A closing agreement with terms affecting subsequent years is an effective settlement agreement pursuant to IRC 6231(b)(1)(C) and removes that partner and those partnership items immediately from the TEFRA partnership provisions, even before the future year commences. If a closing agreement makes reference to the reporting of any item in a subsequent year, the agreement should be considered to be a partial agreement. The phrase "Partial Agreement" should be typed in bold at the top of each page of the closing agreement. Appropriate language to be included in the determination section is discussed in (7)(e) below.

  5. A closing agreement entered into with respect to a TEFRA partnership should identify both the partner and the partnership by name, address, and taxpayer identification number (with the partner as the party to the agreement and the partnership identified in one of the introductory clauses).

  6. The closing agreement should be signed by the partner.

    1. Under IRC 6231(a)(2), the term partner means a partner in the partnership and any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership. Therefore if a partner files a joint return, both husband and wife must sign the closing agreement.

    2. If a partnership has more than 100 partners, all partners with less than a one percent profits interest in the partnership are considered non-notice partners. IRC 6223(b). A group of non-notice partners may form a notice group if the group owns five percent or more interest in the profits of the partnership and files a notice with the IRS in accordance with section 301.6223(b)-1T of the Regulations on Procedure and Administration. The Tax Matters Partner (TMP) may sign a closing agreement for partnership items that binds non-notice partners who are not members of a notice group and who have not otherwise elected not to be bound by any TMP settlement. In order to be effective, the agreement must expressly state that the TMP agrees to bind them. IRC 6224(c)(3). For example, the closing agreement may say, "The agreement is made by the Tax Matters Partner and binds all other partners to the terms of the agreement for whom the Tax Matters Partner may act under IRC 6224(c)." The TMP cannot enter into any agreement to bind non-notice partners for affected items other than partnership-level determinations of penalties for partnership tax years ending after August 5, 1997.

    3. If the partner is a subsidiary corporation that files a consolidated return with its parent, and the subsidiary is not the TMP, the closing agreement should include the name and TIN for both the parent and subsidiary (with the parent as the party to the agreement and the subsidiary identified in one of the introductory clauses). The parent should sign the agreement as "Parent Company" on behalf of" Subsidiary Company" . See IRM 8.13.1.2.5.1. The signature block would appears as follows:
      [Name of Common Parent corporation] by [name of authorized representative title], on behalf of [name of Subsidiary corporation], Partner of [name of TEFRA entity].

      For consolidated return taxable years beginning on or after June 28, 2002, however, the closing agreement should include the name and TIN of the subsidiary (as the party to the agreement), and the subsidiary partner must sign the closing agreement. Treas. Reg. 1.1502-77(a)(6)(iii). The signature block would appear as follows:
      [Name of Subsidiary corporation], by [name of authorized representative, title], Partner of [name of TEFRA entity].
      The parent should also sign, as only the parent can bind the other members of the group.
      The signature block would appear as follows:
      [Name of Parent corporation], by [name of authorized representative, title], on behalf of each of its subsidiaries, including [subsidiary company], Partner of [name of TEFRA entity].

    4. If the partner is a subsidiary corporation that files a consolidated return with its parent, and the subsidiary is the TMP, the closing agreement should include the name and TIN for both the parent and subsidiary (with the parent as the party to the agreement and the subsidiary identified in one of the introductory clauses). The parent should sign the agreement as "Parent Company" on behalf of "Subsidiary Company" . The signature block would appear as follows:
      [Name of Common Parent corporation] by [name of authorized representative, title], on behalf of [name of Subsidiary corporation], Partner of [name of TEFRA entity]

      If the agreement is also intended to bind the non-notice partners, the subsidiary should also be a party to the agreement and the agreement should also be signed by the subsidiary. The signature block for the subsidiary would appear as follows:
      [Name of Subsidiary corporation], by [name of authorized representative, title], Partner of [name of TEFRA entity].

      For consolidated return years beginning on or after June 28, 2002, however, the closing agreement should include the name and TIN for the subsidiary (as the party to the agreement) and only the subsidiary’s signature is required. The parent should also sign, as only the parent can bind the other member's of the group. The signature block would appear as follows:
      [Name of Subsidiary corporation], by [name of authorized representative, title], Partner of [name of TEFRA entity].
      The parent should also sign, as only the parent can bind the other members of the group.
      The signature block would appear as follows:
      [Name of Parent corporation], by [name of authorized representative, title], on behalf of each of its subsidiaries, including [subsidiary company], Partner of [name of TEFRA entity].

    5. A partnership, estate, trust, S corporation, nominee, or other similar person that holds an interest in the partnership is considered a pass-through partner. A person holding an interest in a partnership through one or more pass-through partners is considered an indirect partner. An unidentified indirect partner is one who has not identified himself to the IRS in accordance with the rules of IRC 6223(c)(3) and section 301.6223(c)-1T of the Regulations on Procedure and Administration. If a pass-through partner enters into a closing agreement with respect to partnership items, that agreement binds all unidentified indirect partners holding an interest in that partnership through the pass-through partner. The pass-through partner cannot enter into any agreement to bind indirect partners for affected items other than the partnership-level determination of penalties for partnership tax years ending after August 5, 1997.

  7. The determination section of the closing agreement must include two waiver language paragraphs.

    1. For partnership tax years ending before August 6, 1997, if the agreement is not a partial agreement and relates solely to partnership items, use this language:

      "The undersigned taxpayers, in accordance with IRC 6224(b) and IRC 6213(d), offer to waive the restrictions provided in IRCs 6225(a) and 6213(a) and consent to the assessment and collection of any deficiency attributable to partnership and affected items (plus any interest as provided by law)."


      "This agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. The one-year extension of the IRC 6501 period of limitations on assessment pursuant to IRC 6229(f) will not begin to run until the Commissioner’s representative signs this settlement agreement on the Commissioner’s behalf."

    2. For partnership tax years ending before August 6, 1997, if the agreement is not a partial agreement and relates to both partnership and affected items, use this language:

      "The undersigned taxpayers, in accordance with IRCs 6224(b) and 6213(d), offer to waive the restrictions provided in IRCs 6225(a) and 6213(a) and consent to the assessment and collection of any deficiency attributable to partnership and affected items (plus any interest provided by law)."


      "This agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. The one-year extension of the IRC 6501 period of limitations on assessment pursuant to IRC 6229(f) will not begin to run until the Commissioner’s representative signs the settlement agreement on the Commissioner’s behalf."

    3. For partnership tax years ending after August 5, 1997, if the agreement is not a partial agreement and relates solely to partnership items with or without partnership level determinations as to penalties, use this language:

      "The undersigned taxpayers, in accordance with IRCs 6224(b) and 6213(d), offer to waive the restrictions provided in IRCs 6225(a) and 6213(a) and consent, to the assessment and collection of any deficiency attributable to partnership items partnership level determinations as to penalties and additions to tax, and additional amounts that relate to adjustments to partnership items (plus any interest provided by law)."


      "This agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. The one-year extension of the IRC 6501 period of limitations on assessment pursuant to IRC 6229(f) will not begin to run until the Commissioner’s representative signs this settlement agreement on the Commissioner’s behalf."

    4. For partnership tax years ending after August 5, 1997, if the agreement is not a partial agreement and relates to both partnership items with or without partnership-level determinations as to penalties and other affected items, use this language:

      "The undersigned taxpayers, in accordance with IRCs 6224(b) and 6213(d), offer to waive the restrictions provided IRCs 6225(a) and 6213(a) and consent to the assessment and collection of any deficiency attributable to partnership items, partner level determinations and, penalties and additions to tax that relate to adjustments to partnership items (plus interest provided by law)."

      "This agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. The one-year extension of the IRC 6501 period of limitations on assessment pursuant to IRC 6229(f) will not begin to run until the Commissioner’s representative signs this settlement agreement on the Commissioner’s behalf."

    5. In the case of a partial agreement, the second of the two waiver paragraphs should be changed to the following:

      "This partial agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. It does not settle all of the partnership items. The remaining unsettled partnership items as well as any unsettled penalty, additions to tax, or additional amount that related to an adjustment to a partnership item will remain subject determination under the partnership-level administrative and judicial procedures. The period of limitations for assessing any tax attributable to the settled items shall be determined as if this agreement had not been entered into."

8.13.1.2.6.1  (11-09-2007)
Investors in TEFRA Partnerships

  1. If non-TEFRA issues are being settled and the taxpayer is an investor in an open TEFRA partnership proceeding, the waiver (Form 870 or Form 870-AD) and the closing agreement (Form 866 or Form 906) should include language to the effect that any change to the deficiency caused by the resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. See IRM Exhibit 8.19.4-27 for approved language.

8.13.1.2.6.2  (11-09-2007)
Electing Large Partnerships

  1. Because of the unique nature of the entity and the lack of regulations, contact the Associate Area Counsel for guidance in the construction of a closing agreement for Electing Large Partnerships.

8.13.1.2.6.3  (11-09-2007)
Non-TEFRA Subchapter S Corporations

  1. As a part of the Small Business Job Protection Act, Public Law 104-188, enacted August 20, 1996, the TEFRA provisions applicable to S corporations were repealed. This is effective for all S corporations with taxable years beginning after December 31, 1996. (In general, S corporations with a return due date on or after January 30, 1987, with more than 5 shareholders were subject to TEFRA procedures prior to the repeal.)

  2. Closing agreements relating to S corporations should be entered into only with the individual shareholders and not the S corporation. This is because a closing agreement with the S corporation will not bind the shareholders.

    Note:

    A closing agreement with a non-TEFRA S Corporation may be sought to encourage the S corporation to file subsequent year returns in a specified manner. This agreement will not bind the individual shareholders, so separate closing agreements should be sought from each shareholder.

  3. Dissolved corporations are discussed above. See IRM 8.13.1.2.5.5.

8.13.1.2.6.4  (11-09-2007)
TEFRA Subchapter S Corporations

  1. This section applies only to certain S corporations with taxable years beginning before January 1, 1997.

  2. If the S corporation being considered falls under TEFRA procedures, then a closing agreement constitutes a settlement agreement under IRC 6224(c) that is made applicable by former IRC 6244.

  3. A closing agreement entered into with respect to a TEFRA S corporation should be identify both the shareholder and the S corporation by name, address, and taxpayer identification number (with the shareholder as the party to the agreement and the S corporation identified in one of the introductory clauses). An agreement should be signed by each shareholder that is to be bound since all shareholders are "notice" shareholders under former IRC 6343.

  4. The procedures in this section are generally applicable to TEFRA S corporations. Settlement agreements as to S corporation items, however, are made on Form 870-S or Form 870-S(AD) .

8.13.1.2.7  (10-01-2012)
Limited Liability Companies

  1. A limited liability company (LLC) is a legal entity created under state law or under the laws of another country. The entity is separate from its owners. It owns property, incurs debts, enters into contracts, and can sue or can be sued. Owners are called members. Members are shielded from the entity’s liabilities. All 50 states and the District of Columbia allow the formation of LLCs. Some states allow an LLC to be owned by only one person (single member LLCs).

  2. LLCs will file tax returns based under their classification under Treas. Reg. 301.7701-1, Treas. Reg. 301.7701-2, and Treas. Reg. 301.7701-3. For tax purposes, the LLC may be classified as a partnership, a corporation, or a disregarded entity.

  3. An LLC which is classified as a partnership is subject to the TEFRA partnership rules and the exception for small partnerships. Also see the following:

    • Non-TEFRA partnerships. See IRM 8.13.1.2.5.6.

    • Electing Large Partnerships. See IRM 8.13.1.2.6.2.

    • TEFRA partnerships. See IRM 8.13.1.2.6

  4. An LLC which is classified as a corporation can make an election under Subchapter S, if it otherwise meets the criteria for making the election.

  5. A disregarded entity is a single member LLC which has not elected to be classified as a corporation. It is called a disregarded entity because the owner reports the activity of the LLC as if the entity did not exist.

    1. If the single member is a corporation, LLC transactions are recorded as if they were a branch or division of the owner.

    2. If the single member is a natural person, LLC transactions are recorded on the owner’s Form 1040. For example, business activity of the LLC is reported on Schedule C and the LLC rental income and expenses are reported on Schedule E.

    3. If the single member is a trust, LLC transactions are recorded on the Trust’s tax return.

  6. The WHEREAS section of the closing agreement should state the LLC’s tax classification.

    Example:

    "WHEREAS, ABC LLC is a limited liability company that is classified as a partnership" , or "WHEREAS, DEF LLC is a limited liability company that is classified as a disregarded entity."

  7. If the LLC is a disregarded entity, both the name and identification number of the LLC and the name and identification number of the owner should be shown as the taxpayer.

  8. If an agreement is made with a member of an LLC that is classified as a partnership, the WHEREAS section of the closing agreement should so state.

    Example:

    " WHEREAS, (Taxpayer Name), is a member of ABC LLC, that is classified as a partnership."

8.13.1.2.8  (11-09-2007)
Insolvent Taxpayers

  1. The file should contain a certificate from the court having jurisdiction over the insolvent taxpayer showing the appointment and qualifications of the trustee or receiver, and that such authority has not been terminated. In a case pending before a district court of the United States, an authenticated copy of the order approving the bond of the trustee or receiver may meet this requirement.

    1. If a court has appointed an attorney to act for a trustee or receiver, a copy of the court order should be secured.

    2. If no attorney has been appointed, the trustee or receiver should execute the agreement and the aforementioned evidence should be secured showing the appointment of the trustee or receiver.

  2. Where agreements are entered into in bankruptcy cases, extreme care should be taken to ascertain that the person executing the agreement has the specific authority to do so. Evidence of authority under these circumstances includes court authorization to enter into the agreement, or court approval of the proposed agreement. Care should also be taken to ensure that a closing agreement entered into in a bankruptcy case covers the correct taxable periods for the proper taxable entities. See IRC 1398.

8.13.1.2.9  (11-09-2007)
Guardians and Other Fiduciaries Appointed By Court of Record

  1. The agreement should be executed by the fiduciary in the name of, and on behalf of, the person or entity with respect to whom he/she stands in a fiduciary relationship. The file should contain a copy of the court certificate or court order showing that such fiduciary has been appointed and that the appointment has not been terminated, as well as the notice required by IRC 6903 (usually Form 56, Notice Concerning Fiduciary Relationship).

8.13.1.2.9.1  (11-09-2007)
Minors

  1. There is no general Federal statute dealing with the legal competency of minors. The Code does not define a minor or suggest any reference for the determination of legal competency or capacity to execute documents. Generally, closing agreements with minors should be signed for them by the legal guardian of their property.

  2. In states where the parent is not the guardian of the minor’s property, it will be necessary to secure an appointment of a guardian before a closing agreement with the minor can be entered into. Ordinarily, the law of the domicile of the minor should be referred to. If necessary, a legal opinion can be requested from the Associate Area Counsel.

8.13.1.2.10  (11-09-2007)
Effect of Bylaws

  1. It is not necessary that receiving officers inquire into corporate charters (or equivalent) and bylaws to determine matters with respect to signing authority. For example, the bylaws may require that two officers sign documents equivalent to closing agreements, such as contracts. Treas. Reg. 1.6062-1(c) provides "An individual’s signature on a return, statement, or other document made by or for a corporation shall be prima facie evidence that such individual is authorized to sign such return, statement or other document." However, prima facie evidence is rebuttable.

  2. If the receiving officer is on notice that the agreement has not been signed in accordance with the charter or bylaws (ordinarily such authority would be covered in the bylaws), the receiving should bring this matter to the attention of the taxpayer or the representative and request compliance with the requirements of the corporation.

  3. Unless unusual circumstances indicate that the signature is not authentic, the receiving officer will generally rely on the provisions of IRC 6064 that, "The fact that an individual’s name is signed to a return, statement or other document shall be prima facie evidence for all purposes that the return, statement or other document was actually signed by him."

8.13.1.2.11  (11-09-2007)
Effect of State Law/Corporate Seals

  1. Receiving officers need not concern themselves with the provisions of state laws as to the signing of documents and the imprinting of corporate seals thereon. Instead, reliance will generally be placed on the provisions of IRC 6061, IRC 6062 , IRC 6064, IRC 6065 and the regulations thereunder. Information pertaining to minors was previously covered. See IRM 8.13.1.2.9.1. The corporate seal is not required on closing agreements.

8.13.1.2.12  (11-09-2007)
Multiple Party Agreements

  1. Where the number of taxpayer parties to the agreement (perhaps coupled with geographic location problems) make obtaining the signature of each party on all copies of the agreement impracticable or inconvenient, two alternative methods of signing are available.

    1. The parties may, by power of attorney, authorize one or a small number of individuals to sign the agreement on their behalf.

    2. Alternatively, each party or their respective representatives may separately sign three copies of the agreement. If this alternative is used, each agreement should contain the following statement immediately preceding the signature lines:

      "This agreement is being executed in multiple counterparts for ease of execution."

  2. The representative for multiple parties may agree to distribute all taxpayer copies or to make copies for distribution to the taxpayers. The number of required copies is discussed in a later section. See IRM 8.13.1.2.15.

  3. When entering into multiple party closing agreements, care should be taken to ensure that no unauthorized disclosures of taxpayer information are made. See IRC 6103. If disclosure of taxpayer information between the parties is not expressly authorized by IRC 6103, then written authorization to disclose such information should be secured from the appropriate party or parties. If written authorization cannot be obtained, separate closing agreements should be entered into with each taxpayer.

8.13.1.2.13  (11-09-2007)
Execution for the Commissioner

  1. A Service official executing a closing agreement pursuant to authority delegated by the Commissioner of Internal Revenue should sign following the words "Commissioner of Internal Revenue" and show (by writing, printing, typing, or stamping) the signer’s title and the date signed.

  2. Individuals designated in writing to act in the capacity of such authorized officials may sign closing agreements in their own names.

8.13.1.2.14  (11-09-2007)
Receiving and Reviewing Officers' Recommendations

  1. The reverse side of each copy of the closing agreement retained by the Service should reflect the dated signatures of the receiving and reviewing officers, who are recommending the agreement for acceptance and approval. (The receiving and reviewing officers may sign the reverse side of one agreement and make copies to attach to the other retained agreements.) Where the forms are not used, the recommendation should be reflected in the same manner as shown on the form.

  2. If the receiving officer has neglected to sign and is no longer available, the supervisor or another officer familiar with the case should sign the agreement. The same official should not sign as receiving officer and reviewing officer. Similarly, the same official should not sign as the reviewing officer and execute the agreement for the Commissioner. Operating Division field personnel should consult local procedures.

  3. For agreements received by Counsel, the initiating attorney should sign as the receiving officer. A Counsel manager should initial the reviewing officer block before forwarding the agreement to Appeals or the local Compliance office for review and acceptance.

8.13.1.2.15  (11-09-2007)
Number of Copies — One Taxpayer or Joint Return Agreements

  1. When only one taxpayer (or a husband and wife filing a joint return) is a party to a closing agreement, three original copies of the agreement will ordinarily be prepared and executed. In the joint return situation, the taxpayers may request that each spouse be furnished an executed original or a copy of the agreement. This request should be complied with. Information pertaining to the additional copies needed for follow-up purposes is discussed later. See IRM 8.13.1.4.5.

  2. Closing agreements may be prepared using Form 866 or Form 906 or may be computer generated. Regardless of how the closing agreement is prepared, once it is finalized, three copies of the closing agreement should be prepared for execution by both the taxpayer and the approving official. Where multiple parties are involved, additional executed copies may be necessary if all parties desire copies bearing original signatures. In any event, two additional copies of the agreement will be required for each additional party. One of the additional copies will be furnished to the additional party (or representative), and the other will be attached to the additional party’s return. See IRM 8.13.1.2.17.2. This subsection covers joint returns. Alternative methods of executing closing agreements where the execution of numerous copies by all parties becomes impracticable or inconvenient are previously covered in Multiple Party Agreements. See IRM 8.13.1.2.12. If desired, copies may be certified under IRC 7622. Distribute executed copies of the closing agreement in accordance with the instructions in the subsequent subsection. See IRM 8.13.1.5.2.3.

8.13.1.2.16  (11-09-2007)
Attachments to Agreements

  1. Where feasible, the matters determined in a closing agreement should be contained in the body of an agreement, rather than in an attachment. Attachments may cause problems if they become unattached, or if inadvertent substitutions are made, or if they conflict with, or render ambiguous, the determinations recited in the body of the agreement. Attachments are advantageous for reflecting voluminous data, generally as part of the premises underlying the determinations.

  2. When used, attachments should be clearly identified in the appropriate portion of the agreement. The top of each page of the attachment should include a statement that it is an attachment to a closing agreement with the name of the taxpayer. For example, where the pages of the attachment are already numbered, each page of the attachment may be labeled "Attachment A of Closing Agreement With XYZ Corporation, Page 2 of 4," etc. Where there are several parties to the agreement, the name of the first named party in the agreement plus "et al" may be used to identify pages of the attachment.

8.13.1.2.17  (11-09-2007)
Erasures and Alterations

  1. Significant matters should be set forth in the closing agreement in original print. Avoid typing over an erasure or correction tape or liquid. Also, avoid pen and ink changes to significant matters. If a pen and ink change is made with respect to a nonmaterial aspect of an agreement, prior to execution, the change should be initialed and dated by all parties to the agreement.

  2. After receipt of a signed closing agreement from a taxpayer, and before the agreement is signed for the Commissioner, Service personnel should not make any changes or additions to the agreement above the signature lines, without obtaining the written agreement of the taxpayer. If a correction is necessary after the closing agreement has been executed by the taxpayer, the correction may be handwritten, and all parties to the agreement should initial and date the change. Service personnel may correct printed titles of Service officials, where appropriate, after the agreement has been executed by the taxpayer.

  3. Nonmaterial typographical errors need not be corrected, whether noticed before or after execution of the agreement.

  4. Any necessary date stamping or notations should be made on the reverse side of the agreement.

8.13.1.2.17.1  (11-09-2007)
Required Signatories

  1. All parties by or for whom the agreement is signed should be shown as parties at the beginning of the agreement. Conversely, the agreement should be signed by or for all persons (entities) identified as parties at the beginning of the agreement. An agreement cannot and should not purport to determine matters with respect to a person who is not a party to, nor a signatory of, the agreement. Such other persons may, of course, be bound by a separate agreement. See IRM 8.13.1.7.5. This covers information with respect to unidentifiable successors in interest.

  2. The receiving officer should consider whether it is necessary to secure a closing agreement from a related party in order to protect the Government’s interest. See IRM 8.13.1.2.5.1. This subsection provides an example where consolidated returns are involved.

8.13.1.2.17.2  (11-09-2007)
Joint Return

  1. An agreement as to liability with respect to a year for which a joint income tax return was filed must be signed by both spouses, if it is intended to bind both spouses.

    1. One spouse may sign as agent for the other, if a copy of a power of attorney or other document specifically authorizing the spouse to act in that capacity has been submitted. A copy of the power of attorney or other authorization should be attached to the agreement.

    2. An agreement may be entered into with one spouse for a joint return year, where appropriate. An agreement signed by one spouse (who is not authorized to act an as an agent for the other spouse) will not bind the non-signing spouse.

    Note:

    In community property states, when entering into a closing agreement with only one spouse, special care must be taken to ensure that the community aspects are properly resolved.

  2. Where a divorce has occurred, or one spouse has died, subsequent to the beginning of the first taxable period covered by the agreement, the identity of the parties to the agreement, and the return(s) that may be affected by the agreement, should be carefully determined. A discussion of the number of copies required was previously covered. See IRM 8.13.1.2.15.

8.13.1.2.17.3  (11-09-2007)
Conditions

  1. Conditions that would preclude a closing agreement from taking effect or remaining in effect should be avoided.

    Note:

    It is permissible to include a provision in the body of an agreement that sets forth the treatment of an item upon the occurrence of a future event, for example, the subsequent sale of a depreciable asset.

  2. Occasionally a taxpayer will submit a closing agreement with a letter stating that the submission of the agreement is conditioned upon some other action. Ordinarily the agreement should not be accepted unless a letter is received withdrawing the conditions. The condition that another closing agreement from a related taxpayer be accepted simultaneously would be an exception if the other agreement is submitted and concurrently determined to be acceptable. See IRM 8.13.1.3.10. This subsection covers information concerning the requirement of finality.

8.13.1.2.17.4  (11-09-2007)
Penalties and Additions to Tax — Preassessment

  1. If the agreement contains a determination of tax liability, the agreement should also show the liability for applicable penalties. The amount of each type of penalty for each taxable period should be shown on a separate line of the agreement. Exhibit 8.13.1-2. If the taxpayer requests that the agreement determine the inapplicability of certain specific penalties (perhaps because they were at issue during consideration of the case), the agreement may reflect the inapplicability of such penalties. Exhibit 8.13.1-2. The agreement should not contain a general statement that there are no penalties applicable to a given taxable period or applicable to a specified type of tax for a given taxable period.

  2. The additions to tax for nonpayment under IRC 6651 and bad checks under IRC 6657 should not be waived in advance if there is an unpaid liability. As a further precaution, the agreement should make it clear that the penalty shown is applicable to the particular type of tax shown. To illustrate, the negligence penalty (addition to tax) with respect to an income tax liability should not be shown in such manner as to preclude later assertion of a negligence penalty with respect to another type of tax liability. Exhibit 8.13.1-2. Ordinarily, Exhibit 8.13.1-2 should be used in preference to Exhibit E of Rev. Proc. 68-16, 1968-1, C.B. 770.

8.13.1.2.17.5  (11-09-2007)
Penalties and Additions to Tax — Postassessment

  1. Under the penalty appeal procedure detailed in IRM 8.11.1, Penalties Worked in Appeals, and IRM 20.1.1, Introduction and Penalty Relief, taxpayers are afforded postassessment appeals rights on penalties (including additions to tax and additional amounts) that have been asserted against them. While closing agreements are generally not necessary on postassessment penalty appeal cases, under some circumstances a closing agreement may be appropriate. For example it may be appropriate to enter into a closing agreement with a taxpayer who owes a large dollar penalty based on a tax liability subject to increase by deficiency proceedings.

  2. It is not necessary to enter into a closing agreement if the penalty is sustained in full or abated in full.

8.13.1.2.18  (11-09-2007)
Interest and Waivers

  1. Unless there is some issue with respect to interest liability, a closing agreement should not determine such liability or make any provision therefor. However, see information pertaining to barred years. See IRM 8.13.1.7.1. Interest legally due should not be waived in a closing agreement. Interest applicable to tax liabilities determined by a closing agreement must be assessed and collected pursuant to IRC 6201, IRC 6301 and Regulations 26 CFR section 301.7121-1(d)(2) of the Regulations on Procedure and Administration. The latter provides: "Collection, credit or refund. Any tax or deficiency in tax determined pursuant to a closing agreement shall be assessed and collected, and any overpayment determined pursuant thereto shall be credited or refunded, in accordance with the applicable provisions of law."

  2. Where a closing agreement as to tax liability is entered into, the provisions of IRC 6601(c), relating to the suspension of interest for a period beginning 30 days after a waiver of restrictions under IRC 6213(d) is received (or accepted where an Appeals waiver such as Form 870-AD, are not applicable unless such waiver:

    1. is received (or accepted where acceptance is necessary) before the closing agreement is approved; and

    2. is not conditioned upon execution of the closing agreement. See IRM 8.13.1.4.3 and IRM 8.13.1.5.2.1.

8.13.1.2.18.1  (11-09-2007)
Interest Abatement

  1. A closing agreement may be used to determine with finality the period of time, and the amount of tax, with respect to which interest should be abated.

8.13.1.2.19  (11-09-2007)
Transferee Cases

  1. Closing agreements determining transferee liability are ordinarily entered into as combined agreements. Exhibit 8.13.1-7. The combined agreement should set forth the amount of the transferee’s liability and make specific determinations as to the transferee’s status as a transferee and the extent of the transferee’s liability (e.g., the value of the property transferred to the transferee).

  2. A determination of transferee liability should be set forth in a separate closing agreement and not combined with determinations of the tax liability of the transferor or other tax liabilities of the transferee. In a closing agreement with a transferee, the recital of the name of the taxpayer entering into the agreement should indicate that the taxpayer is acting in the capacity of a transferee (e.g., John Doe, as Transferee of the Estate of Mary Roe). The applicable taxable period (or date of death, etc.) and type of tax (citing Code chapters and subchapter), penalty and interest of the transferor should be specified in the agreement, as well as the amount of transferee liability agreed to with respect to such transferor liability. See IRM 8.13.1.7.5. See this subsection for information on successors in interest.

  3. A closing agreement with a transferee should be signed in a manner equivalent to the following:

    Transferee Signature Block:
    John Doe (signature)  
    Transferee of Richard Roe  
    or  
    John Doe Corporation  
    Transferee of Richard Roe Corporation
    by: John Doe (signature)  
    President, John Doe Corporation

8.13.1.3  (11-09-2007)
Matters of Content

  1. IRC 7121 provides that closing agreements may not be reopened, or modified by any officer, employee, or agent of the United States in the absence of fraud, malfeasance or misrepresentation of a material fact. Closing Agreements cannot be annulled, modified, set aside, or disregarded in any suit, action, or proceeding unless any of these exceptions applies. See IRM 8.13.1.6.1. Because of the finality of these agreements, it is extremely important that they be carefully drafted.

  2. The instructions in this section are intended to cover the more frequently encountered problems concerning the content of closing agreements.

  3. Determinations should be stated so completely and clearly that only one interpretation is reasonable. Although backup material and testimony may be used to explain the intent of the agreement, the agreement itself must be the primary basis for future action. Every non-essential word used in an agreement is a potential source of ambiguity or internal inconsistency in the document. The agreement language should be as brief and concise as possible. Reference to specific Code sections should be made when applicable.

  4. All parties and years must be clearly identified, and all matters explained in sufficient detail to eliminate any ambiguity. Descriptive terms should use statutory language where available and specific code sections should be cited when they apply. The agreement should state the specific treatment (capital, ordinary, etc.) that an amount to be included in income will receive.

8.13.1.3.1  (11-09-2007)
Matters Not Properly Determinable

  1. Determinations should not attempt to settle matters for future years where correct tax treatment will depend on events occurring after the date of the agreement, such as the application of capital gains treatment to future sales of IRC 1231 assets (there may be a loss) or treatment of farm losses for future years (practice may change).

  2. Although closing agreements may reflect corrected taxable income and tax liability for specified taxable periods, interpretive difficulties can occur if a deficiency or over-assessment is determined. To prevent interpretation problems, a determination of a tax deficiency or over-assessment should be avoided in closing agreements.

8.13.1.3.2  (11-09-2007)
Cases in Litigation

  1. A closing agreement should not determine tax liability where this determination is in the jurisdiction of an appropriate court (unless authorized by court order), as in a bankruptcy case). Closing agreements determining specific matters arising in years being litigated affecting years not before the court may be appropriate. Such a closing agreement will not be executed by or for the Commissioner until an agreed decision is entered or a decision in a tried case becomes final. See IRM 8.13.1.1.1. Paragraphs (8) and (9) discuss that the agreement not be executed until certain events occur.

8.13.1.3.3  (11-09-2007)
Scope of Coverage — Recurring Matter

  1. If unknown future developments will not change the tax treatment of items arising from a completed transaction (recurring matters), the agreement should provide for this treatment (stating amounts where determined) in all applicable years. However, there are those overriding the agreement. See IRM 8.13.1.6.1.2.


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