8.13.1. Processing Closing Agreements in Appeals

(1) Closing agreements are used when it is advantageous to have a tax matter permanently and conclusively resolved.

(1) Closing agreements are written and used under the provisions of IRC section 7121.

(1) The Director of Case Operations and Support is the executive responsible for the Closing Agreement program.

(2) The Director of Policy is the program manager responsible for oversight of this program.

(3) The Examination Policy program analyst is responsible for the content and updates to this IRM section including the clearance process.

(1) The table provides commonly used acronyms and their definition.Acronyms

(1) A closing agreement is an agreement authorized under IRC 7121. A closing agreement contains some of the attributes of a contract, but it is not strictly subject to the law of contracts. For example, legal consideration is not required, and 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 given to a closing agreement by the terms of the statute.

(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." 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 is no requirement for a 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 IRM 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, "The 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.

(5) Closing agreements with taxable periods ended prior to the date of the agreement determine either total tax liability of the taxpayer for one or more types of tax for such periods or one or more separate items affecting such liability or both. Agreements also 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 according to Delegation Order 8-3, Closing Agreements Concerning Internal Revenue Tax Liability, as revised. 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. 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 IRC 547(c)(3), IRC 1313(a)(4) and related regulations for information as to other types of determinations for those cases. See IRM 8.7.1.2, Personal Holding Company Tax Alleviated by 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. Each 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.

(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. 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. 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. The stipulation should state that a closing agreement covering the related specific items will be executed by the Service when the stipulation of settled issues is accepted by the court. Basically, the stipulation of settled issues is a proposed settlement for the tax year before the court, but a court is not required to accept that settlement. Consequently, a closing agreement that is dependent on acceptance of the stipulation by the court cannot be executed until that acceptance occurs.

(10) Closing agreements may be shown 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.

(11) Treas. Reg. 301.7121-1(d)(2) provides that a deficiency or overpayment determined pursuant to a closing agreement shall be assessed, 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 8.13.1.3.18. See IRM 8.13.1.5.3.

(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.

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 8.6.1.6, 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. 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 8.11.1.2.6, 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 minimis amount of understated reported income for select information returns.

(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 are 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 that was used for estate tax purposes.

(3) Collateral agreements 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 collateral agreements are administrative devices not expressly provided for by the Code while closing agreements 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. For example, 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.

(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.

(1) 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. A closing agreement must not be entered into by an Appeals official where the case is docketed in the Tax Court and is still under the jurisdiction of the Appeals office, with respect to the docketed taxable period. However, an Appeals official may only enter into a closing agreement that is limited to "related specific items" affecting other non-docketed taxable periods. This type of 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 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 Deputy Commissioner, International) if that official has signing authority.

(2) If a closing agreement originating under the jurisdiction of a Compliance field or Appeals office affects a year where the 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.

(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. Treas. Reg. 301.7121-1 contains regulations pertaining to IRC 7121.

(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 8.13.1.7 and 8.13.1.8. Technical advice, technical information, or technical assistance may be requested to help resolve these problems. See IRM 8.13.1.5.7 and IRM 8.13.1.6.2.4.

(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.

(1) 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.

(2) 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.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

(7) 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.

(1) Final determinations of tax liability under IRC 7121 are shown 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 8.13.1.3.4.2

(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.

(3) If any matter in addition to tax liabilities is to be finally determined by the agreement, a combination agreement should be used.

(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.

(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.

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

(2) Closing agreements 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.

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

(1) Form 866 and Form 906 are not 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.

(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) IRM 8.13.1.7.1 discusses the use of combined agreements for barred years.

(1) This section provides instructions for proper format and language to use when preparing closing agreements.

(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 8.13.1.3.5.2.

(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. The signatures should not be on a page by themselves. If taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax, the IRS can accept by fax taxpayer closing agreements involving any amount of tax.

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. Also, signatures of receiving and reviewing officers are discussed later.

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.

(1) This discussion pertains to TEFRA partnerships. Closing agreements entered with respect to non-TEFRA partnerships are discussed in the previous section. See IRM 8.13.1.3.5.6 Closing agreements entered with respect to Electing Large Partnerships are discussed below.

(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:

(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 4.31.2.4.7.2, Conversion to Nonpartnership Items by Execution of Form 906 Closing Agreement, and IRM 8.19.11, Agreed TEFRA Partnership Cases. 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 requests this information. 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 8.13.1.3.5.1. 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 members 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 to 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."

(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 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 8.13.1.3.5.6.

• Electing Large Partnerships. See IRM 8.13.1.3.6.2.

• TEFRA partnerships. See IRM 8.13.1.3.6

(4) An LLC classified as a corporation can make an election under Sub-chapter 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.

(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.

(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) If 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.

(1) The agreement should be executed by the fiduciary in the name of, and on behalf of, the person or entity 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).

(1) Receiving officers do not need to 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 officer 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."

(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. Reliance will generally be placed on the provisions of IRC 6061, IRC 6062, IRC 6064, IRC 6065 and the regulations thereunder. The corporate seal is not required on closing agreements.

(1) If the number of taxpayer parties to the agreement is large, obtaining the signature of each party on all copies of the agreement could be 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 8.13.1.3.15.

(3) When entering into multiple party closing agreements, it is necessary 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.

(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.

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

(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 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. Information pertaining to the additional copies needed for follow-up purposes is discussed later. See IRM 8.13.1.5.5

(2) Closing agreements may be prepared using Form 866 or Form 906 which 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. 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 8.13.1.3.17.2 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 8.13.1.3.12 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 8.13.1.6.2.3.

(1) 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. If 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.

(1) Significant matters should be set forth in the closing agreement in original print. . 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 should 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.

(1) Unless there is some issue with respect to interest liability, a closing agreement should neither determine nor address interest liability or make any provision therefor. However, see information about barred years. See IRM 8.13.1.8.1. 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) 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 8.13.1.5.3 and IRM 8.13.1.6.2.1.

(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 8.13.1.8.5. 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:

(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.

(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. Paragraphs (8) and (9) discuss that the agreement not be executed until certain events occur.

(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 laws or rule of law exceptions in the Internal Revenue Code overriding the agreement. See IRM 8.13.1.7.1.2.

(1) In cases involving Joint Committee review, closing agreements should not be executed on behalf of the government until a report, in accordance with IRC 6405, has been submitted to the Joint Committee on Taxation (JCT) and the views of the JCT have been considered. See IRM 8.13.1.5.6.1

(1) The determination of a specific matter may have a direct or indirect impact on other years or related cases. This impact, particularly where another office may have jurisdiction, should be carefully considered. Coordination with other offices on related cases or years should be initiated at the earliest possible stage in the processing of closing agreements.

(2) The closing agreement portion of the report or Appeals Case Memorandum should describe the extent and result of such coordination. See IRM 8.13.1.5 and IRM 8.13.1.6.

(1) The agreement should not depend upon executory provisions, i.e., that the taxpayer agrees to do something. To avoid the difficulties that may occur if the taxpayer does not do what is promised, the agreement should state the tax treatment to be given the transaction or amount. Do not include a statement that "the taxpayer shall report" but rather use statements such as "such amount is includible in the taxpayer’s taxable income in the year of receipt."

(1) A closing agreement should provide adequate coverage for reasonably foreseeable developments. For example, an agreement signed by husband and wife determining taxable treatment of a specific matter as it impacts future years should be stated so as to avoid interpretive problems if there is a divorce or separate returns are filed for whatever reasons.

(2) It is preferable to determine the taxable consequences of an event that has not yet occurred by reference to the event rather than to the specific taxpayer (e.g., by stating that an item is includible in income in the year of receipt).

(3) It is not necessary or desirable to attempt to foresee all possible eventualities relating to the matter being settled. Many eventualities are better left to the general application of the Internal Revenue Code rather than providing for specific tax treatment in a closing agreement.

(1) If the agreement reclassifies a transaction or taxable entity (for example, corporate returns were filed but the business should be treated as a partnership), look for consequential changes which need to be covered. In this example, the agreement should specify appropriate treatment for pension plan contributions made after the effective date of the change in status and for benefits to be received pursuant to the plan by the "partners". The validity of various elections, the basis of "corporate" assets deemed owned by the "partners", and treatment of distributions received by the "partners" (e.g., passive versus active or the timing of particular tax effects on the "partner"), all should be determined.

(1) Inconsistencies between parties or years should be avoided or adequately justified. This requirement covers the language used and the conclusions reached. For example, a transfer of funds should not be referred to as a gift in one portion of the agreement but determined to be includible in taxable income in another. Payments in different years to the same entity or to different entities in the same taxable year should receive the same treatment. Where different treatment is justified by circumstances, it must be thoroughly explained in the transmittal letter, report, workpapers, or Appeals Case Memorandum.

(2) A closing agreement should not include matters of discussions, contentions, or other material unless needed for the determination. Any relevant additional information should be placed in the transmittal letter, report, workpapers, memorandum for reviewers or Appeals Case Memorandum.

(1) Closing agreements must not contain provisions which would retroactively rescind or cancel the agreement. A retroactive cancellation provision would violate the congressional intention that closing agreements dispose of matters with finality.

(2) Closing agreements may determine what the taxable treatment will be until a specified event occurs (or after it fails to occur within a specified period or by a specified date). See previous discussion when one agreement is contingent upon acceptance of another. See IRM 8.13.1.3.17.3

(3) A closing agreement should not include a promise or requirement to renegotiate the matter(s) resolved by the agreement. An agreement that certain taxable treatment will apply until renegotiated is not final, since it would permit modification of the established treatment at any time. See IRM 8.13.1.7. This is a general discussion of finality and possible methods for resolving interpretive problems in agreements.

(1) Examining officers and reviewers should have sufficient information to permit a reasonable justification for any recommendation concerning acceptance of a closing agreement, whether it is an agreement determining tax liability (or net income or net operating loss) (Form 866 or equivalent), or a specific matters closing agreement (Form 906).

1. If the taxpayer is under examination for the years in question, a "quality audit," as defined in IRM 4.8.3, Technical Services, Examination Quality Measurement Staff (EQMS), is required.

2. If the taxpayer is not under examination, an equivalent level of certainty should be reached by whatever means prove necessary.

(2) It is the responsibility of those preparing, receiving, and reviewing closing agreements to ensure that:

1. The agreements clearly express the intended disposition of the matters determined (finality of a closing agreement is meaningless if it has more than one reasonable interpretation. See IRM 8.13.1.4

2. The agreements are received and signed so as to become binding upon the parties after execution for the Commissioner. The agreement may be voided or otherwise ineffective if improperly signed or if qualifying conditions not stated in the agreement can be shown to have been known to the Service. See IRM 8.13.1.3

3. The matters determined are suitable for determination by closing agreement (should not fix tax treatment for future years which depend upon circumstances not yet present, and should not have indefinite future effect).

4. Their recommendations are based on adequate record (described in IRM 8.13.1.5.1 and IRM 8.13.1.5.4

(1) Preparation of the closing agreement will differ considerably among cases. The entire agreement may be prepared by the taxpayer or representative, or it may be entirely written by the examiner. In most situations, it is preferable that the parties collaborate in drafting the agreement. Where appropriate pattern agreements are available (see the exhibits) the draft should be based upon a pattern agreement that the Service has previously found to be acceptable, regardless of who prepares the draft. If one of the pattern agreements in Rev. Proc. 68-16, 1968-1, C.B. 770 is being used, the taxpayer should be aware of this fact. The pattern agreement should be carefully matched to the circumstances of the case before using it. Typically the pattern agreement must be modified to fit the case. Such modifications should be adequately discussed in the report. Lack of a closely matching pattern agreement does not preclude the use of a closing agreement in a particular situation. See IRM 8.13.1.3.4.3 This subsection covers stamping the agreements when submitted.

(2) Each Compliance Operating Division will designate reviewers responsible for closing agreements recommended for acceptance by the examiner. If the examiner needs assistance in preparing or processing a closing agreement, the designated reviewer should be contacted. To avoid having the taxpayer sign one or more revised agreements, the proposed agreement should be submitted to the reviewer for approval before securing the taxpayer’s signature, even where prepared by the taxpayer.

(3) When a closing agreement is forwarded for approval, it will be accompanied by affected tax returns, a completed RAR, if available, the workpapers, and any necessary additional documentary evidence to support the agreement. This will specifically include comment by specialist examiners e.g., international or engineering agents if applicable, and advisory opinions of Associate Area Counsel, if available.

(4) The examining officer (or team coordinator or team manager, as appropriate) must sign and date the reverse side of the Form 906, Closing Agreement on Final Determination Covering Specific Matters, in the space provided, as Receiving Officer. The reviewer, or if absent a designated alternate or the reviewer’s supervisor must also sign, as Reviewing Officer. Each copy of the closing agreement to be retained by the service should reflect these. However, only one original need be signed. Additional copies may be made and attached to the other retained forms. If computer generated or completely typed forms are used, a similar receiving and reviewing page must be included with each copy. The reviewer should also complete and attach to the file a checklist, for each agreement to assist in the review.

(5) After approval by the reviewer, three (3) copies of the final agreement with an original signature of the taxpayer will be provided for execution by or for the Compliance Operating Division official. An additional copy of the executed agreement will be forwarded by the reviewer to the appropriate location if needed for a follow-up file. See IRM 8.13.1.5.4. This covers when the examination is not completed at the time of execution of the closing agreement.

(6) Operating Division employees cooperate in securing closing agreements arising out of, and relating to, cases being litigated, when requested to do so by an appropriate office. When such an agreement affects years not being litigated, the Operating Division employee should prepare a memorandum detailing the effect of the agreement on those years. This memorandum, along with a copy of the proposed agreement, should be forwarded to the office that requested the agreement be secured. The final agreement must be signed by the appropriate officers on the reverse side of the form. A copy of the executed agreement should be returned to the requesting office.

(7) Where the agreement will not be executed by the local office, a memorandum will accompany the proposed closing agreement, when it is returned to the requesting office for their action.

(1) Liabilities determined by a Form 866 or combined agreement.

1. The liabilities determined in a Form 866 or combined agreement can be assessed without a separate waiver, as the closing agreement itself provides the necessary authority for making an assessment. See Marathon Oil Co. v. United States, 42 Fed. Cl. 267, 280 (1998), aff’d per curiam, 215 F.3d 1343 (Fed. Cir. 1999); Manko v. Commissioner, 126 T.C. No. 9, 12-13 (2006). Nevertheless, the Service ordinarily secures a Form 870 or another waiver of the restrictions on assessment and collection for taxable periods being determined by a Form 866 or a combined agreement if there is a deficiency or overassessment for those periods. If the Service receives (or accepts, in the case of certain waivers used by Appeals), an unrestricted waiver before the closing agreement is executed on behalf of the Commissioner, and if notice and demand for payment of any deficiency is not made within thirty days after the waiver becomes effective, a closing agreement should be processed to avoid the suspension of interest under § 6601(c) of the Code. Otherwise, interest cannot be imposed on the deficiency for the period beginning immediately after the thirtieth day and ending with the date of the notice and demand. IRC 6601(c). Interest cannot be imposed during this period on any interest with respect to the deficiency for any prior period. If the Service secures a waiver that will become effective when a closing agreement determining tax liability is executed on behalf of the Commissioner, the waiver has no effect on interest. See Rev. Rul. 57-305, 1957-2 C.B. 856. Form 3198, Special Handling Notice for Examination Case Processing (or equivalent form), should be used where the interest computation is affected by a closing agreement.

(2) Specific issues determined by a Form 906 or combined agreement.

1. Specific issues determined by a Form 906 or a combined agreement, other than specific issues related to TEFRA partnerships. An assessment cannot be based upon a specific issue determined by a Form 906 or a combined agreement, unless the restrictions on assessment under IRC 6213 do not apply. See Manko v. Commissioner, 126 T.C. 195 No. 9 (2006). These restrictions do not apply to any amount paid as a tax or in respect of a tax. IRC 6213(b)(4). The restrictions on assessment also do not apply if they are specifically waived. IRC 6213(d). A waiver can be effected in one of two ways: on a separate waiver form, such as Form 870, or as one of the determinations in the closing agreement. If a waiver is included in a Form 906 or combined agreement, it should be explicit (e.g., "By signing this agreement, taxpayer consents to the assessment and collection of the liabilities for tax, interest, additions to tax, and penalties determined by or resulting from the determinations of this agreement, waiving all defenses against and restrictions on the assessment and collection of those liabilities.") As with a waiver executed on a Form 870 or other similar form, interest must be suspended under IRC 6601(c) on a waiver executed as part of a Form 906 or as part of a combined agreement, if notice and demand for payment of the underlying deficiency is not made within 30 days after the closing agreement is executed on behalf of the Commissioner.

2. Specific matters related to TEFRA partnerships -
   Forms 870-LT, 870-LT (AD), 870-PT, 870-PT (AD), 870-L, 870-L (AD), 870-P, and 870-P (AD) are typically used to determine specific matters related to TEFRA partnerships. Each of these forms contains an integrated waiver of the restrictions on assessment and collection of any partnership items determined in the agreement; Forms 870-LT, 870-LT (AD), 870-L, and 870-L (AD) also contain an integrated waiver of the restrictions on assessment for affected items. If a Form 906 or combined agreement is used to determine specific matters related to TEFRA partnerships, that form should either be accompanied by a separate waiver form or contain appropriate waiver language in a determination clause within the agreement. See IRM 8.13.1.3.6 (e.g., "By signing this agreement, taxpayer consents to the assessment and collection of the liabilities for tax, interest, additions to tax, and penalties determined by or resulting from the determinations of this agreement, waiving all defenses against and restrictions on the assessment and collection of those liabilities.") Although settled partnership items are not subject to deficiency procedures, certain items affected by the settled partnership items may be subject to deficiency procedures under IRC 6230(a)(2)(A)(i). An assessment cannot be based upon a specific matter determined by a Form 906 or a combined agreement, unless the restrictions on assessment under IRC 6213 and IRC 6225(a) do not apply. See Manko v. Commissioner, 126 T.C. 195 No. 9 (2006). For partnership tax years beginning after August 5, 1997, in the case of a settlement under IRC 6224(c) that results under IRC 6231(b)(1)(C) in the conversion of partnership items to non-partnership items, interest is suspended on the computational adjustment resulting from the settlement if notice and demand for payment of the adjustment is not made within 30 days after the settlement.

(3) Conditional waivers -
If the taxpayer desires that a waiver be effective only on approval of a closing agreement covering a tax liability, specific matters or both, that provision may be included on the waiver form.

(1) The Revenue Agent’s report (RAR) and workpapers should adequately discuss all significant factors relating to the closing agreement (including the source of and modifications to pattern agreements). This discussion should be prominently located in the file and should explain the reasons for obtaining the agreement (or denying it), and what the parties intend to accomplish by it. This requirement covers all closing agreements, whether specific matters, determinations of net income or net operating loss, or determining tax liability. Follow the quality audit standard cited in the prior subsection in all cases with closing agreements. See IRM 8.13.1.5.1.

(2) The discussion should address the following points:

1. A complete discussion of all major adjustments in the report that relate to the closing agreement; and

2. A discussion of any major unchanged items that may affect the acceptability of the closing agreement.

(3) A specific matter closing agreement may be secured even though Compliance action on the case cannot be completed for reasons not related to and not preventing acceptance of the closing agreement. In such cases, the returns, relevant files and workpapers, and explanation as to why the agreement should be approved prior to the case closure, and the RAR, if available, should be forwarded to the reviewer. Review and approval procedures covered in the prior subsection should be followed. See IRM 8.13.1.5.2.

(1) Attach an original signed copy of the agreement to the latest return in the file affected by the agreement.

(2) All returns in the case file covering years affected by the agreement will be marked as follows: "Agreement under section 7121, Internal Revenue Code of 1986, Year Affected __. Closing agreement attached to return for taxable period ended ___."

(3) If follow-up action is required, send a copy of the executed agreement and other relevant material to the Planning and Special Programs Branch (PSP), or equivalent, for appropriate future action and retain a copy in the file of the executed agreement together with sufficient backup material for use of the agreement in subsequent examinations. If there is no RAR file, return the third original signature copy of the agreement to the reviewer for retention in the files.

1. If one or more filed returns of a party to which the agreement pertains are not in the file, the campus (or other local office if it is known the returns are there) should mark the returns as indicated in the subsection below.

2. If none of the filed affected returns of a party to the agreement are in the file, a transmittal should request that an executed original of the agreement, preferably, be attached to the latest filed affected return. (Attachment to the latest affected return in the file is acceptable if marking any later filed returns is requested.)

3. If one or more parties to the agreement are located in areas or territories not serviced by the service center of the approving area or territory, one copy of the executed closing agreement, supporting material, and RAR (if the principal case will be closed) for each party located in such other areas or territories will be forwarded to the appropriate service center (or directly to the areas or territories if the returns are known to be there), with similar instructions.

4. If, the agreement affects taxable periods for which returns are not yet due for any party to the agreement, follow-up procedures will be taken. See IRM 8.13.1.5.1.1.

5. Where follow-up action may be required in another office, an additional copy of the executed agreement, supporting material, and RAR (if available) should be sent to that area or territory addressed to the appropriate Compliance Operating Division official: "Attention: Planning and Special Programs (or equivalent) Branch."

(4) An executed original of the closing agreement will be mailed to the taxpayer (or to the representative) by appropriate transmittal letter patterned after Exhibit 8.13.1-23. Certified or registered mail will be used if required by other instructions (e.g. personal holding company tax liability.) A copy of the letter should be included in the RAR file.

(5) The designated reviewer will maintain sufficient material (including copies of executed agreements) to provide a historical record of all closing agreements executed in the district. This file will permit responses to questions from whatever source to be made from a central location, as well as to provide additional samples for later use.

(1) Responsibility for protecting the statute of limitations will remain in the recommending office, if it had such responsibility immediately before forwarding the agreement.

(2) When the statute of limitations for a period (or return) involving a closing agreement will expire within 120 days from the date the agreement is to be submitted to Headquarters, the taxpayer will be advised that the closing agreement will not be forwarded unless a consent is signed extending the statute to a date at least 180 days after the agreement is signed by the taxpayer or 120 days after the agreement is submitted to Headquarters, whichever is later.

(3) To comply with this section, consents will be secured to cover years for which overassessments are proposed.

(1) Assistance should be requested from the Commissioner, LB&I Operating Division if a closing agreement is proposed that may be used throughout an industry, homogeneous commercial group, or a large group of taxpayers in similar circumstances where that agreement would:

1. constitute a precedent for disposing of a prevalent or significant issue on a basis not previously employed;

2. establish precedent on such an issue where the Service position is not established or published; or have serious administrative or revenue implications.

(2) This request should be contained in a memorandum to the Commissioner, LB&I Operating Division, forwarding three copies of the proposed Agreement (which will not be returned) and explaining the surrounding circumstances. One of the three copies will be forwarded by the Commissioner, LB&I Operating Division to the Chief, Appeals, C:AP.

(3) If a problem arises concerning the interpretation, scope, and/or application of IRC 7121 which cannot be readily resolved by referring to existing instructions and regulations, a request for Technical Advice may be submitted.

(1) The local Criminal Investigation field office has certain functions with respect to setting aside a closing agreement, as explained. See IRM 8.13.1.7.2.1.1.

(1) For agreements dealing with specific matters, the objective should be to state as concisely as possible a description of the transaction or event giving rise to the specific matter requiring an adjustment. In the determination section of the agreement the preparer should clearly and precisely provide for the adjustments to be made to taxable income, deductions, basis, etc.

(2) It is the responsibility of those preparing, receiving, reviewing, and executing closing agreements to ensure that:

1. The agreements are prepared using terms that clearly express the intended disposition of the matters determined;

2. The agreements are received and signed in such form and manner as to become binding upon the parties after execution for the Commissioner;

3. The matters determined are suitable for determination by closing agreement; and

4. Their approval or recommendation is based on an adequate record.

(3) With respect to IRM 8.13.1.6.1(2)(a), the unique finality of a closing agreement may become meaningless if the provisions are reasonably subject to more than one interpretation. See IRM 8.13.1.4 (3).

(4) With respect to IRM 8.13.1.6.1(2)(b), the agreement may be ineffectual if it can be attacked on various grounds of improper execution or upon showing of qualifying conditions stated in a separate document within possession of the Service. See IRM 8.13.1.3.

(5) With respect to IRM 8.13.1.6.1(2)(c), specific matter closing agreements generally should not purport to make a determination for a taxable period that has not ended prior to the date of the agreement. See IRM 8.13.1.6. Of course, a specific matter closing agreement that makes a determination affecting the calculation of tax liability in a period ending before the date of the agreement can also affect future taxable periods ending after the date of the agreement. For example, determinations can be made concerning the basis and depreciation method of a particular asset that was already acquired in a year ended before the date of the agreement. These determinations will establish the amount of depreciation deduction in the early year and affect the calculation of the depreciation deductions in future years. (See IRC 446(e)).

(6) With respect to IRM 8.13.1.6.1(2)(d) above, Appeals Officers and reviewers should have sufficient information to permit a reasonable justification for any recommendation concerning acceptance of a closing agreement, whether it is an agreement determining tax liability (or net income or net operating loss) ( Form 866 or equivalent), or a specific matters closing agreement ( Form 906). In specific matters agreements the record must exhibit adequate development and coverage of matters pertinent to determining the acceptability of the agreement. Such development should be sufficient to provide the basis for the ACM discussion required. See IRM 8.13.1.6.2.2 (2).

(7) Appeals Area Directors are responsible for ensuring that the closing agreement function is successfully carried out by the Appeals offices in their areas.

(1) Ordinarily, the closing agreement, executed on behalf of the taxpayer, is submitted for review along with the ACM.

(2) Appeals officials authorized to enter into and approve closing agreements should appoint a reviewer for closing agreements for their respective offices. It is generally desirable that a review of the draft take place prior to signing by the taxpayer. This review is concerned primarily with the substance of the agreement. Another review should be made of the final version of the closing agreement, after it is executed by the taxpayer. This review is primarily to ensure proper layout, format, and execution of the agreement and should be done concurrently with execution by the reviewer of the Closing Agreement Checklist, Form 4222. The checklist should be distinctly labeled with the notation "do not destroy until six years after the end of the fiscal year in which the case is closed." During the case closing process, a folder should be set up, with a copy of the closing agreement, and should be retained as provided in the Records and Information Management, The Records and Information Management Program, IRM 1.15.1 and Account and Processing Support, IRM 8.20. Both the Appeals Officer who prepares and the official who reviews the agreement must sign the reverse side as receiver and reviewer, respectively.

(1) Such agreement may not be modified by any officer, employee, or agent of the United States nor annulled, disregarded, or set aside in any suit or proceeding. The courts have consistently recognized and upheld the statutory finality of such agreements. In view of the statutory language, the parties to a closing agreement cannot rescind or modify it by consent. There is an exception to those statutory reasons for which a closing agreement may be set aside. See IRM 8.13.1.7 (2). There is also a treaty authorizing modification or setting aside. See IRM 8.13.1.7.1.2 and IRM 8.13.1.8.3.

(2) Although a closing agreement is final, it only determines matters expressly stated therein.

1. For example a closing agreement determining tax liability does not determine the amount of income or the amounts of any components of income.

2. As another example, it has been held that the fact that a tax liability was determined by closing agreement on a consolidated return basis did not support a later contention by the taxpayer that a consolidated return was validly filed for the year such liability was determined. (Export Leaf Tobacco v. Commissioner, 78 F. 2d (2d Cir. 1935)).

(3) Although a closing agreement is final, where a specific matters type agreement was entered into, there would be no prohibition against entering into another agreement covering specific matters with the same taxpayer pertaining to the same taxable period determining other matters not expressly covered in the first.

(4) Similarly, a closing agreement may not be modified or rescinded by the parties either unilaterally or with the consent of all parties. See the exceptions discussed in IRM 8.13.1.7.1.2 and IRM 8.13.1.8.3. It may be possible to satisfactorily remedy a dispute as to the meaning of the contents of the agreement. If one or more provisions of the closing agreement are reasonably subject to two or more interpretations and the parties have reasonably differed in their interpretation of such provision(s), it is possible for the parties to enter into a new closing agreement which, in terms acceptable to all parties, restates more clearly the intended meaning of the disputed provision(s). This is not a modification of the agreement but a clarification of its terms. This procedure should rarely be necessary. It is not to be used where the taxpayer’s interpretation is unreasonable and unlikely to prevail in the event of litigation. Careful draftsmanship should prevent the necessity of resorting to this procedure.

(1) Setting aside the closing agreement, however, does not authorize assessment for a barred year. If litigated, the burden of proof for setting aside the agreement has been held to be upon the party desiring to do so. See Ingram v. Commissioner, 32 B.T.A. 1063 (1935), aff’d., 87 F. 2d 915 (3d Cir. 1937), and Holmes & Janes, Inc. v. Commissioner, 30 B.T.A. 74 (1934). The latter case contains a statement on the authority of the Tax Court to review setting aside of a closing agreement. (See IRC 7206 and IRC 7207 for possible criminal penalties.) Giving required effect to Code provisions listed above or provisions enacted after the agreement was signed is not a setting aside, modifying, annulling, disregarding or reopening contemplated by IRM 8.13.1.7(2) or IRC 7121(b) . If circumstances indicate reasons for modifying or setting aside a closing agreement, local Counsel should be consulted and Headquarters should be notified before taking any action.

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

1. Setting aside of the closing agreement upon discovery of fraud is not mandatory. If the Government determines retaining the agreement is in its best interests, it may refrain from setting the agreement aside.

2. The term "fraud," as applied under IRC 7121(b), must be based upon evidence showing intent to evade the payment of tax that the taxpayer believed to be owing as distinguished from mistake, inadvertence, reliance on incorrect technical advice, honest differences of opinion, negligence, or carelessness. See Policy Statement P-9-5 and IRM 25.1.6.1, Civil Fraud, Overview.

3. Fraud in a case which does not relate to the premises upon which the closing agreement is based and the determination therein will probably be insufficient to sustain setting aside the agreement. Therefore, in such a situation, no attempt should be made to have the closing agreement set aside unless the fraud goes to the agreement itself (See Helvering v. Kehoe , 309 U.S. 277, (1940). See IRM 8.13.1.7.2 (4).

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

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

"Obviously the use of the word misrepresentation denotes something more deliberate or more conscious than a mere error or mistake. Otherwise the entire rationale of a closing agreement would be lost. Congress intended that innocent mistakes should be buried in a closing agreement. This still leaves an ample field for protection against an agreement founded in trickery or deception."

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

(1) When the tax liability in a Compliance case involving the setting aside of a final closing agreement is considered by an Appeals office and a settlement is reached, the taxpayer will be requested to sign an appropriate waiver of restrictions on assessment and collection containing special provisions. IRM 8.13.1.7.2.1.3. The Appeals office will endeavor also to obtain a check in payment of the liability, and will be responsible for the preparation of the memorandum, in triplicate. Exhibit 8.13.1-25. The case file, including the memorandum, the original, if available, or triplicate copy of the closing agreement and accompanying explanatory memorandum or report, will then be transmitted by memorandum to the Chief, Appeals. After action by Headquarters (by the Commissioner if the agreement is set aside), the file will be returned using certified mail by the Chief, Appeals, to the Appeals office for necessary action, including notifying the taxpayer unless the agreement was signed in Headquarters. Exhibit 8.13.1-26.

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

(3) After the Compliance Operating Division field official determines that there are sufficient facts to justify reopening a case and setting aside a closing agreement, or after a finding that further investigation should be made to determine whether the agreement should be set aside, and the closing agreement was obtained while the case was under jurisdiction of an Appeals office, the Appeals office that handled the case must be apprised by memorandum of the Compliance Operating Division field official’s views on the matter before any further contact is made with the taxpayer with regard to the possible reopening of the closing agreement and before a request is made for issuance of a notice under IRC 7605(b). See IRM 8.13.1.7.2.1.

(4) If the Appeals office concurs, it will request permission to reopen the case from the Chief, Appeals (pursuant to Policy Statement P-8-3 and IRM 8.6.1.6, New Issues and Reopening Closed Issues, forwarding a copy of the Compliance Operating Division field official’s memorandum. Such request must also reflect the concurring recommendation of the appropriate Appeals Director, Field Operations. The Chief, Appeals, will inform the Appeals Area Director of his or her decision. The latter will forward a copy of the decision to the Compliance Operating Division field official.

(5) If the Appeals office believes the facts do not warrant proceeding toward the setting aside of the closing agreement or reopening the case previously closed by Appeals, it will apprise the Compliance Operating Division field official by memorandum. (See IRM 4.13.1, Audit Reconsideration, Introduction, and IRM 8.6.1.6, New Issues and Reopening Closed Issues, as to possible reopening of prior Appeals case for issues not considered by Appeals where prior Appeals disposition was not based on mutual concessions.) If the Compliance Operating Division field official disagrees with the Appeals office’s conclusion, he or she will submit a memorandum to that effect to the Appeals Area Director and forward a copy to the appropriate Compliance Operating Division official. The Appeals Area Director will forward the two memoranda from the Compliance Operating Division field official and a copy of the memorandum to the Compliance Operating Division field official by a cover memorandum, to the appropriate Appeals Director, Field Operations. The appropriate Compliance Operating Division official and the appropriate Appeals Director, Field Operations will attempt to resolve the problem. If a decision is made to recommend reopening the case and setting aside the closing agreement, the appropriate Appeals Director, Field Operations will request permission of the Chief, Appeals, to reopen the case (forwarding copies of the aforementioned memoranda and of the closing agreement). The Chief, Appeals, will inform the appropriate Appeals Director, Field Operations of that decision. The latter will transmit one copy to appropriate Compliance Operating Division official and one copy to the Compliance Operating Division field official.

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

1. a decision by the Chief Criminal Investigation Division, that a joint investigation will not be made;

2. a decision of the Director of Investigations for the appropriate area that prosecution will not be recommended; or

3. in cases involving criminal prosecution, subsequent to notification permitting an ascertainment of civil liability as provided in IRM 8.7.1.9, Cases Involving Criminal Prosecution and Restrictions on Appeals Jurisdiction in Criminal Cases.

(7) The Compliance Operating Division field office will assist the Appeals office in the determination of civil liability by conducting such investigation as the Appeals office requests in order to make an informed disposition of the case. After the Appeals determination of liability is made, and the taxpayer’s agreement (by execution of a waiver of restrictions) or disagreement with the determination is ascertained (and payment requested if agreed to), the memorandum referenced to in IRM 8.13.1.7.3(1) should be prepared and forwarded in accordance with that subsection (unless the agreement was previously set aside while criminal aspects were under consideration). Exhibit 8.13.1-25.

(8) If information pertaining to a taxable year over which Appeals has jurisdiction is discovered that indicates that a closing agreement should be set aside, or that further investigation should be made to determine whether a closing agreement should be set aside, procedures similar to the foregoing will be employed. The Appeals office must, however, make the initial decision as to whether the facts at hand justify asking permission of the Chief, Appeals, to reopen the case. The Appeals office will determine the civil liability. See IRM 8.13.1.7.3.

(1) Questions regarding the setting aside of a closing agreement covering specific matters that was processed in the Office of Chief Counsel should be submitted to that office, with a full statement of facts and a recommendation. See IRM 8.13.1.9. A decision in the matter will be made by the Office of Chief Counsel.

1. If it is decided that the facts and situation do not warrant setting aside the closing agreement, a memorandum to that effect, stating the basis therefor, will be issued to the recommending office.

2. In those cases where it is found that setting aside the closing agreement is justified, the Office of Chief Counsel will notify the taxpayer and will furnish appropriate copies to the recommending office.

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

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

"The Commissioner of Internal Revenue has set aside the final closing agreement previously entered into with you (name of corporation or other entity) on ___,__, with respect to your (type of tax) liability for the taxable year(s) ended ___,__."

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

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

(1) When a taxpayer voluntarily makes a payment of additional tax liability for an indisputably barred year, and there is no material evidence to support an assessment of such liability made by the Government, the taxpayer will not ordinarily be requested to sign a closing agreement. Also a closing agreement does not in any way alter the lack of authority to make refunds or credits for years for which all statutes for refund or credit have clearly expired.

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

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

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

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

(6) If, for any reason, it would appear that it will take more than 30 days to have the closing agreement approved, an unqualified waiver may be taken (received or accepted before the date of approval of the closing agreement) that will suspend interest for a period beginning 30 days after receipt of the waiver if notice and demand has not been made. See IRM 8.13.1.5.3 and IRM 8.13.1.6.2.1. Both of these subsections discuss waivers in closing agreement cases. It is uncertain whether interest on deficiencies for barred years can be assessed and collected where only tax liability and penalties for such years are determined by closing agreement. Exhibit 8.13.1-5. This exhibit covers barred year agreements.

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

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

(1) In the broad sense, the term "tax liability" includes interest and penalties. However, it is ordinarily undesirable to determine the entire tax liability for a period in such fashion as to preclude any further assessment of any type of tax. Therefore, generally only liabilities for specific types of taxes and specific applicable penalties are determined. See IRM 8.13.1.8.1. For these reasons, Form 866, Agreement as to Final Determination of Tax Liability, narrows the extent of the determination to those specific types of taxes and penalties (and, in unusual cases, applicable interest) specifically stated therein.

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

(1) A closing agreement establishing final determination of tax liability for a prior taxable period is valid and binding upon the parties concerned and cannot be set aside in the absence of a showing of fraud, malfeasance, or misrepresentation of material fact. See IRM 8.13.1.7.1.1 and IRM 8.13.1.7.1.2. Insofar as they relate to taxable periods ending at or before the date of the agreement, determinations in the agreement are not affected by subsequent legislation retroactively applicable to the taxable period to which the agreement relates where the legislation is silent as to its effect on closing agreements. Insofar as closing agreement determinations relate to periods ending subsequent to the date of the agreement, they are subject to statutory changes enacted subsequent to that date applicable to such periods. On the other hand, should the Supreme Court declare a statutory provision unconstitutional after liability is based thereon has been determined by a closing agreement, the agreement stands. See Rev. Rul. 56-322, 1956-2 C.B. 963, for authority and cases on point.

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

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

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

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

(1) If the circumstance of the case fits, an agreement closely modeled after the applicable pattern should be acceptable and effective. See IRM 8.13.1.5.2 and IRM 8.13.1.6.2.2.

1. Where the agreement follows the pattern, the reviewer will be concerned with whether or not the circumstances of the case call for departure from the pattern.

2. Where the agreement varies from the pattern, the reviewer should determine whether or not all essential matters have been clearly determined. Such variations should be explained in the Revenue Agent’s Report (or the workpapers where there is no transmittal letter) or in the Appeals Case Memorandum.

3. Where not adequately explained, a note to this effect and additional explanation may be necessary on Form 4222, Closing Agreement Checklist, or in an informal written recommendation to the supervisor.

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

(3) Pattern agreements must be carefully considered in light of the circumstances in the case. Modification of a pattern agreement is permissible and frequently necessary. Therefore, in discussing a draft closing agreement following one of the pattern agreements, the examiner or Appeals Officer should not represent the draft as following a pattern prescribed by Headquarters. The taxpayer’s representative may discover some valid objection to the use of some provisions of the pattern agreement. Alternatively, the taxpayer may request that a published pattern agreement be followed in circumstances where the examiner or Appeals Officer does not agree. If so, Section 11.01 of Rev. Proc. 68-16, 1968-1 C.B. 770, 791, may be referred to as affirming the Service practice to revise or depart from most recently issued patterns where necessary. Variations from pattern and instructions in this handbook should be explained in Compliance field reports and Appeals Case Memoranda.

(1) Those closing agreements not coming within the authority and jurisdiction of the Chief Counsel and not coming within the signing authority of Compliance Operating Division field officials or the Director, International, are reviewed and signed in the office of the Director, Compliance (Small Business/Self-Employed, Wage and Investment); Industry Director (Large Business and International); the Director, Employee Plans; the Director, Exempt Organizations or the Director, Government Entities. See IRM 8.13.1.9. Each agreement or each related group of agreements forwarded for review and signature should be accompanied by a memorandum addressed to the appropriate official and signed by the recommending official. The memorandum should explain the recommendation for execution of the proposed closing agreement. The affected returns, workpapers, reports, and entire administrative file should be forwarded with the proposed closing agreement.

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

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

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

(4) In Joint Committee cases involving offset or combined relief, the file is forwarded from the Compliance field or Appeals Office to the Director, International Operations. If the latter tentatively approves the closing agreement, the transmitting office is advised by a memorandum or other transmittal. A copy of the proposed closing agreement is attached to the report to the Joint Committee. The closing agreement is retained by the Director, International Operations until, in accordance with IRC 6405, the tentative resolution has been submitted to, and the timely views of the Joint Committee have been considered. When compliance with IRC 6405 is complete, the Deputy Commissioner, International Operations, signs the agreement, retains the original and forwards a copy to the taxpayer and the transmitting office. The transmittal document should indicate that returns affected be marked and, when applicable, a follow-up control be maintained on the agreement. See IRM 8.13.1.6.2.3.

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

1. Rev. Proc. 85-45, 1985-2 C.B. 505, sets forth procedures by which a DISC’s related supplier or shareholder may request an adjustment of accounts and a reclassification of actual distributions previously made with respect to all or a part of the amount of the pricing or commission redetermination. These procedures include entering into a closing agreement between the Commissioner and the shareholder, the DISC, and any affected related supplier. These closing agreements are prepared by the Compliance field office or the Appeals office having jurisdiction of the case before closing action is taken on the redetermination of DISC taxable income.

2. Please contact the Associate Chief Counsel (International) if you have any questions regarding adjustments to DISC transfer price or commission closing agreements.

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

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

(3) In Joint Committee cases involving offset or combined relief, the file is forwarded from the Compliance field or Appeals Office to the Director, International Operations. If the latter tentatively approves the closing agreement, the transmitting office is advised by a memorandum or other transmittal. A copy of the proposed closing agreement is attached to the report to the Joint Committee. The closing agreement is retained by the Deputy Commissioner, International Operations until notified that the Joint Committee Staff has cleared the case. Upon notification of clearance, the Director, International Operations signs the agreement, retains the original and forwards a copy to the taxpayer and the transmitting office. The transmittal document should indicate that returns affected be marked as discussed previously and, when applicable, a follow-up control be maintained on the agreement. See IRM 8.13.1.6.2.3.

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

1. Rev. Proc. 85-45, 1985-2 C.B. 505, sets forth procedures by which a DISC’s related supplier and/or shareholder may request an adjustment of accounts and a reclassification of actual distributions previously made with respect to all or a part of the amount of the pricing or commission redetermination. These procedures include entering into a closing agreement between the Commissioner and the shareholder, the DISC, and any affected supplier. These closing agreements are prepared by the Compliance field office or the Appeals office having jurisdiction of the case before closing action is taken on the redetermination of DISC taxable income.

2. Please contact the Associate Chief Counsel (International) if you have any questions regarding adjustments to DISC transfer price or commission closing agreements.

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

1. Rev. Proc. 85-45, 1985-2 C.B. 505, sets forth procedures by which a DISC’s related supplier and/or shareholder may request an adjustment of accounts and a reclassification of actual distributions previously made with respect to all or a part of the amount of the pricing or commission redetermination. These procedures include entering into a closing agreement between the Commissioner and the shareholder, the DISC, and any affected supplier. These closing agreements are prepared by the Compliance field office or the Appeals office having jurisdiction of the case before closing action is taken on the redetermination of DISC taxable income.

2. Please contact the Associate Chief Counsel (International) if you have any questions regarding adjustments to DISC transfer price or commission closing agreements.