Rev. Rul. 56-322

Advice has been requested whether the tax liability of a taxpayer as determined by a closing agreement with respect to a prior taxable year is affected by subsequent retroactive legislation.

Section 7121(b) of the Internal Revenue Code of 1954, relating to closing agreements, provides as follows:

(b) FINALITY-If such agreement is approved by the Secretary or his delegate (within such time as may be stated in such agreement, or later agreed to) such agreement shall be final and conclusive, and except upon a showing of fraud or malfeasance, or misrepresentation of a material fact-

(1) the case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, and

(2) in any suit, action or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.

The provisions for closing agreements have been contained in the Revenue Acts since and including the 1921 Act. The purpose of closing agreements have been to enable the taxpayer and the Government to finally and completely settle tax controversies for any previous taxable period and to protect the taxpayer agains the reopening of the matter at a later date. See Bankers Reserve Life Co. v. United States 42 Fed.(2d) 313, Ct. D. 209, C.B. IX-2, 257 (1930); Aetna Life Insurance Co. v. Collector of Internal Revenue , 43 Fed.(2d) 711, Ct. D. 225, C.B. IX-2, 263 (1930); and Proctor et al, Executors v. White , 28 Fed.Supp. 161.

In Wolverine Petroleum Corp. v. Commissioner , 75 Fed.(2d) 593, certiorari denied, 295 U.S. 743, Ct. D. 990, C.B. XIV-2, 256 (1935), the court, in discussing the nature of a closing agreement, stated that, to facilitate the settlement of many items affecting a taxpayer's liability, the policy has been to broaden rather than limit the scope of these settlements; not even the fact that the tax covered by the agreement had been assessed under a section of the law later declared to be unconstitutional would upset the binding effect of a closing agreement. The court pointed out that to allow the finality of such agreements to be impeached upon grounds other than those enumerated in the statute would tend to diminish the salutary effect of the statute. This principle was most recently reiterated in Cramp Shipbuilding Co. v. Commissioner , 14 T.C. 33, acquiescence C.B. 1954-2, 4.

From the foregoing, it is apparent that a closing agreement establishing final determination of tax liability for a prior taxable period, once approved, 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. Thus, such a closing agreement which has become final and conclusive, within the meaning of section 7121 of the Code, is not affected by subsequent legislation retroactively applicable to the taxable period to which such agreement relates where such legislation is silent as to its effect on closing agreements.