Rev. Rul. 72-486

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 10100, C.B. XI-1, 131 (1932).

The question presented is whether, under the circumstances set forth below, a closing agreement with respect to a prior taxable year may be set aside when it is discovered that a corporate officer committed fraud against the corporation during the taxable year involved.

The corporation and the Internal Revenue Service executed a closing agreement with respect to a taxable year that ended prior to the date of the agreement.

Subsequent to the execution of the closing agreement, it was discovered that A, the manager of the corporation, had misappropriated a large amount of the corporation's funds. Had this fact been known when the prior taxable year return was filed, there would have been no tax liability and a closing agreement would not have been entered into.

The closing agreement was signed by B, the vice president of the corporation, at the direction of A who had substantial control over the operation of the corporation. B admits that when he signed the closing agreement, the corporation's records showed a large indebtedness by A to the corporation. Subsequently, other corporate officers became aware of A's actions and instituted legal action that resulted in a receiver being appointed. The receiver filed a claim for refund of the amount paid under the closing agreement contending that the misappropriation of funds by A constituted a fraud within the meaning of section 7121(b) of the Internal Revenue Code of 1954; and, therefore, the closing agreement should be set aside. The taxpayer admits that the fraud was against the corporation, rather than with respect to its tax return, and that there had been no fraud or misrepresenation of a material fact on the part of the Government, but insists that the fraud of A goes to the very existence of the closing agreement.

Section 7121(b) of the Code 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. In the instant case, the misappropriation of corporation funds by A is not fraud or malfeasance, or misrepresentation of a material fact in connection with a tax return or closing agreement.

Accordingly, it is held that the closing agreement entered into by the corporation and the Service may not be set aside.

G.C.M. 10100 is hereby superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.