Rev. Rul. 73-459

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. 7549, IX-1 C.B. 164 (1930).

The question presented is whether an unintentional mistake in a Revenue Agent's report that was used as the basis for a closing agreement constitutes a misrepresentation of a material fact upon which the closing agreement may be set aside.

A taxpayer filed his income tax return for 1968 on April 15, 1969, and paid the amount reported thereon as tax due. In 1971, the audit of this return was concluded and a report of audit changes was prepared showing an overassessment of tax.

On December 3, 1971, the taxpayer executed a closing agreement on Form 866 with respect to the 1968 taxable year in accordance with section 7121 of the Internal Revenue Code of 1954. His income tax liability for the taxable year was stated therein to be x dollars, the tax liability shown on the audit report. The closing agreement was approved for the Commissioner of Internal Revenue on December 15, 1971.

On January 15, 1972, the taxpayer filed a claim for refund with respect to the 1968 taxable year on the basis that the Revenue Agent had erroneously omitted certain additional allowable deductions when preparing the report of audit changes and computing the amount of the tax liability stated in the closing agreement. The taxpayer alleged that such error constituted a "misrepresentation of a material fact" and therefore the closing agreement entered into was not binding and should be set aside.

With respect to closing agreements, section 7121(b) of the Code provides that:

* * * If such agreement is approved by the Secretary or his delegate * * * 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 * * *

The purpose of section 7121 of the Code is to provide a means of settling controversies of tax liability finally and completely, to protect the taxpayer against reopening of the case at a later date, and to prevent the taxpayer from later filing a claim or instituting a suit for refund of taxes paid. The statute excludes all grounds for setting aside closing agreements except a showing of fraud or malfeasance or misrepresentation of a material fact. Mere mistakes of fact as well as of law are insufficient grounds for rescission. See Wolverine Petroleum Corp. v. Commissioner, 75 F.2d 593 (8th Cir. 1935). A misrepresentation of material fact sufficient to set aside a closing agreement must be more than mere errors or innocent mistakes. See Phoenix Insurance Company, 29 B.T.A. 291 (1933), Acq. XIII-1 C.B. 13(1934), in which the court held that a taxpayer's unintentional mistake in deducting Federal income taxes on its Federal return did not constitute a misrepresentation of material fact, particularly where the facts were before the Commissioner of Internal Revenue.

Under the instant facts, there was an unintentional mistake of fact in the audit report, the contents of which were derived from the tax records of the taxpayer. A Revenue Agent's unintentional oversight in failing to include certain deductions in arriving at the result upon which the closing agreement was based does not constitute a misrepresentation of a material fact relied upon by the taxpayer.

In view of the above, where a Revenue Agent's report sets out an amount which is stated to represent the tax liability of the taxpayer and a closing agreement is duly executed on the basis of such report, a mistake in one of the items of the report does not constitute a misrepresentation of a material fact upon which the agreement may be set aside.

G.C.M. 7549 is hereby superseded since the position set forth therein is restated under the current law in this Revenue Ruling.

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