Rev. Rul. 60-287

Advice has been requested whether 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, has the same effect as a similar determination made by a final closing agreement under section 7121 of the Code.

A District Director of Internal Revenue classified a corporation as a personal holding company and proposed an assessment of personal holding company tax. The taxpayer executed Form 2198, Determination of Liability for Personal Holding Company Tax, seeking to offset this assessment by the timely payment of deficiency dividends.

Section 547 of the Code provides, in part, as follows:

(a) GENERAL RULE.-If a determination (as defined in subsection (c)) with respect to a taxpayer establishes liability for personal holding company tax imposed by section 541 (or by a corresponding provision of a prior income tax law) for any taxable year, a deduction shall be allowed to the taxpayer for the amount of deficiency dividends (as defined in subsection (d)) for the purpose of determining the personal holding company tax for such year, but not for the purpose of determining interest, additional amounts, or assessable penalties computed with respect to such personal holding company tax.

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(c) DETERMINATION.-For purposes of this section, the term determination means-

(1) a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction, which has become final;

(2) a closing agreement made under section 7121; or

(3) under regulations prescribed by the Secretary or his delegate, an agreement signed by the Secretary or his delegate and by, or on behalf of, the taxpayer relating to the liability of such taxpayer for personal holding company tax.

Section 7121 of the Code reads as follows:

(a) AUTHORIZATION.-The Secretary or his delegate is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period.

(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.

Under both section 506 of the Internal Revenue Code of 1939 and section 547 of the 1954 Code, the allowance of the adjustment in question is dependent upon a prior `determination' of tax liability. However, section 506 of the 1939 Code permits relief only where a determination as to personal holding company tax has been established either by a court decision or in a closing agreement. The use of an informal agreement to serve as a `determination' was added by section 547(c)(3) of the 1954 Code in order to avoid the cumbersome and time-consuming closing agreement procedure ordinarily employed by taxpayers to secure elimination of a personal holding company tax deficiency. Form 2198 was designed for this purpose.

Sections 1311 to 1315 of the 1954 Code, relating to the mitigation of the effect of the statute of limitations, provide, under certain circumstances, for adjustments of errors involving closed years. Section 1313 of the 1954 Code is similar to section 547(c)(3) of the Code in that it provides for a `determination' by an informal agreement. A determination by an informal agreement under section 1313 becomes final when the tax liability for the open taxable year to which the determination relates becomes final. However, during the period when a deficiency may be assessed or a refund or credit allowed for such year, either the taxpayer or the Commissioner may attempt to secure a modification of such tax liability and, in so doing, may treat the item that was the subject of the adjustment in a manner different from the way in which it was treated in the agreement.

Accordingly, it is held that 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, as described in section 547(c)(3) of the Code, does not have the effect of a final closing agreement under section 7121 of the Code.