Closing agreement inapplicable to successor in interest.

• Author: Keenan, John

The Service recently issued a Chief Counsel advice (CCA 200802031) that highlights one of the limitations the Service places on the use of closing agreements and serves as a good reminder for practitioners to be aware of those limitations.

In the CCA, the IRS addressed whether a closing agreement that sought to bind the Service and the taxpayer for taxable periods ending after the date of the agreement was valid. The Service concluded that the IRS appeals officer who executed the closing agreement on behalf of the IRS did not have the proper authority to bind the government for taxable periods ending after the date of the agreement. Therefore, the Service determined that the taxpayer could not take advantage of the tax treatment set forth in the closing agreement for those taxable periods subsequent to the date of the closing agreement.

Facts

Although the facts in the CCA are heavily redacted, it appears that the owners of a property and the IRS reached an agreement as to the deductibility of certain costs associated with the property. The parties executed a Form 906, Closing Agreement on Determination Covering Specific Matters, that set forth a defined amount of deduction that could be taken by each of the owners over certain tax years. The closing agreement covered tax periods before and after the date of the agreement. It was executed by the owners of the property and the local IRS Appeals Office chief. Subsequently, the owners sold the property to the taxpayer, who sought to take the deductions agreed on in the closing agreement as a successor in interest.

Tax Periods Covered by a Closing Agreement

Sec. 7121 authorizes the Service to enter into a closing agreement with any person relating to tax liabilities of that person for any taxable period. Regulations under Sec. 7121 set forth matters that can be addressed in a closing agreement. For tax periods ending prior to the date of the closing agreement, Regs. Sec. 301.7121-1(b)(2) states:

Closing agreements with respect to taxable periods ended prior to the date of the agreement may relate to the total tax liability of the taxpayer or to one or more separate items affecting the tax liability of the taxpayer, as, for example, the amount of gross income, deduction for losses, depreciation, depletion, the year in which an item of income is to be included in gross income, the year in which an item of loss is to be deducted, or the value of property on a specific date.

For taxable periods...