William Whitney and Barbara Whitney v. United States

question of judgment enter and coverage under the monetary limits of policy. States American costs recover their shall appellants appeal. RE- AND PART IN

AFFIRMED REMANDED. AND IN PART

VERSED

Edward M. H. Alvarez Charles Sabes, Jose, Cal., San for plaintiffs-appel- lants. William WHITNEY and Barbara

Whitney, Plaintiffs-Appellants, Brissette, Paup Martha Michael L. Pomerance, D.C., Washington, Robert S. UNITED America, STATES of for defendant-appellee.

Defendant-Appellee.

No. 85-2387.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Feb. 1987. ANDERSON, Judge: J. BLAINE Circuit Sept.

Decided William Whitney (Whitneys) and Barbara Valley farmers in the Salinas of Monte- rey County, In regard they California. this lease farm land other landowners and produce crops it. 1975 the Whit- neys portion sold a of their farming opera- (Bassettis). tion to Melvin and Neil Bassetti A partnership purchase formed farming operation. Melvin and Neil Bas- forty-nine percent setti each held a interest in the partnership while the held percent a two interest. The paid Bassettis $1,124,876.00 promissory for the farm a $206,048.00 purchase note. The included prepaid rent for farm land leased $287,116.00 land leased for 1975. The Whitneys deducted the rent as a business on their 1974 and 1975 return, part- returns.1 its 1975 On nership itself also claimed deduction for audit, rent. After Internal (IRS) Revenue Service disallowed these de- ductions. Singleton (Singleton),

Edward an ac- countant, taken reviewed the deductions Whitneys, and the Bas- joint taxpayer. filed income tax returns so are treated as one settis, against to allow the de- and asked IRS We reverse and remand for proceedings. them. The ductions to each of IRS sent further (“Offer Singleton Form 870-AD of Waiv- a government argues language on Assessment and Col- er of Restrictions conclusively Form 870-AD determines that Deficiency Accept- in Tax and of lection of signing seeking those it are barred from a Overassessment”) and indicated ance of Alternatively, refund.2 deductible, rent not prepaid that the was Whitneys contends that the equitably deduct a could estopped claiming from a refund since it promissory note as portion of the a busi- representations relied on their in signing expense. ness by letting Form 870-AD the statute of Whitneys and the Bassettis executed limitations run on additional assessments and returned it to Form 870-AD the IRS. partnership. understood execution of the Form The IRS circuit, In this squarely we nondeductibility that the 870-AD to mean decided whether Form 870-AD standing being rent was conceded in prepaid of the estops executing taxpayers alone granted exchange for deduction seeking later Initially, a refund. in Monge partnership. Less one month after (9th Smyth, Cir.1956), v. we accepted the executed Form 870-AD was peripherally indicated that a Form 870-TS IRS, by the this court decided Zaninovich (the predecessor 870-AD), to Form exe (9th Commissioner, 616 F.2d 429 Cir. v. prior deficiency, cuted to a notice of was a (such 1980), prepaid held that rent as agreement accepted by bilateral when by Whitneys) that deducted was a busi IRS and constituted a final determination ness which was deductible in the Later, deficiency. on a tax Id. at 367. year payment. Whitneys then filed Price, (9th United v. States deductibility refund claim for the a Cir.1959) (en banc), appropriately we ruled 1974 rent based on Zaninovich. concerning Monge that the The IRS denied the claim on the basis of (Form 870-AD) validity of the waiver 870-AD, stating the Form it was a Price, dictum. 263 F.2d at 385. binding agreement. settlement addressing Other circuit courts the Form Whitneys then filed this suit in dis- divergent 870-AD have taken They, trict court to seek their refund. finding views. Those Form 870-AD binds along Singleton, alleged Form 870-AD grounds largely a do so suggestion simply was understood to be See, equitable estoppel. e.g., Flynn v. by the as IRS to what law was with 586, States, 786 F.2d Cir. United respect “pack- rent rather than a (also 1986) (dicta) princi applying contract them, age settlement” between States, Coals, ples); Inc. v. Elbo and the IRS. The IRS 818, Cir.1985); 763 F.2d General summary judg- cried foul and moved for States, Split Corp. 500 F.2d v. United granted summary ment. The district court (7th Cir.1974); States, Cain v. United judgment (8th Cir.1958). ground 255 F.2d Courts equitably that the holding Form 870-AD does not in itself receiving a refund because they signed preclude the Form refund 870-AD and the IRS theory authority find their in the detrimentally upon relied it. The appeal grant summary agreement under judgment sec- part year(s) 2. Form stated above other than for 870-AD states: carrybacks provided by accepted amounts attributed If this offer is for the Commission- er, reopened the case shall not be in the law. fraud, malfeasance, However, absence of concealment Form 870-AD also states: fact, misrepresentation or of material an im- filing “NOTE—The execution and of this calculation, portant mistake in mathematical however, not, offer ... will constitute a clos- carry- or allowances of excessive tentative ing agreement section 7121 of the Inter- under law; provided by backs and no claim for nal Revenue Code.” prosecuted refund or credit shall be filed or government); 7121 of the Internal or Lignos, tion Revenue Code is 439 F.2d at whereby disputes means the exclusive (citing Botany); Livestock, Uinta Engineering Co., can settled. Arch (citing F.2d at 765 Botany). Inc. (Fed.Cir.1986) (dicta); Lignos v. United Having found that Form 870-AD (2d Cir.1971); standing control, alone does not we arrive Corp. Livestock v. United Uinta question. at the next Should the (10th Cir.1966); Cain v. cf. seeking be a refund because States, Cir. the IRS decided not to seek other assess J., 1958) (Van Oosterhout, dissenting). against ments and allowed cases, divergent of light these it is clear the of against statute limitations to run it? question easily is not The deci answered. We cannot answer this turn sions on the intricacies of the facts grant record before us. The district court Compare Lignos involved. v. United government summary ed the judgment. States, (2d Cir.1971), with equitable estoppel Whether apply should States, Stair F.2d against Whitneys questions involves of Cir.1975). credibility fact and determinations which reviewing After these cases of must Lignos, be resolved. See 439 F.2d at gamesmanship, nonbinding we believe the 1368; Livestock, Uinta F.2d at position logical is the more view consistent among why Chief is these general principles in with this area. The would enter a “package into settlement” contradictory. in Form 870-AD is with in they which received As such it should against be construed nothing Also, in actually return. what was purports pre drafter.3 Form 870-AD by, of, said and what was the intent reopening disputed vent a parties during negotiations? If the being agree tax case a without settlement government “package believed this awas ment under I.R.C. 7121.4 Since it is not a § settlement,” why didn’t it state that in its deficiency, valid of a tax stand negotiations Singleton and with the Whit ing alone estop executing it should not neys? us, On the record before a refund. Bota Cf. point represen can to no false ny Mills Worsted v. United (since tations Form 870-AD alone will not 282, 288, 129, 131, U.S. L.Ed. suffice) by Whitneys (1929) (an justi which would agreement complying not statutory fy application with the of of requirements equitable for com the doctrine promises binding cannot be estoppel.5 e.g., officer, Flynn, See applying by at any employee, agent con- ified or of principles parole tract to allow evidence to dem- the United complete agreement. onstrate the absence of suit, action, (2) any proceeding, in or such determination, agreement, any or assess- closing 4. Under agreement § I.R.C. a is ment, collection, abatement, payment, re- authorized as follows: fund, or credit made in accordance there- CLOSING AGREEMENTS. with, annulled, modified, shall not be set (a) Secretary is AUTHORIZATION—The au- aside, disregarded. or agreement writing thorized enter into an any relating person liability to the of equitable estoppel applied: 5. For to be (or person person such or estate for (1) representation acts) there must be false or respect any whom he of internal reve- silence; (2) wrongful misleading any period. nue the error tax for taxable (b) fact, originate agreement ap- FINALITY—If must a such statement not proved (within by law; Secretary (3) opinion such time as or a statement of may agreement, be stated in or claiming such later not benefits of must agreed to) agreement facts; such shall be final and (4) person the true know same and, conclusive, except upon showing adversely be must affected the acts or malfeasance, misrepresentation fraud or or estop- statements the one whom an a material fact— pel is claimed. (1) reopened case shall not as to the Lignos, 439 F.2d at 1368. agreed upon matters or the mod- questions taxpayer, by conduct, determination of these his Since language, includes requires others review acts or silence possibly know- ingly representation makes a fact, or improperly court conceals the district trier material facts which he intends or ex- summary judgment. granted pects upon by taxing will be acted offi- and REMANDED. REVERSED determining tax, cials his and the true or concealed material facts are unknown HALL, HOLCOMB Circuit CYNTHIA taxing equal officials or lack Judge, dissenting: knowledge means of taxpayer, with the representation and act on his or conceal- agree majority’s I with the conclusion ment and to steps retrace their on a Form 870-AD is not a different state of facts cause the would agreement. loss of taxes to the Government. I dispute vigorously this.1 dis- does however, agree, majority’s with the conclu- R.H. Stearns Co. v. United us, 54, 61-62, it sion that on the record before cannot 291 U.S. 54 S.Ct. 328, (1934); Whitneys 78 L.Ed. 647 decide whether the are Dickerson v. Col (10 Otto) 578, 580-581, grove, 100 U.S. seeking a refund. The district court 25 (1879) (estoppel theory). L.Ed. 618 See correctly determined that the uncontrovert- Cooper Agency v. United 301 Whitneys the ed facts show that are es- F.Supp. 871, (D.S.C.1969)(citing 876 & n. 8 topped. cases), (4th Cir.), 422 F.2d aff'd, 1331 cert. ques- majority The outlines the factual denied, 904, 143, 400 91 U.S. to determined on remand: Did the tions be (1970). particular L.Ed.2d This test is Whitneys any representation, make false ly appropriate “package in the deal” con required equitable estoppel? Why for did text before us. Id. at 877. Whitneys package the enter into a settle- expressly Second Circuit has itself they ment with the in which rejected test, the applicability Lignos “nothing in Why received return”? did the utilizes, majority which the to the circum- negotia- parties enter into the settlement supra stances of this case. at n. During negotiations, why tions? the didn’t (applying test in Lignos the set forth v. the state that it viewed the (2d Cir.1971)). package settlement as a settlement? Su- In Stair pra at 898. Cir.1975), explains the Second Circuit that questions definitively These are answer- estoppel is available circumstances sim- ed on the facts before us. These facts are explained ilar to those here. The court dispositive despite majority’s the decision Lignos requirement that the of a false ignore to representation applicable was not where it has clear that the Commissioner been First, majority the states that the Whit affected, adversely particularly by run- the neys apparently representa made no false ning Stair, of the statute of limitations. majority tion. believes that a false at 564-565. representation requirement eq is a estoppel. uitable Under circumstances Stair, the court found that there were here, presented appropri I believe that the grounds estoppel taxpayer where the require ate test for does not a misrepresented position by failing his to representation. settlement, In Robinson v. Com his say, at the time of that false Cir.), missioner, file for a refund agreement not to denied, upon tax law re- cert. U.S. 60 S.Ct. conditional the relevant (1939), Stair, maining L.Ed. 476 the court set out these static. 516 F.2d at 565. explained: requirements: The court appeal, majority "government ar- the case. In its brief on consistently argues only 1. The states that the conclusively gues 870-AD] that “[Forms of Form 870-AD barred, changes signing IRS are on a if the determines that those seeking it are representation----” position Supra in reliance on his a refund.” at 897. This is not requires to demon- ment. The facts clearly It elaboration little demonstrate that contrary relationship outcome the close would between the Whit- strate Bissettis, neys, a shield and arm the with both sword, package him enter the lists permit to shows settlement was in- Stairs, tended, it, if losing. no chance benefited from and fare no the Commissioner proceed, to would worse suffered a allowed detriment they already it. It is absurd for the to If negotiating. victorious claim that there was no be- succeeded merits, they even them only would freed tween and the Bissettis. Not sustaining they they their obligation buyer, seller and were from the bargain. partners such of that Given a state also business. half new affairs, imprudent be an tax- it would The deductions taken litiga- did not resort to payer indeed who closely in- linked. compromise. after We see lit- tion even $1,124,376 expenses curred in planting straining Botany to purpose tle Mills crops growing prior to the March breaking point order accommo- sale of the business such a result. date ship. expenses These were deducted on Id. at their and 1975 returns. On the other hand, profits crops from the when har- case, Whitneys represented In this reported by Whitneys vested were not refund, would sue for a (except through flow to them from 2% reasonably relied on that Commissioner partnership)2 reported by but were representation, and there exists a detri (and partnership in 1975 flowed 98% Commissioner, i.e., expira ment to the the through Bissettis). to the period tion the of of statute limitations parties prevented the the related Commis $1,124,- partnership The also claimed the recouping from sioner concessions made planting growing and of the package the settlement. This detriment crops as a deduction on its 1975 return. by estoppel other cannot rectified Ninety-eight percent of of the the benefit Whitneys. of the Where there a settle through partnership the deduction flowed taxpayer multiple regarding ment with one reported to the Bissettis and was on their issues, may litigate the is Commissioner reported on 1975 return and was the 2% though aby sues conceded settlement even Whitney’s (resulting 1975 return dou- the statute of has run. limitations Whitney’s ble deduction of this the 2% McGraw-Hill, Inc. v. 623 return). The of this deduction was basis (Ct.Cl.1980)(doctrine F.2d of note, n. paid the Bissettis’ which was where, equitable However, recoupment). partnership originally 1975. had not here, multiple as the and statute has run this deduction claimed return. involved, taxpayer settlement is the Com planting growing Part of the cost of and of missioner “cannot set off deficiencies rent, crops represented prepaid namely, taxpayers against other claims the the of $206,048 $287,116 in 1974 and D.D.I., plaintiff Id.; taxpayers.” see prepaid Commissioner contended these Inc. expenses by rental were not the deductible (Ct.Cl.1972), denied, 414 U.S. cert. Whitneys in 1974 and 1975. The conferee (1973); Cooper 38 L.Ed.2d 65 partnership the denied deduction the Agency, F.Supp. repre at 877. “False unpaid amount of the note and for the sentations” therefore should not be re rent, explaining amount quired. note cash basis cannot deduct the remaining questions allegedly paid left and cannot rent. until deduct presented partnership for the the majority unanswered relate to This package receiving benefits and the income existence settle- dilemma through reported solely partners an are A return is information and partners' return and all income and deductions flow individual returns. crops grown getting them, of the but no sale each of and the entire matter to offset that income. by deductions On was handled one district conferee and hand, Whitneys other claimed the de- was later appellate handled confer- expenses reported ductions for the single ee. The relat- the income. The none of set- parties, although, ed to all the as is custom- gave tlement both the and the ary, separate Forms 870-AD were sent to partnership the deductions for the cost of each taxpayer. It was only after all planting growing except crops, for Forms 870-AD signed and returned prepaid rent. taxpayers the Commissioner signed light entanglement of the relationship between the parties deductions, and their there is ship, Whitneys, and the Bissettis raised no doubt that the Commissioner would not questions regarding the propriety have settled with the separately. First, question deductions. there taxpayers may of which claim deduc- I therefore believe that Whitneys years. tions and for which The second estopped a refund. The ma- report was which must jority applies test which courts crops. the income from the sale of the inappropriate have held in circumstances similar if not identical to those here. The The Commissioner could have resolved close Whitneys, between the ways. these issues in numerous As a mat- Bissettis and the shows that a accounting, ter of the Commissioner could package deal was intended and the Whit- attempted expenses to match neys benefited therefrom. The Commis- the income and attributed both to one tax- representations sioner relied on their payer or the other. Under section signing the Form Code, by allowing 870-AD the Internal Revenue the Commis- statute of limitations to run sioner could have on additional allocated the income among parties. assessments the related entities on the basis of related The facts established in the taxpayer’s money gave record are suf- work uphold rise to the ficient to the summary judgment income. U.S.C. 482. Un- § rule, granted by der the tax benefit Commissioner district court.

could have denied the deductions to the

entity report that did not the income.

Therefore, settlement, under the the Com-

missioner relinquished possible all these issues,

resolutions of the and the

ship thereby benefited. further from the benefited disparate because of the finan- TOUSSAINT, Joseph al., et cial circumstances of groups two Plaintiffs-Appellees, taxpayers. Because the were high taxpayers, income the deductions McCARTHY, al., Daniel et were more valuable to the Defendants-Appellants. to the Bissettis who could not use all their deductions in three-year 1975 or in the 84-2833, 85-1507, 85-1878, Nos. 85-2526. carryback years five-year and the forward Appeals, United States Court of years. The income was more valuable to Ninth Circuit. the Bissettis. Argued

The close July the Whit- and Submitted between neys “package” and Bissettis and the na- Sept. Decided ture of the settlement are further illustrat- repre- ed the fact groups that both public

sented pub- accountant. This

lic Attorney accountant had a Power of

Case Details

Case Name: William Whitney and Barbara Whitney v. United States

Court Name: Court of Appeals for the Ninth Circuit

Date Published: Sep 1, 1987

Citation: 826 F.2d 896

Docket Number: 85-2387

Court Abbreviation: 9th Cir.