Opinion ID: 77516
Heading Depth: 2
Heading Rank: 2

Heading: The Effect of the IRS Closing Agreements

Text: 43 To circumvent the obvious impact of Lane on his case, Ellinger argues that [t]he traditional indicia of bona fide indebtedness became irrelevant when the government and the parties executed the closing agreements. Appellant's Br. at 15. Specifically, Ellinger asserts that the closing agreement entered into between the IRS and Aberdeen, in settlement of the prior Tax Court litigation, explicitly stated that the advances made by [Aberdeen] to GlobalTel . . . constitute[d] genuine indebtedness owed by GlobalTel and ProMail to [Aberdeen]. R1-14, Ex. A at 2. Ellinger construes this provision as a quasi-admission by the IRS that the transfers in question were to be viewed as debt; he contends that, because the provision in the Aberdeen closing agreement conclusively binds the IRS to the view that the transfers were debts, the IRS should not be permitted to take a different position in characterizing the transfers. 9 44 Ellinger's appeal hinges on the language of the Aberdeen closing agreement. In effect, he has conceded that the only evidence he has to show the existence of a bona fide debt is the language of that document. The problem with Ellinger's argument, however, is that the reference to the transfers as debts only appears in the closing agreement between the IRS and Aberdeen; the closing agreements between the IRS and GlobalTel and ProMail, on the other hand, are devoid of any such language. 10 45 Section 7121 of the Code authorizes the Secretary of the Treasury to enter into written settlement agreements with any person relating to the liability of such person ... in respect of any internal revenue tax for any taxable period. 26 U.S.C. § 7121(a). Such agreements are deemed to be final and conclusive, and shall not be reopened as to the matters agreed upon. § 7121(b). In turn, [t]reasury regulations authorize the Commissioner [of Internal Revenue] to enter into written closing agreements relating to a person's tax liability and give these agreements final and conclusive effect. Crowell v. IRS, 305 F.3d 474, 476 (6th Cir.2002) (citing 26 C.F.R. § 301.7121-1(a), (c)). 46 Closing agreements are contracts in the ordinary legal sense of the term, and, as such, they are governed by ... federal common law contract principles. United States v. Nat'l Steel Corp., 75 F.3d 1146, 1150 (7th Cir.1996). Consequently, they are interpreted under general principles of contract law and are binding on the parties who enter into them. Id. See also Phillips v. Comm'r, 178 F.2d 270, 271 (3d Cir.1949) (per curiam) (declining to enforce a closing agreement where the plaintiffs were strangers to [the] agreement, and stating that they could neither be bound by it nor [could] they take advantage of it). 47 Moreover, we have stated that IRS closing agreements are exclusive and are to be strictly construed. Klein v. Comm'r, 899 F.2d 1149, 1152 (11th Cir. 1990). That is, only matters specifically spelled out in a closing agreement as being resolved will be treated as settled. Geringer v. Comm'r, 61 T.C.M. (CCH) 1738, at  (Jan. 28, 1991) (citing Zaentz v. Comm'r, 90 T.C. 753, 766, 1988 WL 34876 (1988)). Premises underlying the agreement, or premises not specifically noted as settled, are not binding on the parties to the agreement. Id. 48 Ellinger is seeking to pass-through the claimed COD income based upon his position as a shareholder in GlobalTel and ProMail, not as a shareholder in Aberdeen. In reviewing the GlobalTel and Pro-Mail closing agreements, however, those two documents are silent as to whether the transfers from Aberdeen constituted genuine indebtedness. Indeed, they fail to take any clear position as to how the transfers should be viewed. 11 These two contractual agreements, standing alone, do not indicate that the parties to them (the IRS, GlobalTel, and ProMail) expressly agreed to treat the transfers as bona fide debts. There is no evidence that the nature of the transfers was ever specifically noted as settled between the parties to the two agreements. See id. In examining the agreements between the IRS, GlobalTel, and ProMail according to general principles of contract interpretation, we can conclude only that the transfers were viewed by the parties, rather open-endedly, as transactions. On their face, the closing agreements do not settle conclusively that the transfers to GlobalTel and ProMail constituted genuine debts. 49 It is true, as Ellinger contends, that the closing agreement between Aberdeen and the IRS described the transfers as genuine indebtedness, R1-14, Ex. A at 2, but that agreement only binds the parties to that agreement, Aberdeen and the IRS. As the district court correctly observed, [t]he closing agreement signed by Aberdeen . . . does not relate to the tax liabilities of GlobalTel, ProMail, or the shareholders of those two companies. R1-31 at 19. It bears reiterating that Ellinger's tax refund claim is based upon his standing as a shareholder in GlobalTel and Pro-Mail, not his standing as a shareholder in Aberdeen, and the contractual language of the agreements between those two corporations and the IRS fails to prove the existence of a debt. We agree with the decisions of the Tax Court holding that courts should avoid includ[ing] as part of the [GlobalTel and ProMail] agreement[s] matters other than the matters specifically agreed upon and mentioned in the closing agreement. See Zaentz, 90 T.C. at 766. 50 Ellinger contends that the GlobalTel and ProMail closing agreements must be construed contextually; he seeks to interpret those agreements alongside the more explicit language of the Aberdeen agreement. In effect, Ellinger would have us view the GlobalTel and ProMail closing agreements as partially integrated contracts. [I]f a document is determined to be [] partially integrat[ed], then prior or contemporaneous oral or written agreements can be incorporated provided they do not contradict a term of the existing writing. Marathon Oil Co. v. United States, 42 Fed.Cl. 267, 275 (1998). Essentially, Ellinger seeks to take the separate reference to genuine indebtedness in the Aberdeen agreement and to incorporate it into the GlobalTel and ProMail agreements. R1-14, Ex. A at 2. 51 However, the agreements with GlobalTel and ProMail are fully integrated; they expressly state that they are final and conclusive and that their provisions are to be given full effect. R1-14, Ex. B at 3, Ex. C at 3. While the GlobalTel and ProMail agreements do not define the Aberdeen transfers, they are conclusive in settling the issue of tax liability among the IRS, GlobalTel, and ProMail. Indeed, the terms of the closing agreements state quite clearly what the matters agreed upon are. See Marathon Oil, 42 Fed.Cl. at 275. We find no grounds to view them as partially integrated or in need of supplemental, extrinsic evidence. Accordingly, Ellinger's attempt to incorporate the reference to genuine indebtedness in the Aberdeen agreement into the GlobalTel and ProMail agreements is unavailing. 52 Nor can Ellinger prevail on his argument that the closing agreements contain lurking ambiguities. While it is hornbook contract law that a court may rely on parol evidence to explain or clarify an ambiguity in a contract, Marathon Oil, 42 Fed.Cl. at 275, where the essential terms of a contract are unambiguous the court will not look beyond the four corners of the document to determine the parties' intent. Rink v. Comm'r, 47 F.3d 168, 171 (6th Cir.1995). Although the agreements between the IRS, GlobalTel, and ProMail lack an express definition of the Aberdeen transfers, that fact does not make them ambiguous or vague. Indeed, the fact that the GlobalTel and ProMail contracts are of limited scope indicates that the parties intended to agree to a narrow set of premises, without resolving each and every aspect of their dispute. See, e.g., Geringer, 61 T.C.M. (CCH) 1738 at  (The limited scope of the closing agreement does not make it ambiguous. The agreement is simply limited to those matters contained therein.). See also Bethlehem Steel Corp. v. United States, 270 F.3d 135, 142-44 (3d Cir.2001) (finding that the parties to the closing agreement deliberately opted to exclude certain issues from the contract, and concluding that [i]n light of the Agreement's self-consciously limited scope, its silence regarding these matters unambiguously demonstrates that they were simply not terms agreed upon by the parties). Therefore, we do not conclude that the GlobalTel and ProMail closing agreements are ambiguous or unclear. 53 Finally, Ellinger cites to a written Appeals Memorandum that was prepared by the IRS prior to the settlement of the Tax Court litigation between Ellinger and the IRS, concerning his 1995 readjustment of the Aberdeen transfers. In the course of that settlement memorandum, which was prepared prior to the execution of the closing agreements, the IRS stated that GlobalTel and ProMail had agreed that the advances would be treated as loans from Aberdeen. R1-15, Ex. A at 4. Ellinger construes this as an effective admission by the IRS that the transfers were loans. This argument is also meritless, since the language of the closing agreements with GlobalTel and ProMail is clear and fully integrated. The IRS closing agreements would be undermined if the taxpayer could present the testimony of the IRS agents who had negotiated the agreement [to] mean [] something different from what it says. Nat'l Steel, 75 F.3d at 1150. Accordingly, we decline Ellinger's invitation to look beyond the four corners of the closing agreements with GlobalTel and ProMail. Those agreements are clear, standing alone, and they fail to prove the existence of a debt. 54 Judge Learned Hand once mused that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. 12 In this case, Ellinger, like millions of taxpayers, made a good-faith attempt to do just that. In pursuing his tax refund, however, Ellinger has failed to offer sufficient evidence to support his claim that there was a valid debt running from Aberdeen to GlobalTel and ProMail. Ellinger's attempts to rely on a separate provision of a previously executed closing agreement with the IRS have proven futile, especially since GlobalTel and ProMail were strangers to that agreement and were neither bound by it nor [could] they take advantage thereof. Phillips, 178 F.2d at 271. Because Ellinger cannot rely upon the closing agreements with GlobalTel and ProMail, he has been relegated to proving indebtedness according to the traditional debt-equity analysis we set forth in Lane. Under that analysis, it is clear that there were no indicia of traditional debt in connection with this transfer. Because there is insufficient evidence of an enforceable debt in this case, Ellinger was not entitled to claim COD income arising from a discharge of that debt. And because we hold that Ellinger has failed at the outset to establish the existence of a bona fide debt, we need not reach his second contention that the claimed debt was later discharged by Aberdeen, thereby creating COD income.