Court Opinion

ID: 9476591
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:00:05.353005+00
Date Added: 2024-06-11T17:45:24.314560
License: Public Domain

CYNTHIA HOLCOMB HALL, Circuit Judge,
dissenting:
I agree with the majority’s conclusion that the Form 870-AD is not a binding settlement agreement. The government does not dispute this.1 I vigorously disagree, however, with the majority’s conclusion that on the record before us, it cannot decide whether the Whitneys are estopped from seeking a refund. The district court correctly determined that the uncontroverted facts show that the Whitneys are es-topped.
The majority outlines the factual questions to be determined on remand: Did the Whitneys make any false representation, required for equitable estoppel? Why did the Whitneys enter into a package settlement with the partnership in which they received “nothing in return”? Why did the parties enter into the settlement negotiations? During the negotiations, why didn’t the government state that it viewed the settlement as a package settlement? Supra at 898.
These questions are definitively answered on the facts before us. These facts are dispositive despite the majority’s decision to ignore them.
First, the majority states that the Whitneys apparently made no false representation. The majority believes that a false representation is a requirement of equitable estoppel. Under the circumstances presented here, I believe that the appropriate test for estoppel does not require a false representation. In Robinson v. Commissioner, 100 F.2d 847, 849 (6th Cir.), cert. denied, 308 U.S. 567, 60 S.Ct. 81, 84 L.Ed. 476 (1939), the court set out these requirements:
The taxpayer, by his conduct, which includes language, acts or silence knowingly makes a representation or conceals material facts which he intends or expects will be acted upon by taxing officials in determining his tax, and the true or concealed material facts are unknown to the taxing officials or they lack equal means of knowledge with the taxpayer, and act on his representation or concealment and to retrace their steps on a different state of facts would cause the loss of taxes to the Government.
See also R.H. Stearns Co. v. United States, 291 U.S. 54, 61-62, 54 S.Ct. 325, 328, 78 L.Ed. 647 (1934); Dickerson v. Colgrove, 100 U.S. (10 Otto) 578, 580-581, 25 L.Ed. 618 (1879) (estoppel theory). See Cooper Agency v. United States, 301 F.Supp. 871, 876 & n. 8 (D.S.C.1969) (citing cases), aff'd, 422 F.2d 1331 (4th Cir.), cert. denied, 400 U.S. 904, 91 S.Ct. 143, 27 L.Ed.2d 141 (1970). This test is particularly appropriate in the “package deal” context before us. Id. at 877.
The Second Circuit has itself expressly rejected the applicability of the Lignos test, which the majority utilizes, to the circumstances of this case. See supra at n. 5 (applying the test set forth in Lignos v. United States, 439 F.2d 1365 (2d Cir.1971)). In Stair v. United States, 516 F.2d 560 (2d Cir.1975), the Second Circuit explains that estoppel is available in circumstances similar to those here. The court explained that the Lignos requirement of a false representation was not applicable where it is clear that the Commissioner has been adversely affected, particularly by the running of the statute of limitations. Stair, 516 F.2d at 564-565.
In Stair, the court found that there were grounds for estoppel where the taxpayer misrepresented his position by failing to say, at the time of settlement, that his agreement not to file for a refund was conditional upon the relevant tax law remaining static. Stair, 516 F.2d at 565. The court explained:
*900It requires little elaboration to demonstrate that a contrary outcome would arm the taxpayer with both a shield and a sword, and permit him to enter the lists with no chance of losing. The Stairs, if allowed to proceed, would fare no worse than the compromise they have already succeeded in negotiating. If victorious on the merits, they would be freed even from the obligation of sustaining their half of that bargain. Given such a state of affairs, it would be an imprudent taxpayer indeed who did not resort to litigation even after compromise. We see little purpose in straining Botany Mills to the breaking point in order to accommodate such a result.
Id. at 565.
In this case, the Whitneys represented that they would not sue for a refund, the Commissioner reasonably relied on that representation, and there exists a detriment to the Commissioner, i.e., the expiration of the statute of limitations period for the related parties prevented the Commissioner from recouping concessions made in the package settlement. This detriment cannot be rectified other than by estoppel of the Whitneys. Where there is a settlement with one taxpayer regarding multiple issues, the Commissioner may litigate issues conceded by a settlement even though the statute of limitations has run. McGraw-Hill, Inc. v. United States, 623 F.2d 700, 706 n. 7 (Ct.Cl.1980) (doctrine of equitable recoupment). However, where, as here, the statute has run and a multiple taxpayer settlement is involved, the Commissioner “cannot set off deficiencies of other taxpayers against the claims of the plaintiff taxpayers.” Id.; see also D.D.I., Inc. v. United States, 467 F.2d 497, 500 (Ct.Cl.1972), cert. denied, 414 U.S. 830, 94 S.Ct. 61, 38 L.Ed.2d 65 (1973); Cooper Agency, 301 F.Supp. at 877. “False representations” therefore should not be required.
The remaining questions allegedly left unanswered for the majority relate to the benefits and existence of a package settlement. The facts clearly demonstrate that the close relationship between the Whitneys, the Bissettis, and the partnership shows that a package settlement was intended, the Whitneys benefited from it, and the Commissioner suffered a detriment from it. It is absurd for the Whitneys to claim that there was no relationship between them and the Bissettis. Not only were they seller and buyer, but they were also partners in the new business.
The deductions taken by the taxpayers are also closely linked. The Whitneys incurred $1,124,376 of expenses in planting and growing crops prior to the March 1, 1975 sale of the business to the partnership. These expenses were deducted on their 1974 and 1975 returns. On the other hand, the profits from the crops when harvested were not reported by the Whitneys (except for 2% flow through to them from the partnership)2 but were reported by the partnership in 1975 (and 98% flowed through to the Bissettis).
The partnership also claimed the $1,124,-376 expense of planting and growing the crops as a deduction on its 1975 return. Ninety-eight percent of the benefit of the deduction flowed through the partnership to the Bissettis and was reported on their 1975 return and 2% was reported on the Whitney’s 1975 return (resulting in a double deduction of this 2% on the Whitney’s return). The basis of this deduction was the Bissettis’ note, which was not paid in 1975. The partnership had not originally claimed this deduction on its return.
Part of the cost of planting and growing crops represented prepaid rent, namely, $206,048 in 1974 and $287,116 in 1975. The Commissioner contended that these prepaid rental expenses were not deductible by the Whitneys in 1974 and 1975. The conferee denied the partnership deduction for the amount of the unpaid note and for the amount of prepaid rent, explaining that a cash basis taxpayer cannot deduct the note until paid and cannot deduct prepaid rent. This presented the partnership with the dilemma of receiving the income from the *901sale of the crops grown but getting no deductions to offset that income. On the other hand, the Whitneys claimed the deductions for the expenses but reported none of the income. The compromise settlement gave both the Whitneys and the partnership the deductions for the cost of planting and growing the crops, except for prepaid rent.
The relationship between the partnership, the Whitneys, and the Bissettis raised questions regarding the propriety of the deductions. First, there was the question of which taxpayers may claim the deductions and for which years. The second question was which taxpayer must report the income from the sale of the crops.
The Commissioner could have resolved these issues in numerous ways. As a matter of accounting, the Commissioner could have attempted to match the expenses and the income and attributed both to one taxpayer or the other. Under section 482 of the Internal Revenue Code, the Commissioner could have allocated the income among the related entities on the basis of which taxpayer’s work and money gave rise to the income. 26 U.S.C. § 482. Under the tax benefit rule, the Commissioner could have denied the deductions to the entity that did not report the income. Therefore, under the settlement, the Commissioner relinquished all these possible resolutions of the issues, and the partnership thereby benefited.
The Whitneys further benefited from the settlement because of the disparate financial circumstances of the two groups of taxpayers. Because the Whitneys were high income taxpayers, the deductions were more valuable to the Whitneys than to the Bissettis who could not use all their deductions in 1975 or in the three-year carryback years and the five-year forward years. The income was more valuable to the Bissettis.
The close relationship between the Whitneys and Bissettis and the “package” nature of the settlement are further illustrated by the fact that both groups were represented by one public accountant. This public accountant had a Power of Attorney from each of them, and the entire matter was handled by one district conferee and was later handled by one appellate conferee. The single settlement agreement related to all the parties, although, as is customary, separate Forms 870-AD were sent to each taxpayer. It was only after all Forms 870-AD were signed and returned by the taxpayers that the Commissioner signed them. In light of the entanglement of the parties and their deductions, there is no doubt that the Commissioner would not have settled with the taxpayers separately.
I therefore believe that the Whitneys are estopped from seeking a refund. The majority applies an estoppel test which courts have held inappropriate in circumstances similar if not identical to those here. The close relationship between the Whitneys, Bissettis and the partnership shows that a package deal was intended and the Whitneys benefited therefrom. The Commissioner relied on their representations in signing the Form 870-AD by allowing the statute of limitations to run on additional assessments against the related parties. The facts established in the record are sufficient to uphold the summary judgment granted by the district court.

. The majority states that the "government argues the language of Form 870-AD conclusively determines that those signing it are barred, from seeking a refund.” Supra at 897. This is not the case. In its brief on appeal, the government consistently argues only that “[Forms 870-AD] are binding on a taxpayer if the IRS changes its position in reliance on his representation----”

. A partnership return is solely an information return and all income and deductions flow through to the partners and are reported on the partners' individual returns.