Whitney v. U.S.

• Decision Date: 01 September 1987
• Docket Number: No. 85-2387,85-2387
• Citation: 826 F.2d 896
• Parties: -5547, 87-2 USTC P 9503 William WHITNEY and Barbara Whitney, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 896

826 F.2d 896

60 A.F.T.R.2d 87-5547, 87-2 USTC P 9503

William WHITNEY and Barbara Whitney, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 85-2387.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 10, 1987.

Decided Sept. 1, 1987.

Edward M. Alvarez and Charles H. Sabes, San Jose, Cal., for plaintiffs-appellants.

Martha Brissette, Michael L. Paup and Robert S. Pomerance, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before ANDERSON, ALARCON and HALL, Circuit Judges.

J. BLAINE ANDERSON, Circuit Judge:

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

Edward Singleton (Singleton), an accountant, reviewed the deductions taken by the Whitneys, the partnership and the Bassettis and asked the IRS to allow the deductions to each of them. The IRS sent Singleton a Form 870-AD ("Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment") and indicated that the prepaid rent was not deductible, but that the partnership could deduct a portion of the promissory note as a business expense.

The Whitneys and the Bassettis executed Form 870-AD and returned it to the IRS. The IRS understood execution of the Form 870-AD to mean that the nondeductibility of the prepaid rent was being conceded in exchange for the deduction granted to the partnership. Less than one month after the executed Form 870-AD was accepted by the IRS, this court decided Zaninovich v. Commissioner, 616 F.2d 429 (9th Cir.1980), which held that prepaid rent (such as that deducted by the Whitneys) was a business expense which was deductible in the year of payment. The Whitneys then filed a refund claim for the deductibility of the 1974 prepaid rent based on Zaninovich. The IRS denied the claim on the basis of the Form 870-AD, stating that it was a binding settlement agreement.

The Whitneys then filed this suit in district court to seek their refund. They, along with Singleton, alleged Form 870-AD was understood to be simply a suggestion by the IRS as to what the law was with respect to prepaid rent rather than a "package settlement" agreement between them, the partnership and the IRS. The IRS cried foul and moved for summary judgment. The district court granted summary judgment for the government on the ground that the Whitneys were equitably estopped from receiving a refund because they signed the Form 870-AD and the IRS detrimentally relied upon it. The Whitneys appeal the grant of summary judgment against them. We reverse and remand for further proceedings.

The government argues the language of Form 870-AD conclusively determines that those signing it are barred from seeking a refund. ² Alternatively, the government contends that the Whitneys are equitably estopped from claiming a refund since it relied on their representations in signing Form 870-AD by letting the statute of limitations run on additional assessments against the partnership.

In this circuit, we have not squarely decided whether Form 870-AD standing alone estops the executing taxpayers from later seeking a refund. Initially, in Monge v. Smyth, 229 F.2d 361 (9th Cir.1956), we peripherally indicated that a Form 870-TS (the predecessor to Form 870-AD), executed prior to a notice of deficiency, was a bilateral agreement when accepted by the IRS and constituted a final determination on a tax deficiency. Id. at 367. Later, in United States v. Price, 263 F.2d 382 (9th Cir.1959) (en banc), we appropriately ruled that the language in Monge concerning the validity of the waiver (Form 870-AD) was dictum. Price, 263 F.2d at 385.

Other circuit courts addressing the Form 870-AD question have taken divergent views. Those finding Form 870-AD binds a taxpayer do so largely on grounds of equitable estoppel. See, e.g., Flynn v. United States, 786 F.2d 586, 591 (3d Cir.1986) (dicta) (also applying contract principles); Elbo Coals, Inc. v. United States, 763 F.2d 818, 821 (6th Cir.1985); General Split Corp. v. United States, 500 F.2d 998, 1004 (7th Cir.1974); Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958). Courts holding Form 870-AD does not in itself preclude a taxpayer from seeking a refund find their authority in the theory that a binding settlement agreement under section 7121 of the Internal Revenue Code is the exclusive means whereby tax disputes can be settled. See Arch Engineering Co., Inc. v. United States, 783 F.2d 190, 192 (Fed.Cir.1986) (dicta); Lignos v. United States, 439 F.2d 1365, 1367 (2d Cir.1971); Uinta Livestock Corp. v. United States, 355 F.2d 761 (10th Cir.1966); cf. Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958) (Van Oosterhout, J., dissenting). In light of these divergent cases, it is clear the question is not easily answered. The decisions turn on the intricacies of the facts involved. Compare Lignos v. United States, 439 F.2d 1365 (2d Cir.1971), with Stair v. United States, 516 F.2d 560 (2d Cir.1975).

After reviewing these cases of tax gamesmanship, we believe the nonbinding position is the more logical view consistent with general principles in this area. The language in Form 870-AD is contradictory. As such it should be construed against the drafter. ³ Form 870-AD purports to prevent taxpayers from reopening a disputed tax case without being a settlement agreement under I.R.C. Sec. 7121. ⁴ Since it is not a valid compromise of a tax deficiency, standing alone it should not estop the executing taxpayer from seeking a refund. Cf. Botany Worsted Mills v. United States, 278 U.S. 282, 288, 49 S.Ct. 129, 131, 73 L.Ed. 379 (1929) (an agreement not complying with the statutory requirements for compromises cannot be binding on the taxpayer or the government); Lignos, 439 F.2d at 1367 (citing Botany ); Uinta Livestock, 355 F.2d at 765 (citing Botany ).

Having found that Form 870-AD standing alone does not control, we arrive at the next question. Should the Whitneys be estopped from seeking a refund because the IRS decided not to seek other assessments against the partnership and allowed the statute of limitations to run against it? We cannot answer this question on the record before us. The district court granted the government summary judgment. Whether equitable estoppel should apply against the Whitneys involves questions of fact and credibility determinations which must be resolved. See Lignos, 439 F.2d at 1368; Uinta Livestock, 355 F.2d at 767. Chief among these is why the Whitneys would enter into a "package settlement" with the partnership in which they received nothing in return. Also, what was actually said by, and what was the intent of, the parties during the negotiations? If the government believed this was a "package settlement," why didn't it state that in its negotiations with Singleton and the Whitneys? On the record before us, the government can point to no false representations (since Form 870-AD alone will not suffice) by the Whitneys which would justify application of the doctrine of equitable estoppel. ⁵

Since a determination of these questions and possibly others requires review by a trier of fact, the district court improperly granted summary judgment.

REVERSED and REMANDED.

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 estopped.

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...