Office of Chief Counsel

date:

to:

from:

subject:

Office of Chief Counsel

Internal Revenue Service

memorandum

CC:WR: SWD: PNX: TL-N-6274-99

RVHosler

DEC 17 1999

Chief, Examination Division, Southwest District

Attn: Jackie Topping, Case Manager

Craig Joines, Team Coordinator

District Counsel, Southwest District, Phoenix

Taxpayer:

Request for Advice

DISCLOSURE STATEMENT

This advice constitutes return information subject to I.R.C.

§ 6103. This advice contains confidential information subject to

attorney~client and deliberative process privileges and if

prepared in contemplation of litigation, subject to the attorney

work product privilege. Accordingly, the Collection, Examination

or Appeals recipient of this document may provide it only to

those persons whose official tax administration duties with

respect to this case require such disclosure. In no event may

this document be provided to Collection, Examination, Appeals, or

other persons beyond those specifically indicated in this

statement. This advice may not be disclosed to taxpayers or

their representatives.

This advice is not binding on Collection, Examination or

Appeals and is not a final case determination. Such advice is

advisory and does not resolve Service position on an issue or

provide the basis for closing a case. The determination of the

Service in the case is to be made through the exercise of the

independent judgment of the office with jurisdiction over the

case.

ISSUE

Is the taxpayer precluded from filing a claim for additional

Investment Tax Credit (ITC) for the year GE nen the taxpayer

and the Service have previously executed a Form 870, Waiver of

Restrictions on Assessment and Collection of Deficiency in Tax

and Acceptance of Overassessment, which provides that the

taxpayer's return for the year at issue will be accepted with no

change.

FACTS

is a holding company which

files a consolidated return. is a

11100

CC:WR:SWD:PNX:TL-N 274-99 page 2

first tier subsidiary of | ER accounts for approximately

of the revenues and_assets of EBB this issue in this

case relates solely to

| a public utility subject to regulation by the Arizona

State Corporation Commission (ASCC) and the Federal Energy

Regulatory Commission (FERC).

on , te ii... samo:

executed a Form 870, Waiver of Restrictions on

Assessment and Collection of Deficiency in Tax and Acceptance of

Overassessment. |The waiver covered the years ended December 31,

, MR, and At the time the waiver was executed, valid

Forms 872, Consent to Extend the Time to Assess Tax, were in

effect for the years covered by the waiver.

For the year the waiver stated "No change with

adjustments." s claimed ITC for the year was examined

and accepted as claimed. The sole adjustment to Ss

return consisted of decreasing a NOL carryback from by $

MS saan increasing a NOL carryback from by $

T ervice posted a zero assessment to unt for

for the no change determination on

At a meeting on ME stated that it

intended to file a claim for addition a" | ax credits?

of for the years a fae =a Al The

additional ITC results from the recomputation of Qs 7c

in the transition years J through BF.

* Prior to amendment in 1986, the tax code provided for an

investment tax credit designed to encourage investment in certain

long-lived assets by providing to the investing taxpayer a onetime tax credit of 10 percent of the cost of the property.

I.R.C. § 46. Use of the credit, however, was not automatic. For

example, if a taxpayer had a net operating loss, there would be

no tax liability, and the credit could not be utilized. I.R.C.

$ 38(c). Such a credit was not necessarily lost but could be

elther “carried back” up to three years, or “carried forward” up

to fifteen (15) years to reduce tax liabilities in those years,

I.R.C. § 39 (a).

2 The 1986 amendments generally repealed the investment tax

credit, I.R.C. § 49(a), an exception remained for “transition

property”, which is property purchased prior to 1986 but placed

into service in 1986 or later. I.R.C. § 49(b) (1). After the

1986 amendments, the amount of the investment tax credit for

transition property depended on when the property owner placed

the property into service. Although transition property placed

into service in 1986 provided the full 10 percent, transition

property placed into service in 1987 provided a credit of 8.25

CC:WR:SWD:PNX:TL-N 274-99 page 3

Currently, the tax years || | MM. anc |

for [RBM are open under consents to extend the time to assess

tax. The Appeals Office and are presently in the

process of negotiating a_comprehensive settlement for these

years. The Service and previously agreed to a

settlement for the years and MBM. 39=The settlements for the

vers i, i, OL , and MBBBwill be set forth on Forms

870-AD, Offer of Waiver of Restriction on Assessment and

Collection of Deficiency in Tax and Acceptance of Overassessment.

Under the expected terms of the Appeals Office settlement,

will have no regular tax liabilities prior to the year

ae. Will have an assortment of carryforwards and

All of those tax benefits will be utilized

carryovers into a.

“ during the years , and

if

ANALYSIS

Respondent is authorized by I.R.C. § 7121 to enter into a

written agreement “with any person relating to the liability of

such person (or of the person or estate for whom he acts) in

respect of any internal revenue tax for any taxable period.” The

foregoing section is the *exciusive procedure under which a final

Closing agreement as to the tax liability of any person can be

executed.” Estate of Meyer v. Commissioner, 58 T.C. 69, 70

(1972); see also Botany Worsted Milis v. United States, 278 U.S.

282, 288 (1929) .3

Forms 870, Waiver of Restrictions on Assessment and

Collection of Deficiency in Tax and Acceptance of Overassessment,

and 870-AD, Offer of Waiver of Restrictions on Assessment and

Collection of Deficiency in Tax and of Acceptance of

Overassessment, are the general forms the Service utilizes for

settlement agreements. Forms 870 and 870-AD do not constitute

binding closing agreements under section 7121. The forms are

percent, and transition property placed into service in 1988 or

later provided a tax credit of only 6.5 percent. Similarly, the

amendments effected a 35 percent reduction in the amount of

unexpired investment tax credits that could be carried forward to

1988 or later. I.R.C. § 49{c) (2).

> All closing agreements shall be executed on forms

prescribed by the Internal Revenue Service. I.R.C.

§ 301.7121-1(d). Three forms of closing agreement have been

prescribed: (1) Form 866, Agreement as to Final Determination of

Tax Liability; (2) Form 906, Closing Agreement as to Final

Determination Covering Specific Matters; and (3) combined

agreements which determine both tax liability and specific

Matters. Zaentz v. Commissioner, 90 T.C. 753 (1988); Rev. Proc.

68-16, 1968-1 C.B. 770.

CC:WR:SWD:PNX:TL-N 1274-99 page 4

merely waivers by taxpayer of the statutory notice requirements

imposed upon respondent by section 6213(a). Consolidated

Freightways, Inc. v. United States, 620 F.2d 862, 868 (Ct. Cl.

1980); Digby v. Commissioner, 103 T.C. 441 (1994); Wolf v.

Commissioner, T.C. Memo. 1991-212,

Execution of a Form 870 does not waive the taxpayer’s right

to seek a refund in district court or in the United States Claims

Court following payment of the amount listed on the Form. Nor

does it effect the ability of the Service to seek additional

deficiencies. See Philadelphia & Reading Corporation v. United

States of America, 738 F. Supp. 143 (3d Cir. 1991); Wolf v.

Commissioner, T.C. Memo. 1991-212; Maloney v. Commissioner, T.C.

Memo. 1986-91. In this case, the form itself clearly says as

much. The executed Form 870 reads as follows:

I consent to the immediate assessment and collection of

any deficiencies (increase in tax and penalties) and

accept any overassessment (decrease in tax and

penalties) shown above, plus any interest provided by

law, I understand that by signing this waiver, I will

not be able to contest these years in the United States

Tax Court, unless additional deficiencies are

determined for these years.

A Form 870 standing alone will not estop a taxpayer from

later seeking a refund or credit. See Whitney v. United States,

826 F.2d 896 (9° Cir. 1987). Accordingly, either or

the Service could have subsequently modified the positions set

forth in the Form 870.

The next question is whether BE ccd be estopped

from seeking an increase in its ITC for MB a Form 870 may be

binding on a taxpayer if the Service changed its position in

reliance on the taxpayer's representations. For equitable

estoppel to be applied:

(1) there must be false representation or wrongful

misleading silence; (2) the error must originate ina

Statement of fact, not in an opinion or a statement of

law; (3) the one claiming the benefits of estoppel must

not know the true facts; and (4) that same person must |

be adversely affected by the acts or statements of the

one against whom an estoppel is claimed.

Whitney v. United States, 826 F.2d 896 n.5 (9% Cir. 1987)%.

* Ninth Circuit precedent is the controlling case law for

this case. As will be noted later, other circuits utilize a

slightly different test for estoppel.

CC:WR:SWD:PNX:TL-N 274-99 page 5

For the Service to successfully estop [J from claiming

the additional ITC, the Service must show that the four part test

stated above is met. In the current case, it does not appear

that the Service can meet requirement (1) because there is no

evidence of any false representations or wrongful misleading

Silence. It is clear that requirements (2) and (3) are met. The

issue is one of fact and the Service did not know whether

Pinnacle was entitled to additional ITC. Finally, it does not

appear the Service meets requirement (4) since there is no

indication that the parties intended to reach a final binding

settlement. If there was no intent to be bound, the Service

could not justify relying on the Form. 870.

The first requirement for application of estoppel is the

need for evidence of a false representation or wrongful

misleading silence. There is no evidence that QRmade a

false representation or wrongfully remained silent. However,

where a party has reasonably relied on a representation and a

detriment to that party exists, a "false representation" is not

always required. In Stair v. United States, 516 F.2d 560 (2d

Cir. 1975), the court explained that a false representation was

not necessary where the Service has reasonably relied on a

representation and was adversely affected, particularly by the

running of the statute of limitations. See also Robinson v.

Commissioner, 100 F.2d 847 (6° Cir. 1938), cert, denied, 308

U.S. 567 (1939).

In this case, there is no evidence that the Service relied

on any representations by a. The Form 870 does not put

any limitations on claims for refunds or credits, except that

such claims will not be litigated in the U.S. Tax Court.

Accordingly, it does not appear that the Service can meet the

first requirement to estop — from claiming additional ITC.

The fourth requirement for the application of estoppel is

the need for the party asserting estoppel to be adversely

affected by the acts or representations of the one against whom

estoppel is sought. In Consolidated Freightways, Inc. v. United

states, 620 F.2d 862 (Ct. Cl. 1980), the court held the

government was not estopped from placing in issue the taxpayer's

right to an ITC. The parties executed a Form 870 which stated it

was not a final closing agreement and that its execution would

not preclude the further assertion of deficiencies or a timely

claim for refund or credit. The court reasoned that (1) Form 870

was merely a waiver of the statutory notice requirements for

assessment and (2) no agreements purporting to bind the

government were ever reached by the parties. Since the taxpayer

was never prevented from asserting its claim, there was no

reasonable reliance by the taxpayer to justify equitable relief.

imiiarly, in the present case, the Form 870 executed by

indicates that neither MMnor the Service were

CC: WR: SWD: PNX: TL-N-v274-99 page 6

bound by its terms. Thus, the Service could have asserted its

claim and there could be no reasonable reliance by the Service to

justify equitable relief.

In contrast, in Guqgenheim v. United States, 111 Ct. Cl. 165

(1948), the court held that a taxpayer was estopped where the

Form 870 stated it would be reopened only in the event of fraud,

malfeasance, concealment or misrepresentation of material fact.

The court found that the parties intended a settlement with no

reopening except in the case of a particular occurrence. In

D.D.I., Inc. v. United States, 199 Ct. Cl. 380, 467 F.2d 497

(1972), cert. denied, 414 U.S. 830 (1973), the court held that a

taxpayer was estopped where a Form 870 and additional letters

were found to constitute an offer and acceptance of a final

settlement.

In the current case, no facts were presented which would

indicate that the parties intended the Form 870 to constitute a

final binding settlement. In fact, the circumstances indicate

that the parties did not intend the form to constitute a final

binding settlement, as the Form 870 itself states the Service

could find additional deficiencies. As previously noted, the

only restrictions on claims for refund or credit. were that they

not be litigated in the U.S Tax Court. Therefore, the Service

would not be justified in relying on the form as a final

settlement.

Although the Ninth Circuit applies the estoppel requirements

set forth above, other courts have applied slightly different

requirements. In Kretchmar v. United States, 9 Cl. Ct. 191

(1985) and Lowenstein v. United States, 27 Fed. Cl. 38 (1992),

the taxpayers were equitably estopped from litigating refund

claims because of their execution of Forms 870-AD.° Both courts

held that the taxpayers should be held to their bargains because

the following three criteria were established: (1) the execution

of the Form 870-AD was the result of mutual concessions or

compromise; (2) there was a meeting of the minds that the claims

be extinguished; and (3) that to allow the taxpayer to reopen the

case would be prejudicial given the government’s reliance

thereon. In both of these cases, the statute of limitations on

additional assessments had expired. Prejudice to the government

is presumed where the statute of limitations has passed on

additional tax assessments for the years in question. Guggenheim

v. United States, 111 Ct. Cl. 165 (1948). (It would obviously be

inequitable to allow the plaintiff to renounce the agreement when

the Commissioner cannot be placed in the same position he was

when the agreement was executed.")

5 The Forms 870-AD stated that the taxpayer could not file

a claim for refund or credit, except in the event of carrybacks.

CC:WR:SWD:PNX:TL-N 274-99 page 7

In the current case, there is no evidence that the execution

of the Form 870 was the result of "mutual concessions or

compromise" or that there was a meeting of the ie any

claims be eliminated. There is no evidence that or the

Service conceded any issues in return for the execution of the

Form 870. Nor is there any evidence that the parties mutually

agreed the Form 870 resolved all claims. Accordingly, even under

this test, BBB would not be equitably estopped from

asserting its claims.

CONCLUSION

A Form 870 standing alone will not prevent a taxpayer from

later seeking a refund or credit. For equitable estoppel to be

applied (1) there must be false representation or wrongful

misleading silence; (2) the error must originate in a statement

of fact, not in an opinion or a statement of law; (3) the one

claiming the benefits of estoppel must not know the true facts;

and (4) that same person must be adversely affected by the acts

or statements of the one against whom an estoppel is claimed.

In this case, there is no evidence that RE made a

false representation or was wrongfully silent. Further, there is

no evidence that the Service was adversely affected by the acts

or statements of BRR). Therefore, it is our view that

is not precluded from filing a claim for additional

Investment Tax Credit for the year a

We consider the statements of law expressed in this

memorandum to be significant large case advice. Therefore, we

request that you refrain from acting on this memorandum for ten

(10) working days to allow the Assistant Chief Counsel (Field

Service) an opportunity to comment. If you have any questions

regarding the above, please contact me at (602) 207-8056.

~DAVID W. OTTO

District Counsel

ees | a. |

ay: KN. Me

RICK V. HOSLER

Attorney

cc: Regional Counsel, Western Region

Office of Assistant Chief Counsel, Field Service