CASES WITH ESTATE TAX CLOSING LETTERS CAN BE REOPENED

By Max Wasser, CPA, Wasser, Brettler, Klau & Lipstein, LLP

Most tax professionals breathe a sigh of relief when an estate tax closing letter is issued by the IRS. While practitioners are aware that such closing letters are not binding and do not preclude the IRS from reopening an examination, not many are knowledgeable of the circumstances under which the IRS can do so.

In a recent Tax Court case, Estate of Bommer, TC Memo 1995-197, 69TCM 2541), the decedent owned shares of stock valued at $1,334,573 on the Federal estate tax return. An examination was conducted by the IRS in 1992 and ended with a closing letter showing "no change." The letter, as usual, contained the standard language that the case would not be reopened unless Rev. Proc. 85-13 was applicable.

In 1993, the IRS advised the attorney for the estate that the examination was being reopened to avoid a "serious administrative omission." In 1994, an assessment was issued for $5,510,630 as a result of a revaluation of the shares of stock held by the estate.

The estate filed suit in the Tax Court, claiming that the IRS was barred from reopening the case for three reasons:

• There was a longstanding authority in the Sixth Circuit, which prohibited the IRS from reopening a closed case based on a "new view of old facts." They cited Woodworth v. Kales, 26 Fed 2d 178 (6th circuit 1928), among others.
• It was an abuse of the IRS to disregard its own limitations of discretion as set forth in the closing letter.
• The closing letter was, in effect, a contract to which the IRS was bound.

The Tax Court rejected all three arguments of the petitioner. As to the first argument, the court cited another case, McIlhenny v. Commr, 13 B.T.A. 288 (1928) affd., 39 F.2nd 356 (3rd Cir 1930), which held that the IRS did have the right to reopen an examination. The court gave more credence to the McIlhenny case as it was cited and adopted by the Supreme Court in Burnet v. Porter, 283 U.S. 230 (1931).

As for the second argument, the Court found that the IRS was very much in its right to reopen the case since it had cited one of the reasons listed in Rev. Proc. 85-13--that of permitting it to reopen a case to avoid "a serious administrative omission." The court declined to inquire into the IRS's conduct in making such determination, as it felt there was no substantial evidence of a violation of the taxpayer's constitutional rights.

As to the third argument, the court dismissed it on the grounds that the closing letter is not a contract, since by its very terms it does not constitute a closing agreement pursuant to IRC Sec. 7121.

While in most circumstances, an estate tax closing letter can be considered as a final determination of estate taxes, it is best for practitioners to acquaint themselves with Rev. Proc. 94-68, 1994-C.B. 803 (which superseded Rev. Proc 85-13) and to advise their clients of the nonbinding nature of the closing letter.

The following are three circumstances where the IRS feels it has a right to reopen a case:

• Evidence of fraud, collusion, or misrepresentation of material facts.
• The closing letter contains a clearly defined substantial error based on an established IRS position prevailing at the time of the examination.
• Other circumstances exist which establish that a failure to reopen the matter would result in a "serious administrative omission."