## Facts

- Keith Wold Johnson, majority shareholder of American Video Corp., guaranteed a corporate bank loan and assigned life-insurance policies on his life to the bank as collateral.
- After Johnson’s death, the bank collected approximately $4.2 million in insurance proceeds and then assigned the corporate notes to Johnson’s estate.
- The estate and the IRS executed a closing agreement under I.R.C. § 7121 fixing the estate-tax value and income-tax basis of the estate’s subordinated rights in the notes at $600,000 as of the date of death.
- The notes were later repaid in full during 1980 and 1981; the estate reported capital gains using the $600,000 basis.
- The estate later filed amended returns claiming it constructively received the insurance proceeds and transferred them to the bank for the notes, asserting a $4.2 million basis and seeking large refunds.
- The estate had five residuary beneficiaries (each 20%), including the estate of Johnson’s brother, Willard; both estates shared the same executors and accountants.
- Due to contingent liabilities and other uncertainties, the estate made no principal distributions to beneficiaries by the end of 1981.
- Nevertheless, the executors caused annual “distributions” of 20% of estate income to be recorded for Willard’s estate solely through accountants’ workpaper entries, without cash transfers or segregation of assets.
- The Commissioner determined deficiencies for 1980 and 1981 and disallowed the estate’s claimed distribution deductions for those years, asserting no amounts were properly credited.

## Issues

1. Whether a § 7121 closing agreement fixing the estate’s basis at $600,000 barred the estate from later claiming a $4.2 million basis in the notes based on a constructive-receipt theory.
2. Whether amounts reflected only as workpaper credits to a residuary beneficiary’s estate, with no actual payment or segregation and with continuing contingent liabilities, were “properly credited” so as to be deductible as income distributions for 1980 and 1981.

## Decision

- The Tax Court held the estate was bound by the § 7121 closing agreement and could not assert a basis inconsistent with the agreed $600,000 amount.
- The court rejected the estate’s constructive-receipt recharacterization of the insurance proceeds and treated the estate’s original capital-gain reporting as correct.
- The court held the estate was not entitled to distribution deductions based on accountants’ workpaper entries because the credited amounts were not placed beyond the estate’s recall.
- The Commissioner’s deficiency determinations were sustained, and the estate’s refund claims premised on the higher basis were denied.

## Legal Principles

- A closing agreement under I.R.C. § 7121 is final and binding as to the matters agreed upon, including stipulated basis, absent grounds that would permit setting aside a binding agreement.
- A taxpayer may not claim a basis position that contradicts a binding closing agreement by later recharacterizing the transaction.
- For an estate to deduct amounts as income distributions “paid” or “credited” to a beneficiary, a credit must be definite and must place the amount beyond the estate’s recall; informal, reversible workpaper entries do not suffice.
- Where the estate retains control over the funds and they remain subject to the estate’s liabilities and creditor claims, the amounts are not properly credited and remain taxable to the estate.

## Conclusion

The Tax Court enforced a § 7121 closing agreement fixing the estate’s basis in notes at $600,000 and disallowed distribution deductions based solely on internal workpaper credits because the amounts were not irrevocably allocated beyond the estate’s control.


Estate of Johnson v. Commissioner, 88 T.C. 225 (1987)