## Facts

- William and Barbara Whitney operated a farming business and leased farmland.
- In 1975, they formed a partnership with Melvin and Neil Bassetti, selling part of the operation; the Bassettis held 49% each and the Whitneys 2%.
- The partnership issued a promissory note to the Whitneys; the principal included amounts treated as prepaid rent for the farmland for 1974 and 1975.
- The Whitneys deducted prepaid rent on their 1974 and 1975 individual returns, and the partnership claimed a prepaid-rent deduction on its 1975 partnership return.
- The IRS disallowed the prepaid-rent deductions for both the Whitneys and the partnership.
- After communications through the Whitneys’ accountant, the parties executed and returned IRS Forms 870-AD; the IRS accepted them. The forms stated the case could not be reopened except for limited reasons (e.g., fraud or misrepresentation) and that most refund claims would be barred.
- Shortly after acceptance, controlling circuit precedent held that prepaid rent for business property could be deductible in the year of payment if conditions were met.
- The Whitneys filed a refund claim seeking a 1974 deduction based on the new precedent; the IRS denied the claim, asserting the Form 870-AD barred reopening.
- In a refund suit, the district court granted summary judgment to the government on equitable estoppel, reasoning the IRS relied on the executed forms and allowed limitations periods for other potential assessments to expire.

## Issues

1. Whether a Form 870-AD constitutes a binding tax settlement that precludes a later refund suit.
2. Whether equitable estoppel can bar taxpayers from pursuing a refund claim after the IRS accepted a Form 870-AD and allegedly relied by foregoing other assessments until limitations periods expired.

## Decision

- The Ninth Circuit reversed summary judgment for the United States and remanded.
- The court held that Form 870-AD is not a binding closing agreement under 26 U.S.C. § 7121 and therefore does not, by itself, bar a refund action.
- The court held the government failed to meet the requirements for equitable estoppel against taxpayers in this context.

## Legal Principles

- 26 U.S.C. § 7121 provides the exclusive mechanism for final and conclusive tax “closing agreements” that can bar later litigation or refund claims.
- Form 870-AD is an administrative waiver device used to facilitate assessment and collection; it is not a § 7121 closing agreement and does not automatically foreclose statutory refund rights.
- Equitable estoppel against the United States in tax matters is disfavored and requires a demanding showing, including misleading conduct and substantial prejudice; the government cannot rely solely on its own administrative choices (including allowing limitations periods to run) to estop a taxpayer from asserting statutory refund rights.

## Conclusion

The Ninth Circuit allowed the refund suit to proceed because the executed Form 870-AD lacked the statutory effect of a § 7121 closing agreement, and the government did not establish equitable estoppel based on its claimed reliance and the expiration of limitations periods.


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