Country Gas Service, Inc., Plaintiff, Appellant, v. United States of America, Defendant, Appellee.country Gas Distributors, Inc., Plaintiff, Appellant, v. United States of America, Defendant, Appellee, 405 F.2d 147 (1st Cir. 1969)

These are appeals from summary judgments entered against the corporate taxpayers, Country Gas Service, Inc. and Country Gas Distributors, Inc. in suits for refund of taxes which they alleged were erroneously and illegally assessed and collected. Country Gas Service seeks refunds for the fiscal years ending June 30, 1961, 1962 and 1963, while Country Gas Distributors' suit is for the calendar years 1960, 1961 and 1962.¹  The only claim that the tax was not lawfully due was based upon an oral agreement they assertedly made with the revenue agent. We hold that no such agreement could give them substantive rights.

During 1964 and 1965 Internal Revenue audited taxpayers' income tax returns and those of several related taxpayers, i. e., Clement Realty Trust, Charles and Barbara Clement and Danvers Hardware and Appliance Co., Inc. The revenue agent who conducted the audit, one McInnis, determined that adjustments were necessary. According to taxpayers, they agreed to accept reductions of rent and other corporate expenses in exchange for concessions by the government with regard to the tax treatment of the related taxpayers. They assert that one of these accommodations was that Clement Realty Trust would be taxed as a corporation. At the conclusion of the audit, taxpayers executed Form 870 thereby waiving the restrictions on assessment and collection of the proposed deficiencies.²  At the same time they paid the amounts shown to be due on Form 870.

On January 20, 1965, Internal Revenue notified taxpayers' representative that Clement Realty Trust was revocable and that the income from it was taxable to the grantors; also, that because the statute of limitations was about to expire, an immediate statutory notice of deficiency would be issued. On December 21, 1966, taxpayers filed claims for refund for each of the years involved. When no action was taken by Internal Revenue the instant suit was commenced.³  The district court entered summary judgment for the government on May 13, 1968, and this appeal followed.

It is fundamental that "[o]n appeal from a summary judgment, the only question is whether the allegations of the party against whom it was rendered were sufficient to raise a material or genuine issue of fact." 3 W. Barron & Holtzoff, Federal Practice and Procedure, § 1242 at 199 (Wright ed. 1958); see Gottlieb v. Isenman, 215 F.2d 184 (1st Cir. 1954). Taxpayers take the position that the alleged compromise with agent McInnis was legally binding; that this agreement was breached when Internal Revenue decided to tax Clement Realty Trust as a grantor's trust; that this breach caused taxpayers to be deprived of their property wrongfully, and that they are entitled to a refund of the entire amount of deficiencies agreed to in Form 870.

The narrow issue presented by this case is whether the revenue agent had authority to make a binding agreement. Obviously if there was no contract there could be no breach. The exclusive procedure for compromising tax liabilities is set forth in Int.Rev.Code of 1954 § 7122.⁴  This section explicitly reposes such authority in "the Secretary or his delegate," and such delegation stops at the district director level.⁵  Since the exclusive means of compromise established by § 7122 was not utilized in this case, any arrangement taxpayer made with agent McInnis had no legal standing. Consequently the only document with any relevance was Form 870 in which taxpayers unconditionally agreed to immediate assessment and collection of the deficiencies.

Taxpayers argue that revenue agents are authorized to make binding agreements with regard to allowable deductions without resort to § 7122. But this was precisely the situation in Botany Worsted Mills v. United States, 278 U.S. 282, 49 S. Ct. 129, 73 L. Ed. 379 (1928) in which such an agreement was held not to be binding.

Taxpayers further allege that agent McInnis kept the 870 forms and checks given him by taxpayers for a period of three months before forwarding them to his superiors. This delay, it is argued, forced Internal Revenue to issue an immediate statutory notice of deficiency before the statute of limitations had run, thus depriving taxpayers of their "right" to the usual administrative remedies of "conference" and "appellate review."

The only question presented to the court below was whether there was a compromise settlement between the government and taxpayers, and if so, whether it was breached by the government. That was the question passed on by the court on the motion for summary judgment and it is the only question before us on appeal. Automatic Radio Mfg. Co., Inc. v. Hazeltine Research, Inc., 176 F.2d 799 (1st Cir. 1949). At any rate, we think the contention is without merit. When taxpayers executed Form 870 unconditionally, they agreed to immediate assessment and collection, reserving the right to sue for refund. This substantive right they have not lost. If they wished to reserve their administrative remedies it behooved them not to sign an unconditional Form 870.

Affirmed.