The U.S. Court of Appeals for the Ninth Circuit has reversed a judgment of the District Court for the Northern District of California in an income tax refund action brought by Al Davis, former principal owner of the Oakland Raiders, and his wife Carol Davis.

The court held that the breach of a closing agreement between the IRS and the partnership that formerly owned the Raiders did not invalidate the tax assessments, which were properly assessed within the statute of limitations.

The partnership settled with the IRS under a closing agreement that allowed the partners a designated amount of time to review and comment on the proposed tax liability calculations before any assessments were made. The IRS breached the closing agreement by making certain assessments without giving the Davises a second opportunity to review the calculations.

The partnership and the IRS were involved in long-running Tax Court litigation. In 2005, the partnership and the IRS reached a settlement over tax years 1988 through 1994. The closing agreement, which concluded the litigation, was signed by Davis. In a suit filed just before his death, Davis asserted that the assessments were invalid due to the breach.

The district court held that breach invalidated the assessments and entered judgment for Davis. The Ninth Circuit, in Davis v. United States (filed January 25, 2016), reversed, holding that the assessments were valid.

The court held that the breach entitled Davis to a contractual remedy but did not invalidate the assessments.

“At bottom, the problem with Davis’s argument is that his obligation to pay taxes validly and accurately assessed comes from the Internal Revenue Code, not the Closing Agreement, which only specified the treatment of certain Partnership income as inputs to the calculation of his taxes,” the court stated. “The IRS’s failure to perform its contract with the Partnership cannot relieve Davis of his statutory obligation to pay taxes; nothing in the Closing Agreement provided that any taxes assessed on the partners pursuant to statute would be rendered invalid if the government failed to perform.”

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