Appeal from the United States District Court for the Eastern District of Wisconsin. No. 71-C-699 MYRON L. GORDON, Judges.
Pell, Stevens and Sprecher, Circuit Judges.
This case presents the question of whether a settlement agreement, effected by, inter alia, the execution of a Form 870-AD equitably estopped the taxpayer from later seeking a refund of deficiencies paid as part of the settlement.
Commencing with its organization in 1955, the taxpayer entered into a loan agreement with Kivie Kaplan (Kaplan Loan) providing for a loan of $175,000 to be repaid with interest within ten years. In 1959, taxpayer entered into a loan agreement with the Levine and Sokol family trusts (trust loans) providing for a $50,000 loan to be repaid with interest within ten years. Taxpayer claimed interest deductions in every year that interest was payable. Upon an audit of taxpayer's returns for the taxable years of 1962, 1963, and 1964, the interest deductions on the Kaplan loan for those years were disallowed on the grounds that the advances were not true loans but equity capital. Deficiencies were asserted by statutory notice on December 17, 1964, and on March 15, 1965 taxpayer petitioned the United States Tax Court for a redetermination. Subsequent audits for the taxable years of 1964 and 1965 resulted in disallowance of interest deductions with respect to both the Kaplan and trust loans on the same theory as the earlier disallowance. For the entire five year period, 1962 through 1966, deficiencies totalling $255,707.06 were asserted by the IRS.
In October 1966 during the pendency of the Tax Court case, the parties negotiated a settlement of all deficiencies asserted. The agreement was evidenced by the following:
(1) A stipulated Tax Court decision entered November 9, 1966 which effected a 20 percent disallowance of the interest deductions claimed with respect to the Kaplan loan in the taxable years of 1962, 1963 and 1964. This decision became final in February, 1967; 26 U.S.C. §§ 7481, 7483.
(2) The execution of a "Collateral Agreement" dated October 31, 1966. The agreement stated that taxpayer had offered to effect a settlement of tax liabilities with respect to the Kaplan loan for the 1965 and 1966 years which offer consisted of a 20 percent disallowance of the claimed deductions. The agreement further stated that "as an integral part of the proposal for settlement of its tax liabilities for the taxable years [1965 and 1966] . . . and as additional consideration for the acceptance of said proposal by . . . the Commissioner of Internal Revenue . . ." the taxpayer agreed not to claim interest deductions on the Kaplan loan for subsequent taxable years. The agreement was executed by taxpayer on October 31, 1966.
(3) The execution of a Form 870-AD which effected an approximately 20 percent disallowance of the interest deductions claimed with respect to the Kaplan loan and a 100 percent disallowance of the interest deduction claimed on the trust loans. This agreement covered the 1965 and 1966 taxable years. The 870-AD was executed by taxpayer on October 31, 1966 and accepted on behalf of the Commissioner of Internal Revenue by the Chief of the Appellate Branch Office on November 2, 1966.
The taxpayer paid the deficiencies assessed under the settlement by April 24, 1967. On February 11, 1969, taxpayer filed a claim for refund alleging an improper disallowance of interest payments on the trust loans. The claim for refund was disallowed in full on May 19, 1970 and accordingly, on December 30, 1971 this suit was filed in the district court. At the time the refund claim was filed, assessment of deficiencies for all years but 1966*fn1 was barred either by the stipulated Tax Court decision or the statute of limitations on assessments (26 U.S.C. §§ 6501, 6072(b)).
The transactions of the parties up to this point can be summarized as follows: