Whitney v. United States

William and Barbara Whitney (plaintiffs) were farmers who leased farmland. In 1975, the Whitneys formed a partnership with Melvin and Neil Bassetti and sold some of their farming operation to the partnership. The Bassettis each owned 49 percent of the partnership; the Whitneys owned the remaining 2 percent. The purchase price, which the partnership paid via a promissory note, included prepaid rent for the farmland for 1974 and 1975. The Whitneys deducted the prepaid rent on their 1974 and 1975 tax returns. The partnership also claimed a prepaid-rent deduction on its 1975 return. The Internal Revenue Service (IRS) disallowed the deductions. In response to accountant Edward Singleton’s request that the deductions be allowed, the IRS reiterated its position regarding deductibility but stated that the partnership could deduct some of the promissory note amount. The IRS also sent Singleton a form 870-AD (870-AD) (entitled “Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment”), which stated that upon the IRS’s acceptance of the form, the case could not be reopened in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, a significant math error, or a specified carryback issue. The 870-AD also stated that most refund or credit claims would be barred. The Whitneys and Bassettis signed and returned 870-ADs to the IRS. Shortly after the IRS accepted the forms, the Ninth Circuit ruled that prepaid rent was deductible in the year it was paid. Relying on this ruling, the Whitneys sought a refund based on the deductibility of the 1974 prepaid rent. The IRS refused the refund claim on the ground that the 870-AD was a binding settlement agreement. The Whitneys filed suit in the district court against the United States (defendant), seeking a refund. Per the Whitneys (and Singleton), they did not enter into a package settlement with the IRS regarding the deductibility of prepaid rent and a portion of the promissory note. Rather, the 870-AD merely reflected the IRS’s view regarding the deductibility of prepaid rent. The district court granted summary judgment to the United States, ruling that the Whitneys were equitably estopped from obtaining a refund because the IRS detrimentally relied on the signed 870-AD by not seeking other assessments against the partnership and permitting the statute of limitations to lapse. The Whitneys appealed.