Opinion
6501-20
11-20-2023
ANDREW P. MATTSON & LINDSEY J. MATTSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge
The Mattsons filed a Motion for Partial Summary Judgment asking us to disregard a Closing Agreement they entered into with the Commissioner. They contend the Closing Agreement is invalid because it was signed by an Internal Revenue Service employee who lacked the authority to do so. Alternatively, they ask us to rescind the Closing Agreement because of misrepresentations of material fact or malfeasance by one or more IRS employees. Similarly situated petitioners have filed nearly identical Motions for Partial Summary Judgment in cases with nearly identical facts.
See Hall, Docket No. 4747-21; Nunez, Docket No. 6500-20; Hill & Fuhrman, Docket No. 4854-20; & Bebout, Docket No. 2506-21; see also Smith v. Commissioner, 159 T.C. 33 (2022); Henaire v. Commissioner, T.C. Memo. 2023-131; Baney v. United States, No. 20-1037T, 2023 WL 6564028 (Fed. Cl. Oct. 10, 2023).
During 2017, the year in issue, Mr. Mattson worked as a contractor in Australia at the Joint Defense Facility Pine Gap (Pine Gap). The Mattsons entered into a Closing Agreement with the Commissioner, waiving their right to claim the section 911(a) exclusion from income. Acting Director, Treaty Administration Jennifer Best signed that Closing Agreement on behalf of the Commissioner. Once the Secretary or one of her delegates enters into a Closing Agreement with a taxpayer, that agreement is final and conclusive and may not be set aside without a showing of malfeasance or misrepresentation of material fact. Because Ms. Best was duly authorized as a delegate of the Secretary of Treasury to enter into this Closing Agreement with the Mattsons, and because the Mattsons have not shown malfeasance or misrepresentation of material fact, we must deny the Mattson's motion.
Background
Mr. Mattson was hired by Raytheon in 2014 to work in the Australian Pine Gap Facility. After the Mattsons arrived in Australia, Raytheon presented Mr. Mattson with a Closing Agreement with the IRS. The Mattsons allege that Raytheon told them to sign this agreement to avoid paying Australian taxes. Additionally, the Mattsons alleges that Raytheon told them that signing this agreement was a condition of Mr. Mattson's employment. Although facts considered in a Motion for Summary Judgment are taken in the light most favorable to the nonmoving party (i.e., the Commissioner), see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994), we will accept the Mattsons' allegations for purposes of the pending motion.
The Mattsons and the Commissioner executed the agreement. On August 25, 2015, the Mattsons signed and dated the Closing Agreement. Jennifer Best, who at the time was the Acting Director of Treaty Administrations, signed on behalf of the Commissioner on June 10, 2016. Raytheon was not a party to the agreement. In the agreement, the Mattsons agreed not to make any election under section 911(a) with respect to income from working at Pine Gap.
When the Mattsons filed their 2017 Federal income tax return, they made an election under section 911(a) with respect to the income from working at Pine Gap.
The Commissioner issued a notice of deficiency to the Mattsons, determining a deficiency as a result of disallowing their foreign earned income exclusion as to Mr. Mattson's earnings from Pine Gap. The Commissioner also determined an accuracy-related penalty. The Mattsons filed a petition.
On August 16, 2023, the Mattsons filed a Motion for Partial Summary Judgment. In their motion, they argue that we should disregard the Closing Agreement for any of several reasons. They argue that there was a lack of consideration because (they argue) they were not at risk of double taxation. They also argue that Ms. Best lacked the authority to sign the agreement on behalf of the Commissioner. They argue that we should set aside the Closing Agreement because the Commissioner violated the section 6103 prohibitions on disclosing taxpayer information and that this constitutes malfeasance. Lastly, they argue that they were misled into entering into the Closing Agreement by a material misrepresentation of fact as to their exposure to double taxation.
Although their motion is only signed by Mr. Mattson, the motion recites that "Petitioners move." Accordingly, we will deem the motion to be on behalf of both Mr. and Mrs. Mattson.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520.
In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party may not rest upon mere allegations or denials in his pleadings, but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see also Sundstrand Corp., 98 T.C. at 520.
II. Taxation of U.S. Citizens Working at the Pine Gap Facility
Pine Gap is a defense surveillance facility in remote Australia, jointly operated by the United States and Australia. It is not unusual for U.S. citizens like Mr. Mattson to move to Australia to work there. As is common with U.S. persons living and working abroad, a U.S. person working at Pine Gap faces issues regarding which jurisdiction will tax the income.
A. General Principles of International Taxation
In general, the United States taxes its citizens on their worldwide income. Cook v. Tait, 265 U.S. 47, 56 (1924); Huff v. Commissioner, 135 T.C. 222, 230 (2010). This rule creates the potential for double taxation. AptarGroup Inc. v. Commissioner, 158 T.C. 110, 112 (2022).
The Internal Revenue Code provides relief for U.S. citizens working abroad. Section 901 permits U.S. citizens to take a credit against U.S. tax for taxes paid to a foreign jurisdiction on foreign earned income. I.R.C. § 901(a), (b)(1). Section 911(a) permits certain qualified individuals to elect to exclude foreign earned income from their gross income and to treat that income as exempt from U.S. federal income taxation.
In addition to the Internal Revenue Code, tax treaties often address issues of which jurisdiction can tax a citizen working abroad. Australia and the United States entered into a treaty governing the general avoidance of double taxation long before Mr. Mattson went to work at Pine Gap. See Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Austl.-U.S., May 14, 1953, 4 U.S.T. 2274 (1953 Treaty).
B. Pine Gap Agreements
Concerns with double taxation received attention from the U.S. and Australian negotiators involved in establishing Pine Gap. The United States and Australia entered into two agreements governing the general operation of Pine Gap, one in 1966 and another in 1969. See Agreement Relating to the Establishment of a Joint Defence Space Research Facility, Austl.-U.S., Dec. 9, 1966, 17 U.S.T. 2235; Agreement Relating to the Establishment of a Joint Defense Space Communications State in Australia, Austl.-U.S., Nov. 10, 1969, 20 U.S.T. 3097. With respect to the issue of double taxation, both agreements generally provide that income earned by U.S. citizens working at Pine Gap is deemed not to have been earned in Australia if it is not exempt from tax and is actually brought to tax by the United States. 17 U.S.T. at Art. 9(1); 20 U.S.T. at Art. X(1).
C. 1982 Tax Treaty and the Competent Authority Process
In 1982, the United States and Australia entered into a new income tax treaty that superseded the 1953 Treaty. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Austl.-U.S., Aug. 6, 1982, 35 U.S.T. 1999 (1982 Treaty). Article 4 of the 1982 Treaty provides rules for determining an individual's residency, and Article 15 sets out rules for the taxation of employees. Specifically, Article 15 provides:
(1). . . salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment . . . shall be taxable only in the State unless the employment is exercised . . . in the other Contracting State. If the employment is so exercised . . . such remuneration as is derived from that exercise . . . may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph (1), renumeration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State . . . shall be taxable only in the first-mentioned State if: (a) the recipient is present in that other State for a period . . . not exceeding in the aggregate 183 days in the taxable year or year of income of that other State; (b) the renumeration is paid by, or on behalf of, an employer or company who is not a resident of the other State; and (c) the renumeration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in that other State.35 U.S.T. at Art. 15(1) & (2). Thus, according to Article 15 Australia may not tax U.S. citizens who do not work in Australia. But if a U.S. person is working in Australia and the limitations of Article 15(2) do not apply, that person may be taxed by both the United States and Australia with respect to the compensation earned from working in Australia.
With a change in the residency requirements for Australian taxing authority, both the United States and Australia needed to coordinate taxing U.S. citizens working at Pine Gap. Specifically, they needed a mechanism to ensure that income earned by U.S. citizens at Pine Gap would be "brought to tax" and "not exempt" in the United States and that the term "exempt" was applied consistently by both countries. We have previously addressed the negotiations between Australia and the United States in this regard:
During 1983 and 1984, the United States and Australian competent authorities worked together to develop a procedure to apply the provisions of the Pine Gap Agreement to U.S. citizens working in [Pine Gap]. As a result of those joint consultations, the Australian Tax Office ("ATO") agreed that if an employee executes a closing agreement with the [IRS] stating that he or she will not claim the income exclusion available under section 911(a) of the [IRC], then he or she will not be liable to tax in Australia.
The procedure ensures that income does not inappropriately escape taxation or become subject to double taxation. It further provides clarity, choice, and assurance for the employee as to where they want to be taxed - either (1) solely in the United States with a waiver of the IRC section 911(a) income exclusion, or (2) in both Australia and the United States, with double taxation being relieved by the United States through the IRC section 911(a) income exclusion or a foreign tax credit.Smith, 159 T.C. at 41 (citing Letter from Nicole L. Welch, Program Manager, Treaty Assistance and Interpretation Team, IRS, U.S. Dep't of the Treasury, to John Turnicky, Hous. Program Manager, U.S. Dep't of Def. (Jan. 26, 2018)).
III. Closing Agreements, Generally
Section 7121(a) authorizes the Secretary to "enter into an agreement in writing with any person relating to the liability of such person . . . in respect of any internal revenue tax for any taxable period." The Code refers to these agreements as "closing agreements." Section 7121(b) prescribes the effects of a closing agreement made pursuant to section 7121(a). If "approved by the Secretary," that agreement "shall be final and conclusive." I.R.C. § 7121(b). Lest there be any doubt as to finality, section 7121(b) goes on to provide that the closing agreement "shall not be annulled, modified, set aside, or disregarded" "in any suit, action, or proceeding." I.R.C. § 7121(b)(2).
Further, the Code provides that this treatment extends not just to the closing agreement itself, but also to "any determination, assessment, collection, payment, abatement, refund, or credit made in accordance" with the agreement. Id. As we have said, "Closing agreements are meant to insure the finality of liability for both the taxpayer and the IRS. This is why courts have strictly enforced closing agreements, finding them binding and conclusive on the parties . . . ." Hopkins v. Commissioner, 120 T.C. 451, 457 (2003) (quoting Hopkins v. United States (In re Hopkins), 146 F.3d 729, 733 (9th Cir. 1998)).
As a general matter, a closing agreement is "approved by the Secretary" (and therefore "final and conclusive") once it is signed by the taxpayer and on behalf of the Secretary. See Steffler v. Commissioner, T.C. Memo. 1995-271. The Commissioner's usual procedure is to accept a closing agreement only after a taxpayer or his representative has signed it. See Rev. Proc. 68-16, § 6.07, 1968-1 C.B. 770, 780. The Commissioner construes a taxpayer's signature as an offer to agree to the closing agreement and the subsequent signature on behalf of the Commissioner as an acceptance of the taxpayer's offer to agree. Section 7121(b) provides that the finality accorded a closing agreement can be avoided only "upon a showing of fraud or malfeasance, or misrepresentation of material fact."
Although closing agreements are similar in some respects to traditional contracts, our cases have made clear that the validity and enforceability of closing agreements are governed by the Code. See Rink v. Commissioner, 100 T.C. 319, 325 n.4 (1993) (stating that the determination of the validity or enforceability of a closing agreement is "subject solely to [section] 7121"), aff'd, 47 F.3d 168 (6th Cir. 1995); see also Urbano v. Commissioner, 122 T.C. 384, 393 (2004) (stating that section 7121 sets forth the exclusive means by which a closing agreement between the Commissioner and a taxpayer may be accorded finality) (citing Hudock v. Commissioner, 65 T.C. 351, 362 (1975)); Marathon Oil Co. v. United States, 42 Fed.Cl. 267, 274 (1998), aff'd 215 F.3d 1343 (Fed. Cir. 1999). Whether a Closing Agreement has sufficient consideration is not a relevant factor in determining the validity of the agreement. See Smith, 159 T.C. at 50. We will therefore not set aside the Mattsons' Closing Agreement for want of consideration. See id. (collecting authorities).
IV. Validity of Mr. Mattson's Closing Agreement
The Mattsons filed a Motion for Partial Summary Judgment on the validity of the Closing Agreement they entered into with the Commissioner. Most arguments the Mattsons raise have been directly addressed in one or more of several cases addressing nearly identical motions premised on nearly identical facts. See Smith, 159 T.C. 33, Henaire, T.C. Memo. 2023-131, and Baney v. United States, 2023 WL 6564028. For the same reasons enunciated in these other cases, we will deny the Mattsons' motion.
A. Ms. Best's Authority to Enter the Closing Agreement
The Mattsons ask us to set the agreement aside because Ms. Best lacked the authority to enter this agreement. As we have addressed in previous opinions, a Director of Treaty Administration has the requisite authority to enter into these closing agreements. See Smith, 159 T.C. at 53; see also Henaire, T.C. Memo. 2023-131, at *9-10. Both opinions also addressed the issue of whether delegation order 4-12 authorizes the Director, Treaty Administration to enter into such an agreement. See Smith, 159 T.C. at 60 (holding that Delegation Order 4-12 furnishes a Director, Treaty Administration with the authority to enter into such a closing agreement); Henaire, T.C. Memo. 2023-131 at *9-10 (discussing Smith). The Mattsons offer identical arguments, and those arguments fail for identical reasons.
But the Mattsons also contend that Ms. Best lacked authority because she signed the Closing Agreement in an acting capacity. However, that argument also fails. Supervisory officials are delegated the authority to designate acting supervisory officials in the Internal Revenue Service. See Delegation Order 1-2. Ms. Best was designated as Acting Director, Treaty Administration during the time she signed the Closing Agreement with the Mattsons and, thus, had the same responsibilities as a Director, Treaty Administration at the time she signed the Closing Agreement with the Mattsons. Indeed, the Court of Federal Claims has similarly found that Ms. Best had authority in her capacity as Acting Director, Treaty Administration to sign a Pine Gap closing agreement. See Baney, No. 20-1037T, 2023 WL 6564028, at *1, *4.
B. Lack of Malfeasance
The Mattsons malfeasance arguments track those presented in Smith and Henaire. Namely, they allege that the procedures used by the Commissioner in conjunction with Raytheon and Raytheon employees to obtain the Closing Agreement constitute a disclosure in violation of section 6103.
In general, we will not set a closing agreement aside without a showing of fraud, malfeasance, misrepresentation of material fact. I.R.C. § 7121(b); see, e.g., Halpern v. Commissioner, T.C. Memo. 2000-151, at *3, aff'd, 33 Fed.Appx. 550 (2d Cir. 2002). Malfeasance is not defined in the Code or the Treasury Regulations. According to Black's Law Dictionary, it is a "wrongful, unlawful, or dishonest act; esp., wrongdoing or misconduct by a public official." Malfeasance, Black's Law Dictionary 1145 (11th ed. 2019).
Subject to exceptions set out in the Code, section 6103(a) prohibits an "officer or employee of the United States" from "disclos[ing] any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise." See Mescalero Apache Tribe v. Commissioner, 148 T.C. 291, 294 (2017). A "disclosure" is defined as the "making known to any person in any manner whatever a return or return information." I.R.C. § 6103(b)(8). Return information includes, among other things, "[1] any agreement under section 7121, [2] any similar agreement, and [3] any background information related to such an agreement or request for such an agreement." I.R.C. § 6103(b)(2)(D).
The definition of "return information" is "'deliberately sweeping' . . . in order to effectuate the statute's 'core purpose' of 'protecting taxpayer privacy,'" Sea Shepherd Conserv. Soc'y v. IRS, 208 F.Supp.3d 58, 86 (D.D.C. 2016) (first quoting Landmark Legal Found v. IRS, 267 F.3d 1132, 1135-36 (D.C. Cir. 2001); and then quoting Tax Analysts v. IRS, 117 F.3d 607, 615 (D.C. Cir. 1997)), and "to encourage . . . taxpayers' free and open disclosure to the [IRS]," Estate of Yaeger v. Commissioner, 92 T.C. 180, 184 (1989) (citing Lampert v. United States, 854 F.2d 335, 336 (9th Cir. 1988)). But return information "does not include data in a form [that] cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer." I.R.C. § 6103(b)(2) (flush language).
Congress has established criminal penalties and civil causes of action for violations of section 6103. For purposes of our Order, we assume that willful disclosure of confidential return information in violation of section 6103 is an act of malfeasance for purposes of section 7121(b). But even with that assumption, as discussed below, we find no malfeasance "in the making of" of the Closing Agreement either because no return information was disclosed in contravention of section 6103 or because any inappropriate disclosure did not affect the making of the agreement.
The Mattsons contend that the "IRS officer violated . . . § 6103(a) when the IRS officer disclosed to [Raytheon] that the IRS was requesting a closing agreement." This instance of disclosure refers to the IRS sending a blank form Closing Agreement to Raytheon. We have previously held that this does not amount to a disclosure in violation of section 6103(a). See Smith, 159 T.C. at 63. Again, section 6103(a) protects return information associated with a taxpayer obtained by the IRS. The information contained within the blank form does not constitute "return information", it was not associated with any taxpayer, and it was not obtained by the IRS. See Id. at 63-67.
Next, Mr. Mattson contends that the Commissioner violated section 6103 when "the IRS officer obtained the Closing Agreement through" Raytheon. This instance refers to Raytheon's transmission of the half-executed Closing Agreement from the Mattsons to the IRS. Again, we previously addressed this argument in Smith. See id. at 67-68. For section 6103(a) to apply there must be some action on the part of the IRS. The Mattsons provided their half-executed Closing Agreement to Raytheon, and a taxpayer may disclose his own tax information. See United States v. Richey, 924 F.2d 857, 863 (9th Cir. 1991) (citing United States ex rel. Carthan v. Sheriff, City of New York, 330 F.2d 100, 101 (2d Cir. 1964)).
Finally, Mr. Mattson contends the IRS violated section 6103 when they returned the executed Closing Agreement to Petitioners through Raytheon. But this act occurred after the agreement had been entered into by the parties and has no bearing on the formation of the agreement. Even if it constituted a section 6103 violation, it would not warrant rescission. The Code provides other remedies for any violations of section 6103 that might have occurred. See Smith, 159 T.C. at 68.
C. Lack of Misrepresentation of Material Fact
Like the previous issues, this argument was raised and addressed in both Smith and Henaire. After signing the Closing Agreement, the Mattsons, along with several other Pine Gap employees, came to believe that their Pine Gap income was not subject to Australian tax regardless of whether they entered a Closing Agreement with the IRS. Thus, they contend the IRS misrepresented the law by stating that income earned at the Pine Gap Facility would otherwise be subject to Australian tax.
The Mattsons allege that recitals in the closing agreement amounted to misrepresentations of material facts. They take issue with two recitals in particular. The first recital at issue provides:
WHEREAS, any wages, allowances, benefits, and other emoluments paid or provided to said taxpayer as consideration for services performed for the employer in Australia, hereinafter referred to as income, are subject to taxation by the Government of the Commonwealth of Australia; and
The second recital at issue provides:
WHEREAS, Article 9 and Article X of the agreements between the Government of the United States of America and the Government of the Commonwealth of Australia relating to the establishment of a Joint Defense Space Research Facility and a Joint Defense Space Communications Station, effective December 9, 1966, and November 10, 1969, respectively, provide that such income shall be deemed not to have been derived in Australia, provided it is not exempt, and is brought to tax, under the taxation laws of the United States."
The Mattsons allege that the first recital is a material misstatement because Australian law would not tax income earned at Pine Gap by U.S. citizens. The second recital is incorrect, according to the Mattsons, because the cited treaty provisions "do not govern tax liability in Australia."
In both Smith and Henaire, we classified these recitals as statements of law rather than fact. See Smith, 159 T.C. at 69-72; Henaire, T.C. Memo. 2023-131, at *13-15. We cannot set aside the closing agreements based on misrepresentations of law rather than fact. See Smith, 159 T.C. at 73. And even if these statements were factually incorrect, they would not justify rescission. Mere error is not enough; "misrepresentation denotes something more deliberate or more conscious than mere error or mistake." Id. at 70 n.49 (citing Ingram v. Commissioner, 32 B.T.A. 1063, 1066 (1935)).
Conclusion
The Mattsons entered into a valid Closing Agreement with the Commissioner, waiving their right to claim the section 911(a) exclusion. Because they failed to establish grounds for us to disregard the Closing Agreement, it is
ORDERED that the Mattson's Motion for Partial Summary Judgment filed August 16, 2023, is denied.