UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

WILLIAM C. KERCHEVAL; NANCY M.
KERCHEVAL,
Plaintiffs-Appellants,
                                                                   No. 97-2734
v.

UNITED STATES OF AMERICA,
Defendant-Appellee.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Catherine C. Blake, District Judge.
(CA-97-968-CCB)

Argued: October 30, 1998

Decided: January 26, 1999

Before MURNAGHAN, HAMILTON, and MICHAEL,
Circuit Judges.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

ARGUED: Edward Lee Blanton, Jr., Baltimore, Maryland, for
Appellants. Kenneth W. Rosenberg, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON
BRIEF: Loretta C. Argrett, Assistant Attorney General, Lynne A.
Battaglia, United States Attorney, Richard Farber, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Appellant William C. Kercheval transferred from the Maryland
Retirement System to the Maryland Pension System and, upon retire-
ment, deposited the bulk of the refund he received as a result of the
transfer into an individual retirement account. On advice from the
Maryland Retirement System, Kercheval believed the"rollover" into
an individual retirement account would be tax-free. Subsequently,
however, the federal Internal Revenue Service ruled otherwise and
entered into an arrangement with the State of Maryland that, in part,
relieved employees like Kercheval of the unfavorable tax conse-
quences. Pursuant to the arrangement, Kercheval entered into a clos-
ing agreement with the Internal Revenue Service that he now claims
contained a misrepresentation of material fact. Kercheval filed the
instant suit on April 2, 1997, and the District Court for the District of
Maryland granted the Government's Motion for Summary Judgment
on November 18, 1997. We affirm the district court's ruling.

I.

Kercheval began teaching in the Washington County Public
Schools on September 1, 1956, at which time he enrolled in the
Teachers' Retirement System of the State of Maryland ("Maryland
Retirement System"). In November 1989, on advice from the Mary-
land Retirement System, Kercheval transferred from the Retirement
System to the state's new Pension System, believing that the interest
portion of his transfer refund could be rolled-over, tax-free, to an indi-
vidual retirement account ("IRA"). The Internal Revenue Service
("IRS") and the State of Maryland ("State") subsequently advised
Kercheval that the information previously given to him by the State
was incorrect and the distribution he received was not eligible for tax-
free rollover.

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In order to mitigate the otherwise exorbitant tax consequences,
Kercheval agreed to close his individual retirement account, enter into
a closing agreement with the IRS and State, and pay a $500 adminis-
trative fee to the Retirement System and limited taxes, interest, and
penalties to the IRS. The closing agreement contained a clause that
stated that the "distribution did not meet the definition of either a par-
tial distribution or lump-sum distribution within the definition of the
Internal Revenue Code Section 402(a), [and] thus did not qualify for
`rollover' treatment."

On April 15, 1994, Kercheval filed a claim with the IRS for a
refund of $71,830, which he believes he is due since his distribution
arguably qualified for more favorable tax treatment. The claim for a
refund was disallowed by the IRS, and Kercheval filed the present tax
refund suit. The District Court for the District of Maryland granted
the Government's Motion for Summary Judgment, from which Ker-
cheval now appeals.

II.

The standard of review for a summary judgment motion is de novo.
The Court of Appeals must apply the same legal standards as the dis-
trict court and view the facts and inferences in the light most favor-
able to the nonmoving party. See Evans v. Technologies Applications
& Service Co., 80 F.3d 954, 958 (4th Cir. 1996). With this standard
in mind, we evaluate the merits of Appellant's claim.

Kercheval maintains that the clause in the closing agreement which
indicated that the distribution did not qualify for rollover treatment
constitutes a misrepresentation of material fact, in violation of 26
U.S.C. § 7121.1 Section 7121(a) of the Internal Revenue Code autho-
rizes the Secretary of the Treasury to enter into closing agreements
relating to the liability of taxpayers. 26 U.S.C.§ 7121(a) (1986). Sec-
tion 7121(b) further provides as follows:
_________________________________________________________________
1 Appellant Kercheval also alleges that the clause in question violates
the terms of the closing agreement which, like 26 U.S.C. § 7121(b), pro-
vides that the agreement is final and conclusive, except "in the event of
fraud, malfeasance, or misrepresentation of material fact."

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          (b) *** such agreement shall be final and conclusive, and,
          except upon a showing of fraud or malfeasance, or misrepre-
          sentation of a material fact --

          (1) the case shall not be reopened as to the matters agreed
          upon or the agreement modified by any officer, employee,
          or agent of the United States and

          (2) in any suit, action, or proceeding, such agreement, or
          any determination, assessment, collection, payment, abate-
          ment, refund, or credit paid in accordance therewith, shall
          not be annulled, modified, set aside, or disregarded.

26 U.S.C. § 7121(b). In order for an agreement to be set aside by rea-
son of misrepresentation under § 7121(b),"there must be a misrepre-
sentation of a material fact that goes to the essence of the agreement."
Miller v. Internal Revenue Service, 174 B.R. 791, 796 (B.A.P. 9th Cir.
1994), aff'd, 81 F.3d 169 (9th Cir. 1996)."`A mere mistake of fact
or law, whether unilateral or mutual, no matter how material, is not
a misrepresentation.'" Id. at 797; see also Aetna Life Insurance Co.
v. Eaton, 43 F.2d 711, 714 (2nd Cir.) (noting that the identical provi-
sion in the Revenue Act of 1926 "excludes mistakes of fact, and a for-
tiori of law, as grounds for rescission"), cert. denied, 282 U.S. 887
(1930).

With this in mind, the district court granted the Government's sum-
mary judgment motion, determining that there was no misrepresenta-
tion of material fact. The court concluded:

          the IRS merely took a position on the legality of a tax-free
          rollover, and Mr. Kercheval, faced with the option of con-
          testing that position or paying less than he would have had
          to pay should the IRS turn out to be correct, chose instead
          to enter into the closing agreement and mitigate his losses.
          However unfortunate that decision might have been finan-
          cially ..., it cannot have been in reasonable reliance on a
          misrepresentation of fact.

We must agree with the district court's determination. At the time the
agreement was executed, no federal district or appellate court had

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ruled on the taxability of a transfer refund that had been rolled over
into an IRA. The clause in the closing agreement was a reasonable
interpretation of the relevant provisions of the Internal Revenue Code
as the law then existed, as evidenced by the fact that the U.S. Tax
Court subsequently endorsed the IRS' view. See, e.g., Ross v.
Commissioner, 1995 WL 750120 (U.S. Tax. Ct. 1995) (holding that
a transfer refund did not qualify for tax-free, rollover treatment under
§ 402(a)(5) because it did not constitute a qualified total distribution);
Wittstadt v. Commissioner, 1995 WL 599229 (U.S. Tax Ct. 1995)
(concluding that a transfer refund was not eligible for tax-free, rol-
lover treatment under § 402(a)(5) as a partial distribution); Dorsey v.
Commissioner, 1995 WL 98544 (U.S. Tax Ct. 1995) (concluding that
a transfer refund was not eligible for tax-free, rollover treatment
under § 402(a)(5) as either a qualified total distribution or a partial
distribution), appeal dismissed, 91 F.3d 129 (4th Cir. 1996); Brown
v. Commissioner, 1995 WL 89757 (U.S. Tax Ct. 1995) (concluding
that a transfer refund was not eligible for tax-free, rollover treatment
under § 402(a)(5) as either a qualified total distribution or a partial
distribution), reversed, 97 F.3d 1446 (4th Cir. 1996).

An error of the sort at issue in the present case is not a misrepresen-
tation, as contemplated under § 7121(b). In Aetna Life Insurance Co.
v. Eaton, 43 F.2d 711, a taxpayer entered into a closing agreement
that required the payment of tax under a statutory provision that the
Supreme Court later determined was unconstitutional. 43 F.2d at 713-
714. Despite the provision's unconstitutionality, the Second Circuit
held that, although the agreement rested on an "erroneous assump-
tion," it was binding. The court observed that§ 1106(b) of the Reve-
nue Act of 1926 (now § 7121 of the Internal Revenue Code)2
_________________________________________________________________
2 Section 7121(b) directly descends from § 1106(b), as evidenced by
the following sequence of legislative enactments. Section 7121(b)
derives from § 3760(b) of the Internal Revenue Code. See S. Rep.
accompanying H.R. 8300 (no report number indicated) (noting that
§ 7121 is unchanged from then existing law, which was embodied in
§ 3760), reprinted in 1954 U.S.C.C.A.N. 5250. Section 3760(b) derived
from § 606(b) of the Code, which contained identical statutory language.
See 53 U.S. Statutes At Large, app., pt. I, table A, at xxxv (1939). Sec-
tion 606(b) replaced § 1106(b) of the Revenue Act. See 852 I.R.C.
§ 606(c) (repealing § 1106(b)), reprinted in 45 U.S. Statutes At Large, at
874 (1928).

                     5
"excludes mistakes of fact, and a fortiori of law, as grounds for rescis-
sion." 43 F.2d at 713-714; see also Hering v. Tait, 65 F.2d 703, 706
(4th Cir. 1933) (discussing Aetna Life Insurance Co. as support for its
finding that taxpayer could not avoid the effect of a closing agree-
ment).

Similarly, the "erroneous assumption" contained in the agreement
between Kercheval and the IRS is binding. The clause stating that the
distribution was not eligible for tax-free rollover into an IRA was a
mistake of law, supported even by rulings of the U.S. Tax Court. Sec-
tion 7121 is not intended to cure such mistakes. As the district court
appropriately noted, "[c]losing agreements serve to finalize matters
where the law may not be crystal clear. To allow a taxpayer who
avails him or herself of this option to reopen the matter simply
because the Service's legal position later turns out to be erroneous
would vitiate the statute."

Furthermore, the IRS is under no duty to provide taxpayers with
legal advice, and Kercheval, who was represented by counsel, was not
obligated to accept the IRS' position. He could have litigated the mat-
ter, as did the taxpayers in a subsequent case, Adler v. Commissioner,
86 F.3d 378 (4th Cir. 1996), where we held that the IRS' position
with respect to transfer refunds was erroneous. 86 F.3d 378. Having
opted not to pursue this route and instead execute the agreement, Ker-
cheval cannot now undo a deal that was intended to be a final settle-
ment.

Since there was no misrepresentation of material fact, and there is
no evidence of fraud or malfeasance, Kercheval is obligated to abide
by the terms of his agreement with the IRS. We, therefore, affirm the
district court's grant of summary judgment.

AFFIRMED

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