e. The "additional liability" of the taxpayer parties to this agreement shall be ignored for purposes of computation of any carryover or carryback of any deduction or credit under any provision of the Internal Revenue Code of 1954.

f. For all years beginning after 1974 payments and accruals of moneys by Fantasy/Galaxy Record Company as licensing royalties to Gesternte N.V. and/or Basalt Finance Company N.V. based upon the agreements concerning such royalties set forth above, or extensions and/or renewals of those agreements, shall be allowed as ordinary and necessary business expenses in determining the income of that partnership so long as there is no increase in licensing rates as provided in those agreements and no relevant changes in the Internal Revenue Code subsequent to September 10, 1981.

In 1984, respondent assessed petitioner for excise tax under section 1491 on his sale in 1970 Fantasy, Inc., stock to Argosy through his corporation Jeffrey Investment Co. In settlement of the controversy regarding the section 1491 tax, Argosy agreed to pay the liability. Accordingly, respondent entered into two1988 U.S. Tax Ct. LEXIS 50">*61 closing agreements, one with petitioner and one with Argosy.

In the closing agreement between petitioner and respondent, the parties agreed:

(1) Taxpayer has no Code section 1491 tax liability with respect to any of the transactions hereinabove described.

(2) The payment of the Additional Liability shall not be deemed to be a distribution and/or an event taxable to the Taxpayer.

In the closing agreement between Argosy and respondent, the parties agreed:

(1) Other than as provided for in this agreement, the Taxpayer shall not be liable, either directly or as transferee, for any Code section 1491 tax arising out of its acquisition of the common stock of Fantasy and the common and preferred stock of Fernway, Jeffrey, Van Arvey and Rosewell, or any of the other transactions hereinabove described; and

90 T.C. 753">*760 (2) The Additional Liability paid by the Taxpayer shall not be deemed to be a distribution and/or an event taxable to any of the former stockholders of Fantasy or their spouses.

Petitioners maintain that the three closing agreements bar respondent from arguing in this case that Argosy and its constituent trust partners are shams for Federal income tax purposes or, 1988 U.S. Tax Ct. LEXIS 50">*62 in the alternative, that the Argosy trusts are grantor trusts under sections 671 through 679. We disagree.

Section 7121(a)²authorizes respondent to enter into agreements in writing with any person relating to the liability of that person in respect to any internal revenue tax for any taxable period. Closing agreements are binding on the parties as to the matters agreed upon and may not be annulled, modified, set aside, or disregarded in any suit or proceeding unless there is a showing of fraud, malfeasance, or misrepresentation of a material fact. Sec. 7121(b); Wolverine Petroleum Corp. v. Commissioner, 75 F.2d 593">75 F.2d 593 (8th Cir. 1935), affg. 29 B.T.A. 1236">29 B.T.A. 1236 (1934); Estate of Johnson v. Commissioner, 88 T.C. 225">88 T.C. 225 (1987), affd. without published opinion 838 F.2d 1202">838 F.2d 1202 (2d Cir. 1987); Cramp Shipbuilding Co. v. Commissioner, 14 T.C. 33">14 T.C. 33, 14 T.C. 33">37 (1950), affd. sub nom. Commissioner v. Harriman Ripley & Co., 202 F.2d 280">202 F.2d 280 (3d Cir. 1953).

1988 U.S. Tax Ct. LEXIS 50">*63 There are three types of closing agreements. Form 866 closing agreements are used to close the total tax liability of a taxpayer for a past taxable year or years. See 13 J. Mertens, Law of Federal Income Taxation, sec. 52.01, at 15-16 (1987 rev.). Form 906 closing agreements are used 90 T.C. 753">*761 where there is an agreement as to a specific matter affecting tax liability; a Form 906 closing agreement may be used with regard to specific items in past or future years. See J. Mertens, supra at 16. The third type of closing agreement is a combined agreement which relates to both total tax liability for a past year or years and specific matters. See J. Mertens, supra at 17.

Form 866 closing agreements are binding upon the parties only as to the tax period specifically stated in the agreement; a party is not precluded from challenging for a different year a matter agreed upon in a Form 866 closing agreement. See, e.g., Export Leaf Tobacco Co. v. Commissioner, 78 F.2d 163">78 F.2d 163 (2d Cir. 1935), affg. 31 B.T.A. 28">31 B.T.A. 28 (1934); Phillips v. Commissioner, 8 T.C. 1286">8 T.C. 1286 (1947), affd. 178 F.2d 270">178 F.2d 270 (3d Cir. 1949).1988 U.S. Tax Ct. LEXIS 50">*64 Form 906 agreements are binding as to the matters agreed upon for the taxable period stated in the agreement, which may also include future years. Sec. 7121(b); 14 T.C. 33">Cramp Shipbuilding Co. v. Commissioner, supra.

The closing agreements petitioners rely upon are Form 906 agreements. Petitioners argue that in the closing agreements at issue, it was agreed that Argosy and its constituent trust partners were valid entities and that the trusts were not grantor trusts under sections 671 through 679 and, therefore, respondent is precluded from making arguments to the contrary in this case. Petitioners have misconstrued the closing agreements for purposes of the matters at issue in this controversy.

The matters agreed upon in the closing agreements have been set forth in our background statement above. Nowhere in these documents is there an agreement that Argosy and its constituent trusts are valid entities or that the trusts are not grantor trusts under sections 671 through 679.

Petitioners maintain, however, that the closing agreements are based upon the premises that the entities at issue are valid entities and that the trusts at issue are not grantor trusts. 1988 U.S. Tax Ct. LEXIS 50">*65 Petitioners also cite language from the recitals in the closing agreements to support their position.

However, section 7121does not bind the parties as to the premises underlying their agreement; they are bound only as to the matters agreed upon. Sec. 7121(b). In fact by excluding, as grounds for rescission, mistakes of fact or law, 90 T.C. 753">*762 the statute contemplates that the parties may premise their agreement upon such a mistake. See 75 F.2d 593">Wolverine Petroleum Corp. v. Commissioner, supra.Although the parties are bound by their mistakes as to the matters agreed upon in the closing agreement (see 88 T.C. 225">Estate of Johnson v. Commissioner, supra), section 7121 does not require the parties to perpetuate the same mistakes with regard to matters that were not agreed upon.

Nor is respondent barred by the recitals in the closing agreements from litigating the matters at issue in this controversy. Although the recitals in a closing agreement are important for interpreting the agreement, they are not binding upon the parties for purposes of resolving an issue concerning a matter other than the matter agreed upon. The bona fides of Argosy1988 U.S. Tax Ct. LEXIS 50">*66 and its constituent trusts and the character of the trusts in question in this case are matters other than the matters agreed upon in the closing agreements.

The dispute that led to the FGRC royalty closing agreement concerned the proper allocation of the profits and losses of FGRC to its partners and whether deductions taken for royalty payments for rights to the Fantasy Galaxy record catalog were allowable to the partnership. The other two closing agreements concerned the payment of excise tax under section 1491 for the sale of Fantasy. The matter at issue in this case concerns the proper allocation of income from the motion picture "One Flew Over the Cuckoo's Nest" and of certain interest income that petitioner assigned to the entities whose bona fides respondent now challenges. Accordingly, respondent is not precluded from arguing in this case that the entities in question are shams or that the trusts are grantor trusts.

Relying on 88 T.C. 225">Estate of Johnson v. Commissioner, supra, petitioners contend that the parties to a Form 906 closing agreement may not take a position in a later controversy that is inconsistent with their position under the closing1988 U.S. Tax Ct. LEXIS 50">*67 agreement. Because respondent took the position under the closing agreements that Argosy and its constituent trusts were valid and that the constituent trusts were not grantor trusts, petitioners argue that respondent is precluded from 90 T.C. 753">*763 taking an inconsistent position in this case. Petitioners' reliance on Estate of Johnson is misplaced.

In Estate of Johnson, the decedent had purchased two life insurance policies on his life in the total amount of $ 7 million and assigned them as collateral to guarantee a loan from a bank to a corporation of which he was the majority shareholder. After the decedent died, a dispute arose as to whether the insurance company was liable for payment on the policies. The taxpayer and the bank entered into an agreement under which the bank would release the taxpayer from liability on the loan to the corporation, and the parties would work together to collect the insurance proceeds. Eventually, the insurance company paid the bank $ 4,200,000 of insurance proceeds, and the bank assigned to the taxpayer an interest in the notes documenting the loan to the extent of $ 4,200,000.

On its Federal estate tax return, the taxpayer in Estate1988 U.S. Tax Ct. LEXIS 50">*68 of Johnson took the position that it had no right to the insurance proceeds and attributed no value to its right to its subordinated participation in the bank loan. Respondent disagreed with the taxpayer's valuation, and the parties entered into a closing agreement that established a value for estate tax purposes and an unadjusted basis for income tax purposes of $ 600,000 for the taxpayer's right to subordinated participation in the bank loan. Subsequently, the corporation paid its debt to the bank and to the taxpayer, and the taxpayer, concluding that it was entitled to increase its basis in its subordinated participation in the loans by the $ 4,200,000 that the insurance company paid, filed amended returns claiming a refund based on the increase in basis.

The taxpayer in Estate of Johnson argued that it had constructively received the insurance proceeds and transferred them to the bank in exchange for the notes from the corporation. We held in Estate of Johnson that although the basis of an asset set in a closing agreement may be adjusted to reflect subsequent events, the taxpayer could not contradict the position he had taken, and the respondent had accepted, in entering1988 U.S. Tax Ct. LEXIS 50">*69 into the closing agreement, i.e., that the taxpayer had received no right to the life insurance proceeds. We explained:

90 T.C. 753">*764 [At the time the closing agreement was entered into] the parties knew about the very transaction that petitioner now seeks to characterize as a subsequent event that requires an adjustment to basis. Payment of the insurance proceeds was the heart of the controversy settled by the closing agreement. The bank had been paid; petitioner held the AVC notes and was no longer liable to the bank; and the only remaining issue was the value of petitioner's prospect of recovering on the notes. Thus, regardless of whether petitioner's current position is correct, it contradicts the position petitioner agreed to in entering into the closing agreement and, having entered into that agreement, petitioner is bound by it. See Cramp Shipbuilding Co. v. Commissioner, 14 T.C. 33">14 T.C. 37. * * * [88 T.C. 225">88 T.C. 232-233; fn. ref. omitted.]

In Estate of Johnson, we relied upon the premises underlying the parties' agreement to determine what matters they had agreed upon in making the basis valuation. Accordingly, the 1988 U.S. Tax Ct. LEXIS 50">*70 taxpayer was barred from modifying the agreement by taking an inconsistent position as to the same matter that was agreed upon, i.e., the nature of the transaction establishing the value of the taxpayer's basis in the notes. In this case, respondent is not taking an inconsistent position with regard to the matters that were agreed upon in the closing agreements. Nor does respondent seek to annul, modify, set aside, or disregard the agreements. Instead, respondent is taking a position inconsistent with the position assumed as a basis for settling by closing agreements tax disputes involving different issues, and in two instances, different types of taxes from those in the case before us. Accordingly, respondent is not bound to take the same position in this case.

Petitioners' reliance on Temple v. United States, 11 Cl. Ct. 302">11 Cl. Ct. 302 (1986), is also misplaced. In Temple, the taxpayer entered into a Form 906 closing agreement with respondent agreeing that certain issues regarding his tax liability would be resolved in a manner consistent with the resolution of an identified test case. After the test case was resolved adversely to the taxpayer, a dispute1988 U.S. Tax Ct. LEXIS 50">*71 arose as to the application of the closing agreement to the taxpayer's situation. In interpreting the closing agreement, the court considered the entire agreement and the circumstances under which it was executed.

The issue in Temple concerned the interpretation of the closing agreement for purposes of its application to the 90 T.C. 753">*765 matter that had been agreed upon. In this case, petitioners seek to use the recitals contained in the closing agreements and the premises underlying the agreements to prevent respondent from taking an inconsistent position in a case that involves a matter different from the matters that had been agreed upon in the closing agreement. This cannot be done.

14 T.C. 33">Cramp Shipbuilding Co. v. Commissioner, supra, is not to the contrary. As in Estate of Johnson and in Temple, this Court in Cramp Shipbuilding considered the circumstances under which the closing agreement was executed for purposes of interpreting the agreement. In none of these cases was a party bound to a position taken under the closing agreement in regard to a matter other than the matter that had been agreed upon.

Nor does Parish & Bingham Corp. v. United States, 44 F.2d 993">44 F.2d 993 (Ct. Cl. 1930),1988 U.S. Tax Ct. LEXIS 50">*72 help petitioners in this case. In Parish & Bingham Corp., the taxpayer sought a refund of interest paid on a deficiency assessment agreed to in a closing agreement. The taxpayer argued that because the closing agreement mentioned only the tax liability and not interest, it was entitled to a claim for interest.

Although the closing agreement in Parish & Bingham Corp. did not refer to interest, the court held that the taxpayer's suit was barred because the closing agreement settled the entire tax liability of the taxpayer for the year in issue. Accordingly, the court concluded that the matter of interest had been included within the terms of the agreement. The court explained:

When a closing agreement is entered into between the taxpayer and the Commissioner under section 1106(b), it must, of necessity, embrace every element of the Commissioner's determination; otherwise it is not an agreement under that section, and, when so entered into, it is final and conclusive as to all questions with respect to which the Commissioner has made a determination or as to which he is by law required to make a determination. * * * [44 F.2d 993">44 F.2d at 997.]

The agreement1988 U.S. Tax Ct. LEXIS 50">*73 in Parish & Bingham Corp. was executed under section 1106(b) of the Revenue Act of 1926, Pub. L. 20, 44 Stat. 9, 113, which provided:

(b) If after a determination and assessment in any case the taxpayer has paid in whole any tax or penalty, or accepted any abatement, credit, 90 T.C. 753">*766 or refund based on such determination and assessment, and an agreement is made in writing between the taxpayer and the Commissioner, with the approval of the Secretary, that such determination and assessment shall be final and conclusive, then (except upon a showing of fraud or malfeasance or misrepresentation of fact materially affecting the determination or assessment thus made) (1) the case shall not be reopened or the determination and assessment modified by any officer, employee, or agent of the United States, and (2) no suit, action, or proceeding to annul, modify, or set aside such determination or assessment shall be entertained by any court of the United States.

Under section 1106(b) of the Revenue Act of 1926, closing agreements were final as to the entire determination and assessment of tax for the year or years to which the agreement pertained. The Court of Claims concluded that a closing1988 U.S. Tax Ct. LEXIS 50">*74 agreement entered into pursuant to section 1106(b) of necessity embraced every element of the Commissioner's determination, including interest. The parties in Parish & Bingham Corp. were bound to matters not mentioned in the closing agreement because the statute in effect at the time of the agreement dictated that those matters were part of the agreement.

Section 1106(b) of the Revenue Act of 1926 has been amended. ³1988 U.S. Tax Ct. LEXIS 50">*75 The statute that controls the closing agreements in this case is section 7121 which determines finality only as to the "matters agreed upon." Under section 7121 a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing agreement. ⁴

To reflect the foregoing,

An appropriate order will be issued.