Chief Counsel Advice 1138032 Released September 23, 2011 Advice

CCA 1138032: Indemnity agreement for an erroneous refund must cap IRS liability

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This page covers one taxpayer's ruling from 2011, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

Chief Counsel Advice addressed a revised indemnity agreement connected with an erroneous refund. The advice stated that an agreement capping the IRS's liability at the refund amount complied with the Anti-Deficiency Act because the Act restricts agencies from incurring obligations beyond available appropriations. It explained that contingent liabilities must be limited to a sum certain and that sufficient funds must be available or reserved. The advice also discussed the necessary-expense doctrine, the permanent tax-refund appropriation under 31 U.S.C. § 1324, possible limited reimbursement for expenses of returning a check, and the payee for a replacement check.

Ruling snapshot

Question: What limits apply to an IRS indemnity agreement connected with an erroneous refund?
Outcome: advice given
Key authorities: 31 U.S.C. §§ 1301(a), 1324, and 1341(a); Anti-Deficiency Act; Matter of U.S. Park Police Indemnification Agreement, Comp. Gen. B-242146 (Aug. 16, 1991)

Full text (IRS public release)

ID: CCA_2011061511435556 Number: 201138032
Release Date: 9/23/2011
Office: ----------
UILC: 9999.00-00

From: -----------------
Sent: Wednesday, June 15, 2011 11:44:05 AM
To: -------------------
Cc:
Subject: FW: Conference Call at 3:30 today?

Here is the ------ opinion stating that ---------------- needs to sign indemnity agreements.

From: --------------------------------
Sent: Tuesday, May 24, 2011 11:41 AM
To: --------------------------
Cc: ---------------------------------
Subject: FW: Erroneous Refund Case

Attached please find a revised Indemnity Agreement, which has also been reviewed by the -------------------
--------------------------------------------------- within ------.

As discussed during our telephone conversation, the Indemnity Agreement that was submitted by ---------
raises concerns under the Anti-Deficiency Act, 31 U.S.C. § 1341(a). However, by capping the IRS's
liability to the refund amount, $--------------, the revised Indemnity Agreement complies with the Anti-
Deficiency Act.

The Anti-Deficiency Act prohibits agencies from entering into contracts or incurring obligations in
excess of available appropriations. 31 U.S.C. § 1341(a). Contingent liabilities, such as unlimited
indemnification agreements, present a risk that occurrence of the contingency would result in an obligation in
excess of available appropriations. See Matter of U.S. Park Police Indemnification Agreement, Comp. Gen. B-
242146 (August 16, 1991). Thus, the Comptroller General has explained that indemnification agreements
are subject to two limitations:

First, a Federal agency may not enter into an indemnification agreement that would impose an indefinite
or potentially unlimited contingent liability on the government, unless specifically authorized to do so by
law. Second, even if the potential liability is limited, such agreements are permissible only to the extent
that they are reasonably necessary or incident to the execution of the applicable program or activity. 63
Com. Gen. 145, 147 (1983). See also Hercules, Inc. v. United States, 516 U.S. 417, 427 (1996) (open-
ended indemnification agreements barred by the Anti-Deficiency Act).

This first limitation is based upon the Anti-Deficiency Act. To ensure compliance with the Anti-Deficiency
Act and to avoid the prohibition on contingent liabilities, it is necessary to set a specific dollar limit on the
liability. Comp. Gen. B-114860 (December 12, 1979), modified by Comp. Gen. B-198161 (November 25,
1980). Further, even in cases where the agency’s liability is “limited and determinable,” the agency must
have sufficient funds available should the contingency ripen into an obligation. GAO, Principles of
Federal Appropriations Law, (3d. Ed. Feb. 2006), 6-73, and cases cited therein. This concern may be
addressed by either obligating or administratively reserving funds to cover the potential liability. GAO,
Principles of Federal Appropriations Law, (3d. Ed. Feb. 2006), 6-73.

The second limitation on entering into an indemnity agreement is based upon the “necessary expense
doctrine.” Under 31 U.S.C. § 1301(a), funds may only be used for the purpose for which they are
appropriated. However, the statute does not require that every item of expenditure be specified in the
appropriations act. Under the “necessary expense doctrine” authority is also conferred to incur expenses
which are necessary and proper or incident to the execution of the object. 63 Comp. Gen. 422 (1984).
Therefore, an indemnification agreement may be proper if it is authorized expressly or if it is a necessary
expense. 59 Comp. Gen. 369 (1980).

By capping the IRS liability under the Indemnity Agreement to $--------------, a sum certain that is equal to
the refund amount, the revised Indemnity Agreement complies with the Anti-Deficiency Act. Refunds are
paid from the permanent indefinite tax refund appropriation authorized under 31 U.S.C. § 1324. 55
Comp. Gen. 625 (1976). This appropriation is called the "Refunding Internal Revenue Collections"
account. See GAO, Principles of Federal Appropriations Law, Vol. III, Ch.14-27(1994); Matter of
Southside Investment Co., Comp. Gen. B-211389 (July 23, 1984). Thus, if the IRS had to reimburse ------
------ for the refund amount under the Indemnity Agreement, the IRS would make the reimbursement from
the "Refunding Internal Revenue Collections" account. See U.S.C. § 1324 (disbursements from this
appropriation may only be made for "(1) refunds to the limit of liability of an individual tax account; and (2)
refunds due from credit provisions of the Internal Revenue Code of 1956 (26 U.S.C. 1 et seq.) enacted
before January 1, 1978 or enacted by the Taxpayer Relief Act of 1997, or from section 25A, 35, 36, 36A,
168(k)(4)(F), 53(e), 54B(h), 6428, or 6431, of such Code, or due under section 3081(b)(2) of the Housing
Assistance Tax Act of 2008. 31 U.S.C. § 1324(b)").

We understand, however, that ------- may not be willing to assist the IRS by returning the erroneous
refund check if the indemnification is limited to the amount of the check. That is because ------- may incur
expenses as a result of returning the check to the IRS (e.g., if the IRS incorrectly identified the taxpayer's
account). Those expenses, which could not be paid from the "Refunding Internal Revenue Collections
Account," may only be covered by an Indemnification Agreement if they were limited to a sum certain, the
IRS (through the ---------------------) obligates or reserves sufficient appropriated funds to cover the
service's obligations under the Agreement, and the amount is determined to be reasonably necessary to
carry out an authorized function such as the Service's collection activities.

In the event that ------- is not willing to enter into the indemnity agreement because the indemnification is
limited to the refund amount and the --------------------------------------------------is willing (and able) to reserve
limited funds (------------------) to cover reasonable expenses of litigation that may be incurred by -------, we
believe that the IRS could enter into an Indemnity Agreement that would cover such limited expenses. In
that case, however, a contracting officer may also need to sign the indemnification agreement (and even
recommend specific language). See e.g., Form 13857 (03-2007) (Indemnification of Locksmiths and Tow
Truck Operators).

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2) Should the check be made to the Department of Treasury or the IRS?

The Check should be payable to "United States Treasury." See e.g.,
http://www.irs.gov/newsroom/article/0,,id=108544,00.html and 2010 Instructions for Form 1040, line 76.

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