Burton v. Comm'r ( 2009 )

T.C. Memo. 2009-60
UNITED STATES TAX COURT
ROGER A. BURTON AND COLLEEN C. BURTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7001-07. Filed March 18, 2009.
Claudia M. Revermann and John R. Koch, for petitioners.
David L. Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a $239,309 deficiency
in petitioners’ 2000 joint Federal income tax and a $47,862
accuracy-related penalty under section 6662(a).
At this time the only issue for decision is whether
petitioners entered into a binding settlement agreement with
respondent’s Appeals Office relating to petitioners’ joint
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Federal income tax liability for 2000.1 Petitioners assert that
a final binding settlement was entered into under which they were
to pay a single lump sum of $60,000 without any further liability
to pay statutory interest. Respondent asserts, among other
things, that no final binding agreement was ever reached--
particularly with regard to petitioners’ liability for statutory
interest.
Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
When they filed the petition, petitioners resided in
Minnesota.
Over the course of 17 years, petitioners owned the stock in
an S corporation that operated a truck stop, a convenience store,
storage units, and rental units located in a building complex on
Interstate 10. In 2000 petitioners transferred their stock in
1
By order dated Apr. 8, 2008, the issue as to whether
petitioners entered into a binding settlement agreement with
respondent’s Appeals Office was severed for trial and decision.
Trial of other issues will await resolution of this issue.
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the S corporation to an affiliated employee stock ownership plan
(ESOP), and the ESOP in turn sold the assets of the S corporation
to a third party for $627,344.
The $627,344 was to be paid in installments over a number of
years. Robert Olson, acting under a power of attorney for
petitioners (Attorney Olson), assisted in the transfer of the S
corporation stock and in the sale of the S corporation’s assets.
On their 2000 joint Federal income tax return petitioners
did not report any of the $627,344 as income.
During an audit by respondent of petitioners’ 2000 joint
Federal income tax return, Attorney Olson represented
petitioners. As a result of the audit, respondent’s revenue
agent proposed to ignore petitioners’ ESOP, to treat the above
asset sale as a sale by petitioners directly, and to charge
petitioners under sections 1231 and 1366 with the $627,344 in
proceeds from the asset sale. Respondent’s revenue agent also
proposed the $239,309 tax deficiency, the $47,862 section 6662(a)
accuracy-related penalty, and statutory interest. Respondent’s
revenue agent also proposed two alternative adjustments (first
alternative--recognize the ESOP but treat the sale by the ESOP of
the S corporation’s assets as a sale that did not qualify under
section 453 for installment sale reporting; second alternative--
recognize the ESOP but, if the sale of the S corporation assets
was treated as qualifying under section 453 for installment sale
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reporting, treat the sale of the assets under section 453(e) as a
second disposition by a related party and charge petitioners with
income each year for the payments received by the ESOP).
Petitioners protested the revenue agent’s proposed
deficiency to respondent’s Appeals Office. During the protest
Attorney Olson represented petitioners. In petitioners’ written
protest no mention was made of statutory interest.
In a February 17, 2005, letter respondent’s Appeals officer
notified petitioners and Attorney Olson that he had been assigned
the case. Respondent’s Appeals officer further stated that
statutory interest would accrue on the proposed tax deficiency as
required by law.
Soon thereafter, Attorney Olson and the parties initiated
settlement discussions.
In a faxed letter dated July 31, 2006, respondent’s Appeals
officer stated that for purposes of settlement negotiations the
maximum tax that would be due from petitioners on the sale of
their S corporation assets was estimated to be $107,000.
Respondent’s Appeals officer also stated that under his estimate
the minimum tax that would be due from petitioners was $90,000.
Respondent’s Appeals officer further stated that the amount of
any settlement would have to at least equal the estimated minimum
of $90,000.
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During a conference on August 3, 2006, Attorney Olson argued
that each side had hazards of litigation of at least 50 percent,
and he proposed that petitioners’ 2000 Federal income taxes be
settled for $40,000.
In a letter dated August 7, 2006, to respondent’s Appeals
officer, Attorney Olson summarized his calculation of his $40,000
settlement proposal as follows:
Description Amount
Net sale proceeds $600,000
Capital gain tax rate 15%
$ 90,000
Hazards of litigation 50%
$ 45,000
Addition for future capital gain taxes that
would have been paid under current
structure $ 15,000
Subtraction for taxes already paid on
$275,000 $(20,000)
Total $ 40,000
In the above July 31, August 3, and August 7, 2006,
communications apparently no reference was made to statutory
interest.
In a faxed letter dated August 21, 2006, respondent’s
Appeals officer sent to Attorney Olson revised calculations in
which he used $106,881 for the total estimated tax due and in
which he restated that from respondent’s viewpoint and for
settlement negotiations $90,000 was being treated as the minimum
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tax due under any settlement. In this letter no mention was made
of statutory interest.
At the next conference, on September 1, 2006, Attorney Olson
and respondent’s Appeals officer discussed a possible settlement
at $60,000. The record does not reflect what was said, if
anything, about statutory interest.
In a faxed letter dated September 1, 2006, respondent’s
Appeals officer sent Attorney Olson a computerized calculation of
interest on a hypothetical tax liability of $25,000. On the copy
of this letter which is in evidence there appears a handwritten
calculation reflecting a $60,000 liability that appears to
include some statutory interest. This handwritten calculation
reflecting $60,000, however, is not explained and is ambiguous.
On September 7, 2006, respondent’s Appeals officer sent a
cover letter to Attorney Olson with regard to a proposed
settlement with an enclosed Form 870-AD, Offer to Waive
Restrictions on Assessment and Collection of Tax Deficiency and
to Accept Overassessment. In the September 7, 2006, cover letter
respondent’s Appeals officer referred expressly to the accrual of
statutory interest as follows:
The computations do not include interest. By law,
interest accrues from the due date of the return. In
order to stop additional interest from accruing, you
may enclose full payment payable to the United States
Treasury.
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The proposed Form 870-AD shows $60,000 as the tax due and
refers expressly to the accrual of statutory interest as follows:
“with interest as provided by law.”
In an October 20, 2006, faxed letter Attorney Olson proposed
that a closing agreement be entered into regarding the settlement
of petitioners’ 2000 joint Federal income tax liability, and on
or before October 23, 2006, Attorney Olson mailed to respondent’s
Appeals officer a proposed closing agreement. The proposed
closing agreement stated in part--
The total sanction amount due to the United States Treasury
under this Agreement is Fifty-Five Thousand Dollars
($55,000). The taxpayers shall pay this sum * * *
contemporaneously with the execution of this Agreement, or
by five (5) payments of Eleven Thousand Dollars ($11,000)
per year plus statutory interest paid annually * * *.
After discussing the above language for a closing agreement
with one of respondent’s closing agreement coordinators, on
November 15, 2006, respondent’s Appeals officer mailed to
Attorney Olson a cover letter with a revised closing agreement
for petitioners’ signature. In the letter respondent’s Appeals
officer explained that the tax due under the proposed revised
settlement would be $60,000 and that interest would “continue to
accrue” thereon until paid.
Attorney Olson notified respondent’s Appeals officer that he
agreed on behalf of petitioners to the revised closing agreement,
and on November 20, 2006, respondent’s Appeals officer sent to
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Attorney Olson the original revised closing agreement along with
the Form 870-AD for signature.
On or about November 27, 2006, petitioners and Attorney
Olson signed the closing agreement and the Form 870-AD and mailed
them, along with a check for $60,000, back to respondent’s
Appeals officer. On petitioners’ $60,000 check the words “paid
in full” were written in the lower left corner.
On November 28, 2006, respondent’s Appeals officer mailed a
letter to Attorney Olson acknowledging receipt of the closing
agreement signed by petitioners, the Form 870-AD signed by
petitioners, and petitioners’ $60,000 check. In his letter,
however, respondent’s Appeals officer explained that he could not
process petitioners’ $60,000 check because that check and
petitioners’ payment did not include an additional $23,684 in
statutory interest respondent’s Appeals officer calculated had
accrued and was due on the $60,000 through November 30, 2006.
Respondent’s Appeals officer also included a computation of the
$23,684 in accrued interest.
On December 5, 2006, respondent’s Appeals officer mailed
another letter to Attorney Olson reiterating that the payment due
under the settlement that had been discussed was $60,000 in taxes
and $23,684 in statutory interest.
Not having received a response from petitioners, on
December 11, 2006, respondent’s Appeals officer by mail returned
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to Attorney Olson with a cover letter petitioners’ $60,000 check,
and on December 21, 2006, respondent issued the notice of
deficiency.
Neither respondent’s Appeals officer nor any other
representative of respondent or of the United States ever signed
the closing agreement that petitioners had signed regarding
petitioners’ 2000 Federal income tax liability.
OPINION
As explained recently in Dormer v. Commissioner, T.C. Memo.
2004-167, the law applicable to administrative settlement offers
involving Federal income taxes is well established. Regulations
establish the procedures for closing agreements and compromises
under sections 7121 and 7122. Secs. 301.7121-1, 301.7122-1,
Proced. & Admin. Regs. These procedures are exclusive and must
be satisfied in order to effect an administrative compromise or
settlement which will be binding on both a taxpayer and
respondent. Rohn v. Commissioner, T.C. Memo. 1994-244, see also
Urbano v. Commissioner, 122 T.C. 384, 393 (2004) (“it is firmly
established that section 7121 sets forth the exclusive means by
which an agreement between the Commissioner and a taxpayer
concerning the latter’s tax liability may be accorded
finality.”); Estate of Meyer v. Commissioner, 58 T.C. 69, 70
(1972) (“Section 7121 of the Internal Revenue Code of 1954 sets
forth the exclusive procedure under which a final closing
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agreement as to the tax liability of any person can be
executed”); Harbaugh v. Commissioner, T.C. Memo. 2003-316 (“It is
well settled that section 7122 and the regulations thereunder
provide the exclusive method of effectuating a valid compromise
of assessed tax liabilities.”); Ringgold v. Commissioner, T.C.
Memo. 2003-199 (“The law regarding compromises is well
established. The regulations and procedures under section 7122
provide the exclusive method of effectuating a compromise.”).
Regulations under sections 7121 and 7122 require that any closing
agreement or offer-in-compromise be submitted and/or executed on
or in the specific form prescribed by the IRS. Secs. 301.7121-
1(d), 301.7122-1(d), Proced. & Admin. Regs.
Respondent has prescribed that one of two forms be used to
finalize closing agreements--Form 866, Agreement as to Final
Determination of Tax Liability, or Form 906, Closing Agreement on
Final Determination Covering Specific Matters. Form 866 is used
to determine conclusively a taxpayer’s total tax liability for a
taxable period. Form 906 is used if an agreement relates to one
or more separate items affecting a taxpayer’s tax liability.
Sec. 601.202(b), Statement of Procedural Rules; see Manko v.
Commissioner, 126 T.C. 195, 201-202 (2006).
Further, final authority over administrative settlements
involving Federal tax matters has been delegated to Regional
Counsel, Regional Director of Appeals, Chiefs, Assistant Chiefs
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and Associate Chiefs of the Appeals Offices, Appeals Team Chiefs,
Team Managers, Directors of an Appeals Operating Unit, Appeals
Area Directors, Deputy Appeals Area Directors, and Appeals Team
Case Leaders. Sec. 601.106(a)(1)(i) and (ii), Statement of
Procedural Rules; Delegation Order No. 66 (Rev. 15 Jan. 23,
1992). The purported closing agreement in this case was never
executed by an authorized representative of respondent. Neither
the Appeals officer nor the Closing Agreement Coordinator ever
signed the document.
Once a case is docketed in this Court a different framework
of rules is typically applied. In Dormer v. Commissioner, supra,
we explained that after a case is docketed in this Court a
settlement agreement may be reached and may become final and
binding on the parties through contract principles of offer and
acceptance. See also Dorchester Indus. Inc. v. Commissioner, 108
T.C. 320, 330 (1997), affd. without published opinion 208 F.3d
205 (3d Cir. 2000).
As has been stated, it “‘is not necessary that the parties
[in litigation] execute a closing agreement under section 7121 in
order to settle a case pending before this Court, but, rather, a
settlement agreement may be reached through offer and acceptance
made by letter, or even in the absence of a writing.’” Id.
(quoting Manko v. Commissioner, T.C. Memo. 1995-10).
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In this connection, a settlement is a contract, and general
principles of contract law govern whether a settlement has been
reached. Id. A prerequisite to the formation of a contract is
mutual assent to its essential terms, arrived at through offer
and acceptance. Id.
Whichever framework and set of rules we apply here, on the
record before us we conclude that no settlement was entered into
between the parties. Clearly, no final closing agreement was
signed by an individual authorized to bind respondent, and no
mutual agreement was reached by the parties that either excluded
petitioners’ liability for statutory interest on the lump sum
$60,000 petitioners tendered to respondent or that affirmatively
included statutory interest as part of the $60,000 that was
tendered by petitioners. The bulk of the relevant documentation
in evidence supports the conclusion that statutory interest was
to accrue and was to be paid in addition to the $60,000.
We agree with respondent that no mutual agreement was
reached on key aspects of the proposed settlement that were being
negotiated (particularly as to petitioners’ liability for
statutory interest) and that no final and binding settlement was
entered into between the parties. We also conclude that no
person authorized to bind respondent ever executed an agreement
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under section 7121. This case is returned to the general
jurisdiction of the Court for trial.2
An appropriate order will be
issued.
2
In their posttrial memorandum, petitioners for the first
time raise equitable estoppel. This issue is not properly before
the Court. See Rule 39. In any event, the facts do not support
a finding that respondent’s Appeals officer made any false
representations to or in any way misled petitioners or Attorney
Olson about the terms of the proposed settlement. FPL Group,
Inc., & Subs. v. Commissioner, T.C. Memo. 2008-144.