Under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.
Don Bear v. Commissioner

Docket No. 11582-91., T.C. Memo. 1992-690, 64 TCM 1430, Filed December 3, 1992

An individual was denied a capital loss deduction on the sale of a mobile home because he used the mobile home as his residence. Further, the negotiation by the IRS of a check tendered by the taxpayer did not constitute an accord and satisfaction of the taxpayer's deficiencies. The taxpayer and the IRS did not enter into a closing agreement or compromise as required by the regulations, and the U.S. government, as a sovereign, was not bound by the provisions of the Uniform Commercial Code. Additionally, the taxpayer was held to be liable for additions to tax for failure to file, negligence and underpayment of estimated tax. The taxpayer failed to demonstrate reasonable cause for his failure to file returns. Finally, the taxpayer was not entitled to a refund of withheld taxes because he did not pay the taxes within two years of the issuance of a notice of deficiency. The two-year statute of limitations applied to the claim for refund because the taxpayer failed to file a tax return.

Memorandum Opinion
SCOTT, Judge:
This case was assigned to Special Trial Judge Joan Seitz Pate pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below.
Opinion of the Special Trial Judge
PATE, Special Trial Judge: Respondent determined the following deficiencies in and additions to petitioner's income tax: (1) For 1984, a deficiency of $12,304 and additions to tax under section 6651(a)(1) of $3,022, section 6653(a)(1) of $615, section 6653(a)(2) of 50 percent of the interest on $12,089, and section 6654 of $756; (2) for 1985, a deficiency of $10,468 and additions to tax under section 6651(a)(1) of $2,386, section 6653(a)(1) of $523, section 6653(a)(2) of 50 percent of the interest on $9,543, and section 6654 of $534; (3) for 1986, a deficiency of $5,796 and additions to tax under section 6651(a)(1) of $868, section 6653(a)(1)(A) of $290, section 6653(a)(1)(B) of 50 percent of the interest on $3,472, and section 6654 of $141; and (4) for 1987,a deficiency of $2,249 and additions to tax under section 6651(a)(1) of $538, section 6653(a)(1)(A) of $112, section 6653(a)(1)(B) of 50 percent of the interest on $2,249, and section 6654 of $113.
Petitioner was a resident of Kennewick, Washington, at the time he filed his petition. Some of the facts have been stipulated and they are so found. The Stipulation of Facts and attached exhibits are incorporated herein by this reference.
During all of the years in issue, petitioner was employed as a mechanical designer by Hughes Aircraft in Tucson, Arizona. He received the following amounts of gross income during those years:
(1) For 1984, wages of $37,072 and interest income of $35;
(2) For 1985, wages of $43,485 and interest income of $17;
(3) For 1986, wages of $36,632; and
(4) For 1987, wages of $5,711 and other income of $2,106.
Nonetheless, petitioner failed to file Federal income tax returns for 1984, 1985, 1986, and 1987.
After concessions by the parties, the only issues for our decision are: (1) Whether petitioner may deduct a capital loss of $660 sustained from the sale of a mobile home in 1985; (2) whether the Internal Revenue Service's negotiation of a check dated November 26, 1985, constitutes an accord and satisfaction of petitioner's Federal income tax liabilities for 1984 and 1985; (3) whether petitioner is liable for additions to tax under section 6651(a)(1) for failure to timely file Federal income tax returns for each of the years in issue; (4) whether petitioner is liable for additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987, for negligence or disregard of rules or regulations; (5) whether petitioner is liable for additions to tax under section 6654 for underpayment of estimated tax for each of the years in issue; and (6) whether petitioner is entitled to a credit or refund for an overpayment of tax for 1987. For purposes of clarity, we have combined our findings of fact and conclusions of law as to each issue.
Loss on Mobile Home
In 1985, petitioner sold the mobile home in which he lived, thereby sustaining a loss of $660. Petitioner claims the loss is deductible, whereas respondent maintains that the loss is personal and, therefore, not deductible.
In general, section 262 provides that expenditures for personal, living, or family expenses are not deductible. The regulations under that section specifically provide that losses sustained by the taxpayer upon the sale or other disposition of property for residential purposes are not deductible. Sec. 1.262-1(b)(4) , Income Tax Regs.
Petitioner admittedly used the mobile home at issue as his residence. Consequently, we hold that he may not deduct the loss he sustained when he sold his mobile home.
Accord and Satisfaction
In November 1985, petitioner tendered a check to the Internal Revenue Service (hereinafter the IRS) in the amount of $1,177.67, on the back of which he had written "Endorsement of this draft constitutes agreement that all taxes, interest, penalties, or other indebtedness is paid in full through 11/30/85." The IRS negotiated the check. Petitioner contends that the IRS's acceptance of his check constitutes an accord and satisfaction of his 1984 and 1985 income tax liabilities and that, therefore, he is not liable for the deficiencies determined by respondent for those years.
Sections 7121 and 7122 set forth the exclusive method for settling claims arising under the Internal Revenue laws. Section 7121(a) authorizes the Commissioner to enter into agreements in writing with any person relating to the liability of that person for any taxable period. Set forth in the regulations thereunder are formal procedures for closing agreements and compromises which must be followed to effect a settlement. Laurins v. Commissioner [89-2 USTC ¶9636 ], 889 F.2d 910 (9th Cir. 1989), affg. Norman v. Commissioner [Dec. 43,943(M) ], T.C. Memo. 1987-265. Secs. 301.7121-1 and 301.7122-1 , Proced. & Admin. Regs.
Petitioner did not follow the procedures set forth in those regulations, nor did respondent agree to conclude any closing agreement or compromise as set forth in the regulations. Consequently, there was no closing agreement or compromise effectuated between the parties and, therefore, respondent is not bound by the payment made by petitioner in November 1985.
Nevertheless, petitioner argues that his submission of the check with the endorsement language contained thereon together with the negotiation of the check by the IRS constitutes an accord and satisfaction under the Uniform Commercial Code. However, the United States Government, as the sovereign, is not bound by such State statutes as the Uniform Commercial Code. See Burnet v. Harmel [3 USTC ¶990 ], 287 U.S. 103, 110 (1932); Texas Learning Technology Group v. Commissioner [Dec. 47,318 ], 96 T.C. 686, 693 (1991), affd. [92-1 USTC ¶50,224 ] 958 F.2d 122 (5th Cir. 1992). As we noted earlier, the only way income tax liabilities can be settled or compromised is by following the procedures set forth in the Internal Revenue Code and the regulations thereunder. Since the parties' actions do not fulfill these requirements, no settlement was effectuated thereby.
Failure To File
Petitioner contends that he is not liable for the additions to tax under section 6651(a)(1) for failing to timely file his income tax returns for each of the years in issue. Section 6651(a)(1) provides:
In case of failure--
(1) to file any return * * * unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as taxon such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month * * * not exceeding 25 percent in the aggregate * * *
To be absolved of the liability, the taxpayer must show that his failure to file was due to reasonable cause and not due to willful neglect. Sec. 301.6651-1(c)(1) , Proced. & Admin. Regs. Illness or incapacity may constitute reasonable cause if the taxpayer establishes that he was so ill that he was unable to file. See Williams v. Commissioner [Dec. 18,247 ], 16 T.C. 893 (1951). The taxpayer bears the burden of proving that this addition to tax does not apply. Rule 142(a); BJR Corp. v. Commissioner [Dec. 34,078 ], 67 T.C. 111, 131 (1976).
Petitioner admits that he did not file income tax returns for any of the years in issue, but argues that he had reasonable cause for not doing so. He claims that he was severely depressedduring all of those years, and that his mental state was so extreme that he could not cope with the negative reaction he had when contemplating such filing. However, the fact that petitioner worked as a mechanical designer for Hughes Aircraft on a full-time basis at a substantial salary during this time period refutes his contention. Consequently, we hold that petitioner has not shown that he had reasonable cause for not filing his income tax returns. Accordingly, we sustain respondent's determination on this issue.
Negligence
Next, petitioner contends that he is not liable for the additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987. These sections provide that, if any portion of the underpayment of tax is due to negligence or intentional disregard of rules or regulations, an amount equal to 5 percent of the underpayment and 50 percent of the interest on the portion of the underpayment attributable to negligence is added to the tax.
Negligence has been defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Zmuda v. Commissioner [84-1 USTC ¶9442 ], 731 F.2d 1417, 1422 (9th Cir. 1984), affg. [Dec. 39,468 ] 79 T.C. 714 (1982); Marcello v. Commissioner [67-2 USTC ¶9516 ], 380 F.2d 499, 506(5th Cir. 1967), affg. in part, remanding in part [Dec. 27,043 ] 43 T.C. 168 (1964); Neely v. Commissioner [Dec. 42,540 ], 85 T.C. 934, 947 (1985). Because an addition to tax under section 6653(a) is presumptively correct, the taxpayer bears the burden of establishing that respondent's determination was erroneous. Betson v. Commissioner [86-2 USTC ¶9862], 802 F.2d 365, 372(9th Cir. 1986), affg. in part, revg. in part [Dec. 41,219(M) ] T.C. Memo. 1984-264; Bixby v. Commissioner [Dec. 31, 493], 58 T.C. 757, 791-792 (1972); Enoch v. Commissioner [Dec. 31,301 ], 57 T.C. 781, 802-803 (1972).
Petitioner again argues that his mental condition precluded him from acting prudently with regard to filing income tax returns and, therefore, we should absolve him of the addition to tax. Again, we disagree. His employment during the years in issue evidences far too much ability on his part to cope with the ordinary requirements of the business world for us to accept his reasoning. Furthermore, there is evidence in this record, such as the small amount of the tax withheld from petitioner's wages and the allegations contained in the petition, that indicates that petitionerwas a tax protestor and intentionally did not file his returns. For these reasons, we uphold respondent's determination on this issue.
Estimated Tax
Next, petitioner asks this Court to absolve him of the additions to tax under section 6654 . Section 6654 imposes an addition to tax in the case of any underpayment of estimated tax by an individual.
It is clear on this record that petitioner paid no estimated tax for the years in issue although he was required to do so. The imposition of an addition to tax under section 6654 is mandatory unless the taxpayer can show that one of the computational exceptions applies. Grosshandler v. Commissioner [Dec. 37,317 ], 75 T.C. 1, 20-21 (1980). Petitioner has failed to do so. Accordingly, we hold that petitioner is subject to the addition to tax under section 6654 .
Refund of Overpayment
Finally, petitioner claims that he is entitled to a refund of $100 for 1987. The parties agree that, due to concessions, petitioner's taxable income for 1987 is zero and that he had withholding credits of $100 for that year. However, respondent maintains that petitioner is not entitled to have his withholding credits refunded to him because the period of limitations on such refundhad expired at the time the notice of deficiency was issued.
In general, section 6511(a) provides that a claim for refund of tax must be filed by a taxpayer within 3 years from the time the income tax return was filed or 2 years from the time the tax was paid, whichever period expires later. Moreover, if no return is filed, the claim must be filed within 2 years from the time the tax was paid. Sec. 6511(a) . Since petitioner did not file anyincome tax return for 1987, the 2-year period applies in this case.
All of the tax paid by petitioner for 1987 was withheld from his wages. Withheld taxes are deemed to have been paid by a taxpayer on the 15th day of the 4th month following the close of the taxable year. Sec. 6513(b) ; Stokes v. Commissioner [Dec. 46,212(M) ], T.C. Memo. 1989-661; sec. 301.6513-1(a) , Proced. & Admin. Regs. Therefore, petitioner's withheld taxes are deemed paidon April 15, 1988.
Where a taxpayer fails to file a return and a notice of deficiency has been issued, the taxpayer is entitled to a credit or refund of amounts paid within 2 years preceding the mailing of the notice. Secs. 6511(b)(2)(C) , 6512(b)(2)(B)(now sec. 6512(b)(3)(B) ). Respondent issued the notice of deficiency with regard to petitioner's 1987 tax year on March 19, 1991, a date almost 3 years from the April 15, 1988 date on which his taxes are deemed paid. Because petitioner did not pay the taxes he is claiming within 2 years of the issuance of the notice of deficiency, he is not entitled to a refund or credit for such taxes. Allen v. Commissioner [Dec. 48,566 ], 99 T.C. 23 (Oct. 6, 1992); Braman v. Commissioner [Dec. 48,612(M) ], T.C. Memo. 1992-636.
Because of concessions by both parties,
Decision will be entered under Rule 155.
1 All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.



Donald Eugene Rudisill and Barbara Jean Rudisill v. Commissioner

Docket No. 7903-91., T.C. Memo. 1992-388, 64 TCM 93, Filed July 13, 1992


[Code Secs. 7121 and 7122 ]


An investor in computer software was not granted immunity by the IRS. Although the taxpayer met with a desk clerk of the Criminal Investigation Division of the IRS and was allegedly toldhe did not have to refile his taxes, the clerk had no authority to grant immunity or consummate an agreement. Since closing agreements and compromise agreements are the exclusive means of settling disputes over civil taxes and since no such agreement existed, the taxpayer was not entitled to immunity. Accordingly, the penalties determined by the IRS and conceded by the taxpayer were upheld.

Memorandum Opinion
FAY, Judge:
By statutory notice of deficiency, respondent determined deficiencies in and additions to petitioners' Federal income tax in the following amounts:
Additions to Tax
----------------
Year Deficiency Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659
1980 ....... $5,976 $299 $1,793
1981 ....... 6,443 $322 1 1,933
1982 ....... 7,779 389 1 2,334
1983 ....... 6,983 349 1 2,095
------------------------------------------------------------------------------
1 Fifty percent of interest computed on $6,443, $7,779, and $6,983 of the
deficiency for taxable years 1981, 1982, and 1983, respectively.

All section references are to the Internal Revenue Code in effect for the years in issue.
The sole issue before this Court is whether petitioners were granted immunity by respondent and are thereby relieved of the deficiencies and additions to tax as set forth in the notice ofdeficiency for the years at issue. We hold petitioners were not granted immunity by respondent. For purposes of clarity, the findings of fact and opinion have been combined.
The Stipulation of Facts and exhibits are incorporated herein by this reference. Petitioners were residents of Bonita, California, at the time the petition in this case was filed.
On their 1983 Federal income tax return, petitioners claimed a Schedule C loss in the amount of $9,181 and an investment tax credit (ITC) in the amount of $25,134, both in connection withtheir investment in Courseware Research Corp. (CRC), a computer software leasing program.
Petitioners deducted $4,937 of the total claimed ITC on their 1983 Federal income tax return and carried back $5,976, $6,443, and $7,779 of the ITC to their 1980, 1981, and 1982 tax years, respectively.
In the notice of deficiency, respondent disallowed the claimed loss and ITC on the primary grounds that the transactions were not bona fide arm's length transactions at fair market value and that the transactions lacked economic substance.
Petitioners do not dispute that they are not entitled to the claimed loss and ITC. Instead, petitioners assert that they should not be held liable for the deficiencies and additions to tax for the years at issue on the ground that they were granted immunity by a desk clerk employed by the Internal Revenue Service. 1
Mr. Rudisill (petitioner) contacted the Criminal Investigation Division (C.I.D.) of the Internal Revenue Service on April 1, 1985, on his own initiative for the purpose of having the CRC computer leasing program "declared illegal" and to refile his taxes for the years at issue.
Petitioner asserts that he met with Catherine MacNeill (MacNeill), a desk clerk employed by respondent, who proceeded to take down information provided by petitioner. Petitioner claims that during his April 1, 1985, contact with C.I.D., he was advised by MacNeill as follows: "Mr. Rudisill, you were a victim. You don't have to refile your taxes. You go home and forget about it."
Respondent concedes that MacNeill was the employee of respondent who wrote down the information provided by petitioner. Respondent, however, does not concede that MacNeill made the statements alleged by petitioner. Respondent further argues that MacNeill did not have authority to grant petitioners immunity or to make any type of agreement relating to petitioners' civil tax liabilities and that, in fact, no such agreement ever existed between the parties.
In the context of a civil tax dispute, closing agreements under section 7121 and compromise agreements under section 7122 provide the exclusive means of settling such controversy. See Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288 (1929); Shumaker v. Commissioner [81-2 USTC ¶9508 ], 648 F.2d 1198, 1200 (9th Cir. 1981); see also Estate of Meyer v. Commissioner [Dec. 31,336 ], 58 T.C. 69, 70 (1972). We consider petitioners' claim of immunity from the tax deficiencies and additions to tax before us as a claim arising under each of these sections. Both closing agreements under section 7121 and compromise agreements under section 7122 , however, are required to be in writing and to be accepted by the Secretary. Sec. 301.7121-1 and sec. 301.7122-1 , Proced. & Admin. Regs.
Petitioners were unable to show that any written agreement complying with the applicable rules and regulations was entered into with respondent relating to petitioners' civil tax liabilities for 1980 through 1983. In addition, we discern no other evidence in the record before us that supports petitioners' claim of immunity. 2
We therefore hold petitioners' allegations of a grant of immunity by respondent to be meritless.
Decision will be entered for respondent.
1 In paragraph 8 of the Stipulation of Facts, the parties stipulated to reduced amounts of the deficiencies in income taxes and additions to tax due from petitioners in the event that this Court holds for respondent. The reduced deficiencies and additions to tax are consistent with settlement offers given to other investors in CRC.
2 At trial, neither party called MacNeill to testify as a witness before this Court. Because we find that the record is devoid of any evidence supporting the existence of a written agreement within the context of sec. 7121 or sec. 7122 , we need not resolve whether MacNeill made the statements attributed to her by petitioner or whether MacNeill was authorized by respondent toenter into any such agreement.



Robert F. and Frances H. Haiduk v. Commissioner

Docket No. 36632-87., TC Memo. 1990-506, 60 TCM 864, Filed September 24, 1990



[Code Sec. 7121 ]

Commissioner of Internal Revenue: Closing agreements: Nonstatutory agreements.--An IRS settlement letter for one tax year that was accepted by the taxpayers was a binding contract and could not be set aside despite the IRS's unilateral error in calculating the amount of taxes owed under the agreement. The IRS objected to the settlement because of deductions that taxpayers had taken in earlier years barred by the statute of limitations in another case. Formal stipulations of settlement or decision were not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties and settlement terms were otherwise ascertainable and a closing agreement was not necessary to settle a case before the Tax Court. Nothing in the settlement agreement required the taxpayers to make adjustments in tax years prior to the year at issue because the IRS failed to include such terms. The IRS failed to offer argument or authority to support findings of impermissible tax benefits or that the agreement was voidable on the basis of mutual mistake or that a manifest injustice would result from the enforcement of the agreement.

Memorandum Opinion
COUVILLION, Special Trial Judge:
This case was assigned pursuant to section 7443A(b)(3) 1 and Rule 180 et seq.
At issue is a motion by petitioners for entry of decision as to which respondent has filed a notice of objection. At the time the petition was filed, petitioners were residents of El Toro, California.
Respondent determined a deficiency in Federal income tax, for petitioners' 1983 tax year, of $6,119; additions to tax under section 6653(a)(1) and (2), respectively, of $305.95 and 50 percent of the interest due on $6,119; the addition to tax under section 6659 in the amount of $1,835.70; and additional interest under section 6621(c) .
Petitioners were investors in a program known as "Philatelic Leasing" (Philatelic) which has been identified by respondent as a national litigation project. In general, participants in Philatelic paid cash and executed promissory notes in consideration for which they received rights to the exploitation of a stamp master. All of the deductions and credits claimed by participants in the program were disallowed by respondent.
Respondent, by letter, extended an offer to petitioners for settlement of this case. Essentially, the offer allowed investors a deduction of 50 percent of their cash investment in the year at issue. In the letter, respondent represented that petitioners could accept the offer, within 14 days, by (1) returning a checklist properly marked to indicate acceptance of the settlement offer; and (2) establishing proof of their cash investment in the Philatelic program. Petitioners timely complied with both requirements. Respondent now refuses to proceed with the settlement for the reason that the offer, as respondent envisioned it, contemplated that taxpayers would not enjoy any tax benefits from Philatelic for other years and, since petitioners realized tax benefits from Philatelic for four years not before the Court, the settlement is not binding upon respondent.
Petitioners entered the Philatelic program in 1982. On their 1982 return, they claimed certain deductions and the investment credit relating to the stamp master. Because petitioners could not utilize the entire investment credit against their 1982 taxes, they carried back the credit to 1979, 1980, and 1981. These three years apparently utilized the credit in full. On their 1983 return (which is the only year at issue in this case), petitioners claimed certain expenses relating to Philatelic which respondent disallowed in the notice of deficiency. The claimed expenses related to cash payments totaling $17,527.37 petitioners made in 1983.
Respondent's objection to settlement of the 1983 tax year is based upon the disposition which came about as to petitioners four earlier years, 1979, 1980, 1981, and 1982. A separate notice of deficiency had been issued with respect to these four years, disallowing the expenses and investment credit arising out of Philatelic, and petitioners filed a petition with this Court at docket No. 26658-88. That case was settled by the parties through a stipulated decision which decreed no deficiencies in income taxes and no additions to tax. The case was settled because of respondent's concession that the four years were barred by the statute of limitations. It appears that, while the 1982 tax year was under audit, petitioners and respondent had jointly agreed to an open-ended consent to extend the period of limitations through execution of a Form 872-A. In accordance with the provisions of Form 872-A, petitioners later executed and delivered to respondent a Form 872-T, which terminated the extension of the period of limitations. Under the Form 872-A, respondent was allowed 90 days to issue the notice of deficiency once respondent received a Form 872-T. Respondent failed to issue the notice of deficiency within this time period; the defense was properly raised by petitioners and resulted in the stipulated decision referred to. In the decision in docket No. 26658-88, petitioners were awarded litigation costs in the amount of $2,856.76 pursuant to section 7430 . Because petitioners enjoyed the tax benefits for these earlier years from Philatelic, respondent contends he should be allowed to "back out" of the accepted settlement offer for this case involving the 1983 tax year.
Respondent argues that no binding settlement agreement has ever been entered into by the parties since the offer and the purported acceptance were evidenced only by letters between the parties. Alternatively, respondent argues that, even if an agreement was entered into, the agreement should not be enforced.
Respondent first takes the position that the letters between the parties, without additional documentation, are insufficient to constitute an enforceable settlement agreement because there are no documents memorializing the agreement other than a "form" letter from respondent and a letter from petitioners' counsel accepting the offer contained in respondent's letter. Respondent contends that, in the absence of a stipulation of settled issues, filed decision documents, or administrative forms such as a closing agreement under section 7121 , there is no binding settlement.
Formal stipulations of settlement or decision documents are not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties to settle and the terms of the settlement are otherwise ascertainable. Further, respondent's contention that a closing agreement under section 7121 is necessary to settle a case pending in this Court is simply not correct. The regulations under section 7121 provide a procedure whereby taxpayers may, at the Commissioner's option, administratively settle their tax liabilities with finality by entering into closing agreements, but exclusive use of such agreements to settle cases docketed in this Court is clearly not contemplated by the regulations:
A request for a closing agreement which relates to a prior taxable period may be submitted at any time before a case with respect to the tax liability involved is docketed in the Tax Court of the United States * * * [Emphasis added.] Section 301.7121-1(d)(1) , Proced. & Admin. Regs.
An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the court and even in the absence of a writing. Green v. John H. Lewis and Co., 436 F.2d 389 (3d Cir. 1971). The compromise and settlement of tax cases is governed by general principles of contract law. Robbins Tire and Rubber Co. v. Commissioner [Dec. 29,612 ], 52 T.C. 420, 435-436 (1969); Quinones v. Commissioner [Dec. 44,848(M) ], T.C. Memo. 1988-269. Settlement offers made and accepted by letters have been enforced as binding agreements by this Court. See Tompkins v. Commissioner [Dec. 45,864(M) ], T.C. Memo. 1989-363, where a settlement offer made by letter from the Commissioner's Appeals Officer and accepted by a letter from taxpayers' counsel was enforced over the taxpayers' objection; Himmelwright v. Commissioner [Dec. 44,644(M) ], T.C. Memo. 1988-114, where a settlement agreement of the parties, memorialized in a letter to the Commissioner from the taxpayer's counsel, was enforced upon the Commissioner's motion.
It is undisputed that an offer to settle this case was made by respondent, and petitioners, through counsel, timely notified respondent of their acceptance of the settlement offer. Respondent does not contend that the settlement offer was unauthorized, that petitioners failed to properly accept the offer, or that petitioners failed to establish their cash investment in Philatelic. Therefore, under general principles of contract law, petitioners established the basic elements of an enforceable contract: a valid offer and acceptance. The Court finds that the parties entered into an agreement to settle the case, the terms of which were set forth in respondent's letter to petitioners' counsel.
Respondent's next position, that the agreement entered into by the parties should not be enforced, incorporates two contentions: (1) That the settlement agreement is unenforceable under its own terms because disallowance of the deductions and credits for petitioners four earlier years was barred, and/or (2) that petitioners already received the benefit of the settlement agreement by virtue of having been allowed the tax benefits of Philatelic for the four earlier years.
With respect to the first contention, respondent argues that, since no deductions or credits attributable to Philatelic were eliminated and no additions to tax were imposed for the four earlier years, no further deductions from Philatelic are allowable in taxable year 1983 "under the terms of the settlement agreement." Respondent points to nothing in the settlement agreement to buttress this contention, offering instead an unsupported allegation that the settlement offer was based upon "the assumption that all petitioners had not received any benefit from their actual cash investment." This assumption is not evident from the terms of the settlement offer made by respondent. Respondent's offer provided:
1. Taxpayer would be allowed an ordinary deduction equal to 50% of his cash investment, if proof of payment is provided.
2. No investment tax credits would be allowed in any year.
3. Penalties under section 6653(a) would be evaluated on an individual basis and would be conceded by the government, if the taxpayer could demonstrate a reasonable basis for entering into this leasing activity.
4. Section 6659 would apply in full (30%) only to the portion of the deficiencies resulting from depreciation deductions and investment tax credits, since those items are directly attributable to valuation overstatements of the stamp masters. Section 6659 would not be applied to any other portion of the deficiencies in issue.
5. Section 6621(c) increased rate of interest would apply to the entire deficiencies.
6. Section 6661 would not apply to any year.
7. In addition, your clients would be required to enter into a closing agreement for subsequent years which is consistent with the above modified settlement.
Under the modified offer, section 6659 would be applied to those portions of the deficiencies which result from investment tax credit or depreciation. Thus, section 6659 would apply to all carryback years and would apply only to that portion of 1982 and 1983 deficiencies resulting from investment tax credits or depreciating deductions.
At the outset, respondent's offer specifically references the instant case by its Tax Court docket number. The only taxable year at issue in the instant case is 1983. Therefore, the only other years (other than 1983) which were made part of respondent's offer were "subsequent" years, referred to in paragraph 7 above. This meant only years subsequent to 1983 and clearly could not mean years prior to 1983. If respondent had intended that the settlement was conditioned upon disallowance of tax benefits for prior years, a provision to that effect could have easily been included in the settlement offer. However, no such provision was included by respondent, and the Court will not rewrite the parties' agreement to include one.
Although not clearly articulated, respondent also appears to argue that the settlement agreement is unenforceable because the offer was predicated upon a mistaken belief that prior years would be open to disallowance of deductions and credits when the agreement was implemented. If that is the case, it would appear that respondent would not have extended the offer if respondent realized that adjustments in the prior years were barred. However, any misapprehension about the status of the periods of limitation for the four earlier years appears to have been a unilateral mistake on respondent's part and, therefore, does not, without additional evidence, offer sufficient grounds for setting aside the settlement agreement. Respondent does not suggest any misrepresentation by petitioners or their counsel and offers no argument or authorities to support a finding that the settlement agreement is avoidable on the basis of mutual mistake, or that enforcement of the agreement will result in manifest injustice.
In Stamm Intl. Corp. v. Commissioner [Dec. 44,584 ], 90 T.C. 315 (1988), the Court held that a unilateral error by respondent's counsel in calculating the amount of taxes that would be owed under a settlement agreement, in the absence of misrepresentation by the adverse party, was not a sufficient ground to vacate the agreement. Similarly, the Court refused to set aside the parties' settlement agreement on the basis of the unilateral mistake of the taxpayers in Korangy v. Commissioner [Dec. 45,403(M) ], T.C. Memo. 1989-2, affd. [90-1 USTC ¶50,030 ] 893 F.2d 69 (4th Cir. 1990).
Finally, respondent contends that, because petitioners realized tax benefits for the four earlier years, these benefits should be held to offset the concessions by respondent in the agreement to settle the case for 1983. Respondent offers no argument or authority in support of this contention, and it is not evident to the Court that the terms of the settlement agreement justify the interpretation respondent urges.
The Court finds that insufficient reason exists to set aside the settlement agreement of the parties. Respondent is bound by the settlement offer extended to and accepted by petitioners as to their 1983 tax year. Accordingly, petitioners' motion for entry of decision will be granted.
An appropriate order will be issued. 2
1 All section references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable year in question unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.
2 The Court is unable to enter a decision because the agreement fails to compute the deficiency or additions to tax. Additionally, the agreement, as framed, does not resolve the addition to tax under section 6653(a), since resolution of that issue is based upon petitioners' demonstrating "a reasonable basis for entering into this leasing activity." The order will allow the parties the opportunity to resolve such factual matters and, if the parties are unable to resolve such matters, they will so report to the Court, and litigation of this case will be limited to those factual matters within the framework of the agreement of the parties.


Chief Counsel Advice 200133040 , June 13, 2001

CCH IRS Letter Rulings Report No. 1277, 08-22-01

IRS REF: Symbol: CC:PA:CBS:Br2-GL-114892-01

Uniform Issue List Information:
UIL No. 17.10.00-00

Compromises

UIL No. 9999.98-00

Miscellaneous issues

- Not able to identify under present list

[Code Sec. 7122]


MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 2, NEWARK

FROM: Joseph W. Clark, Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Collateral Agreements in Effective Tax Administration Offers in Compromise

This Chief Counsel Advice responds to your request dated March 16, 2001. In accordance with I.R.C. §6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

ISSUE:

Can the Internal Revenue Service accept, as additional consideration for an offer in compromise, a collateral agreement or other document which will entitle the Government to the proceeds from the sale of a particular asset at some point in the future?

CONCLUSION:

Yes. Although Treasury regulations establish certain conditions that must be satisfied in order to compromise under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.

BACKGROUND:

The Compliance Area Director has asked your advice on the following scenario. The taxpayers, an elderly couple who are not employed, have submitted an offer in compromise. An analysis of the taxpayers' financial condition shows that the tax could be collected in full. The major source of potential collection is their home, which has substantial net equity. However, the Service has determined that seizure of the home would cause the taxpayers economic hardship, and that collection in full cannot be accomplished otherwise. Based on the determination that collection in full would create economic hardship, the Service is considering accepting the taxpayers' offer on the basis of the promotion of effective tax administration. The Area Director is concerned, however, that compromise under such circumstances would only serve to create a windfall for the taxpayers' heirs. He has proposed obtaining a collateral agreement in such compromises which would allow the taxpayers to reside in their home until their deaths. Thereafter, the home would be sold with the proceeds going to the Government as part of the compromise.

LAW & ANALYSIS:

Section 7122 of the Internal Revenue Code grants the Secretary the authority to compromise and establishes certain rules to be followed in exercising that authority. Treasury regulations further define the Secretary's authority by establishing permissible bases for compromise. See Temp. Treas. Reg. §301.7122-1T(b). The regulations provide procedures for the submission and processing of offers to compromise, as well as other rules relating to the acceptance or rejection of offers and how the submission of offers impacts upon the Service's ability to continue collection efforts. See Temp. Treas. Reg. §301.7122-1T(c)-(i).

None of these rules, however, address how much should be accepted to resolve a case, or what terms or conditions should be included in a compromise agreement. The preamble to the temporary regulations explains this omission, stating:

Although the temporary regulations set forth the conditions that must be satisfied to accept an offer to compromise liabilities arising under the internal revenue laws, they do not prescribe the terms or conditions that should be contained in such offers. Thus, the amount to be paid, future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the discretion of the Secretary.

T.D. 8829, Compromises, 64 Fed. Reg. 39020, 39023 (July 21, 1999). In exercising this discretion, the Service may request, "[a]s additional consideration, ... that the taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States." Temp. Treas. Reg. §301.7122-1T(d)(2).

Terms and conditions applicable to all compromises are set forth in Form 656, Offer in Compromise, which must be submitted by all taxpayers offering to compromise with the Service. The Service's procedures recognize that additional terms may be appropriate in some cases. These agreements, commonly known as "collateral agreements," are discussed in Chapter 6 of the Offer in Compromise Handbook, IRM 5.8. Standard collateral agreements include: waivers net operating losses; agreements reducing the basis in particular assets; or agreements to pay a set percentage of future income over a certain base amount. See IRM 5.8.6.3(1). Such agreements allow the Service to recover part of the difference between the amount of the offer and the total liability. However, collateral agreements should not be used to allow acceptance of an amount less than the financial analysis dictates, or to recover amounts that should have been included on the Form 656 as part of the compromise. See IRM 5.8.6.1(3). Similar to the foregoing examples of collateral agreements, an additional agreement like the one proposed by the Area Director is legally permissible, and insisting on such an agreement would be within the Service's discretion.

As with the other types of collateral agreements, whatever obligation a taxpayer undertook (for example, to sell the house and forward the proceeds to the Service) would have to take place within the statute of limitations applicable to the tax to which the proceeds would be applied. Section 6502(a) establishes a ten-year statute of limitations within which a tax liability must be collected or a proceeding in court commenced. Prior to the amendment of that section by the IRS Restructuring and Reform Act of 1998 (RRA), the Form 656 and any collateral agreements provided that the statute of limitations for collection was waived for the period of time that any terms of the compromise or collateral agreement remained outstanding. However, following the amendment of section 6502(a) of the Code by section 3461 of RRA, the ten-year statute of limitations can no longer be extended by agreement for this purpose. As a result, the terms of compromises and collateral agreements can last only for the period remaining on the collection statute.

An agreement for the limited amount of time remaining on the collection statute would not appear to address the concerns raised by the Area Director. One alternative might be the acceptance of some other type of debt instrument granting the Service the ability to collect as a state-law creditor rather than through the administrative collection provisions of the Internal Revenue Code. Courts have long recognized that the Service may accept bonds, letters of credit, or mortgages as a means of securing the payment of taxes, and have upheld the Service's right to collect on such instruments as separate debts not subject to the administrative collection procedures set forth in the Internal Revenue Code. See Royal Indemnity Co. v. United States, 313 U.S. 289 (1941) [41-1 USTC ¶9487], Gulf States Steel Co. v. United States, 287 U.S. 32 (1932) [3 USTC ¶989], United States v. John Barth Co., 268 U.S. 370 (1929) [1 USTC ¶402] (bonds); United States v. Citizens Bank, 50 F.Supp. 2d 107 (D.R.I. 1999) [99-2 USTC ¶50,615] (promissory note secured by mortgage); Julicher v. Internal Revenue Service, 95-2 U.S.T.C. ¶50,379 (USDC, E.D. Pa. 1995) (irrevocable letter of credit).

In each of those cases, the taxpayers attempted to defeat the Government's right to collect on the debt instrument by arguing that the statute of limitations for collection under the Code had expired. Each court held that the instrument executed in the Government's favor created a new debt not subject to the period of limitations for taking administrative collection action or bringing suit. See Royal Indemnity, 313 U.S. at 283 [41-1 USTC ¶9487]; Gulf States, 287 U.S. at 39 [3 USTC ¶989]; Barth, 279 U.S. at 374 [1 USTC ¶402]. The court in Citizens Bank summed up the reasoning in this line of cases as follows:

The principle to be derived from Barth and Julicher is that where the government suspends the collection of a tax at the request of a taxpayer, who in turn provides the government with security for later payment, the government is not thereafter bound by the statute of limitations applicable to the original obligation. Instead, the government may proceed against the security provided to it in consideration of its earlier forbearance.

Citizens Bank, 50 F.Supp. 2d at 111 [99-2 USTC ¶50,615].

Thus, a mortgage on the taxpayers' personal residence may give the Service an enforceable agreement of the sort contemplated by the Area Director. There is no mention of this kind of arrangement in the offer in compromise handbook, but mortgages, bonds and other similar arrangements are discussed in IRM 5.6, Collateral Agreement and Security Type Collateral. That handbook contemplates the use of mortgages not as a replacement lien on property already subject to the lien arising under section 6321 of the Code, but as a means of securing the Government's right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety. See IRM 5.6.1.2.3(4).1 The handbook further states: "The Service should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim to judgment or requiring the taxpayer post a bond." IRM 5.6.1.2.3(5). This instruction is in keeping with the handbook's recognition that the filing of a notice of federal tax lien provides the Service greater protection than a debt instrument enforceable only under state law. See IRM 5.6.1.1(3)a.

Although the IRM authorizes the use of mortgages and other consensual security arrangements in certain limited circumstances, the offer in compromise handbook does not appear to have considered the use of such instruments as part of a compromise. Because of the novelty of such an arrangement, we recommend that the Area Director consult with the Office of Compliance Policy, SB/SE, for guidance as to whether and under what circumstances a collateral agreement allowing the Service to collect from a personal residence in the future can be secured as consideration for a compromise.

If you have any questions or need further assistance, please contact the attorney assigned to this matter at 202-622-3620.

1 It is significant that the mortgage in Citizens Bank gave the Service a security interest in property that was not already subject to the lien created by the failure to pay the tax liability. The personal residence used as an example in the Area Director's question is already subject to the Government's lien and is reachable by levy.


The transfer of an individual's suit in connection with an Offer in Compromise (OIC) regarding his unpaid tax liabilities from district court to the Court of Federal Claims was improper. The determination of jurisdiction depended not simply on whether the case involved contract issues, but on whether, despite the presence of a contract, the claim was founded only on a contract, or whether it stemmed from a statute or the Constitution. Although the parties agreed that the OIC was a contract, the suit was based on a refund theory and not on the interpretation of a contract. The taxpayer claimed that the IRS wrongfully terminated the OIC and that, since he paid taxes that he alleges were wrongfully or illegally collected, he was entitled to a refund. Because the taxpayer satisfied all necessary jurisdictional requirements for a tax refund suit, the district court should have retained jurisdiction.

M.J. Roberts, CA-FC, 2001-1 USTC ¶50,306.

Agreements compromising tax litigation are contracts and, as such, they are subject to the rules applicable to contracts generally.

R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.

B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352. Rehearing denied.

B.R. Kurio, DC Tex., 71-1 USTC ¶9112.

An agreement signed by an executor consenting that property transferred by the decedent without consideration within two years of his death be included in the taxable estate on condition that other property, similarly transferred, be not so included and that other property be valued at a specified amount was not a compromise.

Leach, CA-1, 1 USTC ¶269, 23 F2d 275.

A married couple's letter to an IRS revenue officer requesting a release of tax liens and proposing that the IRS accept a specified amount in full satisfaction of its proofs of claim did not constitute a compromise of their tax liability. No notation or instructions for application of the payment accompanied their subsequent payment of the specified amount. The purported offer in compromise did not follow the required procedures, the IRS's actions in discharging liens and retaining the payment did not constitute acceptance of an offer to compromise the full tax liability, and the IRS was not bound by principles of satisfaction and accord.

F.G. Harper, BC-DC Va., 96-2 USTC ¶50,676.

An individual debtor's motion to enforce a tax liability settlement with the IRS was granted where the amount agreed upon was actually paid to the IRS approximately one year after the agreement was approved and signed. Because the binding settlement agreement constituted a full and complete resolution of the IRS's claim, the IRS could not subsequently assess post-petition penalties and interest.

E.B. Adelstein, BC-DC Ariz., 94-1 USTC ¶50,270.

Documents that by express agreement of the IRS and a group of affiliated corporations constituted the terms of a settlement did not support the corporations' contention that one of the agreed to terms was the resolution of a foreign income sourcing issue in their favor.

ITT Corp., DC N.Y., 91-2 USTC ¶50,372.

The IRS was allowed to contest an installment agreement and enforce the immediate payment of an assessment of unpaid withholding taxes plus a 100-percent penalty. The installment agreement was only signed by one of the IRS's Group Managers, an employee who did not have authority to compromise tax liabilities on behalf of the IRS. In addition, the installment agreement was not a compromise pursuant to Code Sec. 7122, and the agreement stated on its face that permission to make installment payments could be withdrawn.

J.R. McGee, DC Fla., 83-1 USTC ¶9245.

Internal Revenue Manual Instructions read in conjunction with Code Sec. 7122 are not an offer in compromise that the taxpayer could contend he accepted. Instructional materials are advisory and do not narrow IRS discretion in regard to entering into compromises.

B.E. Shanahan, DC Mo., 78-1 USTC ¶9404.

An attorney was required to abide the terms of a settlement agreement he mistakenly signed with the IRS. The settlement agreement was subject to the general principles of contract law; the attorney's unilateral mistake was not sufficient grounds to set aside an otherwise enforceable agreement.

E.W. Goss, 93 TCM 706, Dec. 56,817(M), TC Memo. 2007-16.

The IRS's rejection of a 73 year old insurance salesman and his wife's $2000 offer to compromise a tax liability in excess of $200,000 was not arbitrary or unreasonable in light of the taxpayers' collection potential. The IRS considered the husband's age, health and the fact that the husband remained active in the insurance business. The IRS's refusal of the second offer was justified by the income generated from the husband's insurance business, the value of the transferred automobile, and the taxpayers' increased expenditures since the first settlement offer.

S. Alaniz, 89 TCM 660, Dec. 55,905(M), TC Memo. 2005-4.