                  T.C. Summary Opinion 2002-52



                     UNITED STATES TAX COURT



       DANIEL R. AND MARGARET J. KALLMYER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 4862-00S.              Filed May 9, 2002.


     Daniel R. Kallmyer, pro se.

     Stephen J. Neubeck, for respondent.


     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.1    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined a deficiency in petitioners’ 1996

Federal income tax of $4,287.   The issues are (1) whether


1
   Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue.
                               - 2 -

respondent was barred from issuing the notice of deficiency for

the additional tax imposed by section 72(t); (2) whether

respondent had conceded the additional tax under section 72(t) in

a settlement prior to the issuance of the notice of deficiency;

and (3) whether petitioners are liable for the additional tax

under section 72(t) for distributions from individual retirement

accounts (IRA) owned by petitioner Daniel R. Kallmyer

(petitioner).   Petitioners resided in Maineville, Ohio, at the

time the petition was filed.

                            Background

      The applicable facts may be summarized as follows.2    Prior

to the distributions at issue, respondent assessed petitioners

for delinquent taxes and sought to collect the amount due.

According to petitioner, a revenue officer threatened to levy

petitioner’s retirement accounts at Vanguard Fiduciary Trust Co.,

Star Bank Cust. Analysts Invest. Trust, and T. Rowe Price Trust

Co.   During 1996, petitioner caused the trustees of these

accounts to make distributions of $42,870 from the accounts to

petitioner.

      These distributions were deposited into petitioners’

checking account and commingled with other funds.   Petitioners

paid $15,000 to satisfy the previously assessed tax liability.


2
   The facts are not in dispute, and the issues are primarily
ones of law. Sec. 7491, concerning burden of proof, has no
bearing on the issues at hand.
                               - 3 -

Petitioner alleges that he used $19,000 from the distributions to

pay the taxes resulting from the IRA distributions and the

balance of the funds was used to finance petitioner’s business

activities.   Petitioners did not report the $42,870 distributions

on their joint 1996 Federal income tax return.

     On February 24, 1999, respondent issued a notice of

deficiency to petitioners asserting that the $42,870 was

includable in petitioners’ gross income for 1996, and determined

a deficiency of $13,839 plus an addition to tax and penalties.

The deficiency included the additional tax of $4,287 under

section 72(t) that is at issue here.   Petitioners did not file a

petition with this Court.   Instead, petitioners contacted

respondent in an attempt to negotiate a settlement of the

deficiency.

     By letter dated March 4, 1999, petitioners asserted that the

distributions resulted from a threat of levy and that the

additional tax under section 72(t) should not be imposed.

Respondent mailed to petitioners a letter dated March 31, 1999,

which proposed changes in petitioners’ 1996 Federal income tax to

include the $42,870 distributions in petitioners’ gross income,

and determined a delinquency penalty and interest but omitted the

additional tax under section 72(t).    Petitioners disagreed with

the proposed changes.   Petitioner testified, however, that he had

contacted Mary Flanagan (Ms. Flanagan), an employee in
                               - 4 -

respondent’s Philadelphia office, and that she assured him that

respondent would “abate” the section 72(t) additional tax if

petitioners immediately paid the deficiency shown in the March

31, 1999, letter.   Petitioner was unaware of the extent of Ms.

Flanagan’s authority to compromise their tax liability, and

petitioners never received any correspondence from Ms. Flanagan.

On or about April 6, 1999, petitioners paid $11,818.

      On February 9, 2000, respondent issued another notice of

deficiency relating to petitioners’ 1996 Federal income tax.     The

second notice, at issue here, asserted that petitioners’ 1996

retirement account distributions were subject to the section

72(t) additional tax.   Petitioners timely filed a petition

contesting respondent’s determination.

      Petitioners contend (1) that the second notice is invalid;

(2) that all matters relating to their 1996 taxable year were

settled; and (3) that the IRA distributions are not subject to

the section 72(t) additional tax.

                            Discussion

1.   Validity of the Second Notice of Deficiency

      Section 6212(a) authorizes respondent to issue a notice of

deficiency if there is a deficiency in respect to income taxes.

Section 6212(c)(1) provides that respondent “shall have no right

to determine any additional deficiency of income tax for the same

taxable year * * * except in the case of fraud” if respondent has
                                - 5 -

mailed a notice of deficiency under section 6212(a) “and the

taxpayer files a petition with the Tax Court within the time

prescribed”.    Hemmings v. Commissioner, 104 T.C. 221, 226-228

(1995).    In this case, petitioners did not file a petition with

this Court challenging the February 24, 1999, notice of

deficiency.    Accordingly, respondent was not barred by section

6212(c)(1) from issuing another notice of deficiency as to

petitioners’ 1996 taxable year.

2.   Whether There Was a Binding Settlement

      Petitioners argue that respondent settled their tax dispute

as to all matters relating to the 1996 taxable year when

petitioners signed the letter of March 31, 1999.    That letter

provided for a response to respondent’s proposed changes whereby

petitioners could either agree or disagree with the proposed

changes.    On April 5, 1999, petitioners signed the form and

checked the provision that stated:

      Disagreement With Proposed Changes - I disagree with some or
      all of the proposed changes on page 2 of this notice. For
      each proposed change that I disagree with, I have attached a
      signed statement and supporting documents explaining why.

There does not appear to have been any attached statement.      On

April 6, 1999, however, petitioners sent a check for $11,818, and

by letter claimed a refund of $1,788 for interest.

      We have held that

      A settlement is a contract and, consequently, general
      principles of contract law determine whether a settlement
      has been reached. * * * A prerequisite to the formation of a
                                - 6 -

     contract is an objective manifestation of mutual assent to
     its essential terms. * * * Mutual assent generally requires
     an offer and an acceptance. [Dorchester Indus. Inc. v.
     Commissioner, 108 T.C. 320, 330 (1997), affd. 208 F.3d 205
     (3d Cir. 2000) (quoting Manko v. Commissioner, T.C. Memo.
     1995-10).]

A party cannot accept certain provisions and reject other

provisions of an offer.    See Philadelphia & Reading Corp. v.

Beck, 676 F.2d 1159, 1164 (7th Cir. 1982).    It is quite clear

here that, while there may have been an offer, petitioners did

not accept that offer.    Indeed, they specifically rejected it.

Accordingly, there is no basis for petitioners’ argument that the

case had been settled and that respondent was, therefore,

precluded from asserting the section 72(t) additional tax.3

     Petitioners also suggest that respondent should be estopped

from imposing the additional section 72(t) tax.    The traditional

elements of estoppel are:    (1) A misrepresentation or omission of

a material fact by another party; (2) a reasonable reliance on

that misrepresentation or omission; and (3) a detriment to the

other party.   See United States v. Asmar, 827 F.2d 907, 912 (3d

Cir. 1987).

     Assuming that Ms. Flanagan did in fact promise to “abate”

the section 72(t) penalty, petitioners may not claim estoppel

against respondent based on that promise.    Even if petitioners


3
   Respondent also argues that Ms. Flanagan had no authority to
settle the matter, and that, if there was a settlement, a closing
agreement under sec. 7121 was required. We see no reason in
visiting these questions.
                                - 7 -

relied on that promise, they suffered no detriment that is

legally cognizable.   Petitioners did not surrender any rights.

Petitioners paid the tax that was lawfully owing and did not

change any position to their detriment.

3.   Liability for Section 72(t) Additional Tax

      Section 72(t) provides:

           (1) Imposition of additional tax.–- If any taxpayer
      receives any amount from a qualified retirement plan * * *
      the taxpayer’s tax under this chapter for the taxable year
      in which such amount is received shall be increased by an
      amount equal to 10 percent of the portion of such amount
      which is includible in gross income.

Section 72(t)(2) provides for exceptions to the additional tax,

which petitioners concede are not applicable here.

      Petitioners argue, however, that their case is analogous to

Larotonda v. Commissioner, 89 T.C. 287 (1987), in which this

Court held that where the Commissioner levied on the taxpayer’s

qualified retirement plan, the resulting distribution was not

subject to the 10-percent premature distribution penalty imposed

by then section 72(m)(5).   We reasoned that the penalty provision

was meant to discourage voluntary early withdrawals from

qualified retirement plans and to discourage income averaging

which could be achieved by deferring the timing of income until

years with lower annual income amounts.   Id. at 292.   In deciding

Larotonda we noted that “admittedly, this is a close question”;

however, in light of the involuntary nature of the withdrawal and
                               - 8 -

the clear intent of Congress to prevent voluntary withdrawals, we

decided that the penalty was inapplicable.      Id. at 291.

     Petitioners’ reliance on Larotonda v. Commissioner, supra,

is misplaced.   Here, respondent did not levy on the retirement

accounts.   Petitioners made voluntary withdrawals from the

accounts and then satisfied their delinquent tax liability by

paying $15,000 out of those withdrawals.     The excess withdrawals

were used by petitioner for other purposes.4     We decline to

extend the holding of Larotonda to circumstances such as here,

where petitioners willingly made withdrawals from the retirement

accounts and had actual possession of those distributions prior

to using a portion of the distributions for the payment of the

preexisting tax liability.   See Czepiel v. Commissioner, T.C.

Memo. 1999-289; cf. Murillo v. Commissioner, T.C. Memo 1998-13

(distributions from retirement accounts forfeited held not

subject to the section 72(t) additional tax), affd. without

published opinion on other issues 166 F.3d 1201 (2d Cir. 1998).

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                            Decision will be entered

                                       for respondent.



4
   Petitioner claims that $19,000 of the distributions was used
to pay the tax incurred during the year from the distributions.
The facts belie this assertion. Petitioners did not even report
the distributions.
