                     T.C. Memo. 1997-140



                   UNITED STATES TAX COURT



             ESTATE OF JAMES A. BEATON, DECEASED,
SHIRLEY BEATON, EXECUTRIX, AND SHIRLEY BEATON, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



  ALAN B. STEINER AND BARBARA W. STEINER, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket Nos. 28181-92, 28182-92.    Filed March 18, 1997.



        R issued notices of deficiency dated Sept. 28, 1992,
   for Ps’ 1985 year. Ps filed timely petitions asserting the
   period of limitations had expired. R filed answers
   asserting the application of the mitigation provisions.
   Secs. 1311-1314, I.R.C. 1986. Decisions as to 1984, entered
   pursuant to our opinion in Steiner v. Commissioner, T.C.
   Memo. 1995-122, which respondent contends are the relevant
   determinations, became final in late 1996.

         Held: The mitigation provisions do not permit an
   adjustment to Ps’ 1985 year, because on the date the notices
   of deficiency for 1985 were issued a relevant determination
   had not occurred within the 1-year period ending on that
   date.
                                  - 2 -


        Michael I. Sanders, Craig A. Etter, and Timothy J. Jessell,

for petitioners.

        Kathleen E. Whatley, for respondent.



                           MEMORANDUM OPINION

        CHABOT, Judge:   This matter is before the Court on

respondent’s motions for partial summary judgment1 under Rule

121.2    The instant cases have been consolidated for opinion.

        Respondent asks the Court to determine that, on the date the

notices of deficiency were issued, the statute of limitations for

assessment of Federal income tax had closed petitioners’ 1985

year and that year had not been reopened by the mitigation

provisions of sections 1311-13143.        We decide these motions on

the basis of the parties’ pleadings and written submissions, and




1
     If respondent’s motions are granted, then there will not be
any issue remaining to be decided, and decisions will be entered.
Accordingly, respondent’s motions are treated as motions for
summary judgment.

2
     Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
3
     References to secs. 1311-1314 are to sections of the
Internal Revenue Code of 1986 as in effect for determinations (as
defined in sec. 1313(a)) made in or after 1992; references to
sec. 83(b) are to that provision of the Internal Revenue Code of
1954 as in effect for 1983; unless indicated otherwise, all other
section references are to sections of the Internal Revenue Code
of 1954 as in effect for 1985.
                                 - 3 -

our findings and holdings in Steiner v. Commissioner, T.C. Memo.

1995-122.

      By notices of deficiency issued September 28, 1992,

respondent determined deficiencies in Federal individual income

tax and additions to tax under sections 6653(a) (negligence,

etc.) and 6661 (substantial understatement of income tax) against

petitioners as follows:

                                                 Additions to tax
                                          Sec.        Sec.        Sec.
Petitioner      Year        Deficiency   6653(a)(1) 6653(a)(2)    6661
                                                        1
Beaton          1985        $119,550       $5,978              $29,888
                                                        1
Steiner         1985          53,335        2,667               13,334

1
    50 percent of the interest due on the entire deficiency.

                              Background

      When the petition was filed in docket No. 28181-92, Shirley

Beaton resided in Rancho Mirage, California.        James A. Beaton

resided in Reno, Nevada, when he died.       When the petition was

filed in docket No. 28182-92, Alan B. Steiner and Barbara W.

Steiner resided in Italy.

      James A. Beaton (hereinafter sometimes referred to as

Beaton) was a senior vice president of VeloBind, Inc.

(hereinafter sometimes referred to as VeloBind) from April 1983

until May 1, 1986, when he retired.      Alan B. Steiner (hereinafter

sometimes referred to as Steiner) was a director of VeloBind from

1979 until November 1991.
                               - 4 -

     In June 1983 VeloBind’s shareholders and directors approved

a sale of VeloBind Junior Common Stock--Series A to Beaton, and

to Steiner and the other directors of VeloBind.    In 1983, Beaton

bought 15,000 shares and Steiner bought 7,500 shares of Junior

Common Stock--Series A.   Beaton and Steiner filed timely

elections under section 83(b) with respect to these purchases.

     Each share of Junior Common Stock--Series A carried one-

sixteenth of the dividend, liquidation, and voting rights of one

share of VeloBind common stock.   Each share of Junior Common

Stock--Series A was to convert automatically into one share of

common stock if one of four specified events occurred.    One of

these events did occur, and the stock converted.

     On September 13, 1990, respondent issued notices of

deficiency for 1984 to petitioners.    In these notices of

deficiency respondent determined that the conversion of Junior

Common Stock--Series A into common stock was a taxable event that

occurred in 1984.   On December 12, 1990, petitioners filed

petitions for 1984.

     On September 28, 1992, respondent issued notices of

deficiency for 1985 to petitioners.    In these notices of

deficiency respondent determined that petitioners received

additional income in the form of common stock.    On December 21,

1992, petitioners filed petitions for 1985.    In their petitions

for 1985, petitioners assert that the period of limitations under

section 6501 for assessment of tax for 1985 had expired before
                                - 5 -

respondent mailed the notices of deficiency for 1985.

Petitioners filed their tax returns for 1985 on or before April

15, 1986.

     In the answers for 1985 respondent contends that if the

Court holds in petitioners’ dockets for 1984 that the Junior

Common Stock--Series A converted into common stock in 1985, then

the period of limitations for 1985 is open as a result of

mitigation under sections 1311-1314.      Respondent does not deny

that, otherwise, the period of limitation is closed.      In the

replies petitioners deny that the mitigation provisions apply for

1985.

     Petitioners’ dockets for 1984 were consolidated for trial,

briefing, and opinion with six other dockets; the Court held in

Steiner v. Commissioner, T.C. Memo. 1995-122, that the Junior

Common Stock--Series A converted into common stock at some point

in 1985.    The Court entered decisions in petitioners’ dockets for

1984 on February 12, 1996.   On July 23, 1996, the Court of

Appeals for the Tenth Circuit dismissed respondent’s appeal in

the Steiners’ docket.   On August 8, 1996, the Court of Appeals

for the Ninth Circuit dismissed respondent’s appeal in the

Beatons’ docket.   Respondent did not file any petition for

certiorari, and our decisions became final in due course.

                             Discussion

     Respondent contends that the mitigation provisions under

sections 1311-1314 do not open the period of limitations for
                               - 6 -

petitioners’ 1985 year in the instant cases because the notices

of deficiency were issued before a determination under section

1313(a) constituting a mitigating event had occurred.

     Petitioners contend that the mitigation provisions under

sections 1311-1314 do not apply to petitioners’ 1985 year because

(1) the notices of deficiency were issued before a determination

under section 1313(a) constituting a mitigating event had

occurred, and (2) there has not yet been a determination

described in section 1312(3)(B).

     We agree with respondent and with petitioners’ first

contention.

     The question before us appears to be one of first impression

for this Court; it is whether a notice of deficiency can open for

limited purposes an otherwise closed year, when that notice (1)

alleges the applicability of the mitigation provisions to make an

adjustment in the closed year, and (2) was issued before the

occurrence of a mitigating “determination”.   Or, as respondent

puts it, the question is “whether a premature notice of

deficiency can be cured”.

     “The purpose of sections 1311-13154 is to mitigate the

effect of the statute of limitations in certain carefully

described situations.”   Bradford v. Commissioner, 34 T.C. 1051,


4
     Sec. 1315, a special effective date provision for the
mitigation provisions revision by the enactment of the Internal
Revenue Code of 1954, was repealed by the so-called “Deadwood”
title of the Tax Reform Act of 1976. of Pub.L. 94-455, Sec.
1901(a)(143) 90 Stat. 1520, 1788. Secs. 1311-1314 remain.
                                    - 7 -

1054 (1960).   (Emphasis added.)      Our discussion will focus on

those portions of the mitigation provision necessary or helpful

to understand the resolution of these dockets.       So, for example,

our discussion of notices of deficiency and respondent’s

invocation of these provisions will not deal with the similar,

but sometimes not identical, rules for taxpayers’ refund claims.

O’Donnell v. Belcher, 414 F.2d 833, 841 (5th Cir. 1969).

Section 13115 provides for the correction of an error if, on the


5
     Sec. 1311 provides, in pertinent part, as follows:

     SEC. 1311. CORRECTION OF ERROR.

          (a) General Rule.--If a determination (as defined in
     section 1313) is described in one or more of the paragraphs
     of section 1312 and, on the date of the determination,
     correction of the effect of the error referred to in the
     applicable paragraph of section 1312 is prevented by the
     operation of any law or rule of law, other than this part
     [i.e., secs. 1311-1314, which constitute part II of subch. Q
     of ch.1] and other than section 7122 (relating to
     compromises), then the effect of the error shall be
     corrected by an adjustment made in the amount and in the
     manner specified in section 1314.

          (b) Conditions Necessary for Adjustment.--

                        *   *   *    *   *   *   *

               (2) Correction not barred at time of erroneous
          action.--

                     (A) Determination described in section
                1312(3)(B).--In the case of a determination
                described in section 1312(3)(B) (relating to
                certain exclusions from income), adjustment shall
                be made under this part only if assessment of a
                deficiency for the taxable year in which the item
                is includible or against the related taxpayer was
                not barred, by any law or rule of law, at the time
                the Secretary first maintained, in a notice of
                                                    (continued...)
                                   - 8 -

date of a determination (as defined in section 1313 and described

in section 1312), correction of the effect of the error is

prevented by the operation of any law or rule of law, other than

(1) sections 1311-1314 and (2) section 7122.        Section 1311

provides that the effect of the error is to be corrected by an

adjustment under section 1314.

     Section 1313(a)6 defines the term “determination”.       Section

13127 describes the specific requirements that a determination


5
     (...continued)
               deficiency sent pursuant to section 6212 or before
               the Tax Court, that the item described in section
               1312(3)(B) should be included in the gross income
               of the taxpayer for the taxable year to which the
               determination relates.
6
     Sec. 1313 provides, in pertinent part, as follows:

     SEC. 1313. DEFINITIONS.

          (a) Determination.--For purposes of this part, the term
     ”determination” means--

               (1) a decision by the Tax Court or a judgment,
          decree, or other order by any court of competent
          jurisdiction, which has become final;
7
     Sec. 1312 provides, in pertinent part, as follows:

     SEC. 1312. CIRCUMSTANCES OF ADJUSTMENT.

          The circumstances under which the adjustment provided
     in section 1311 is authorized are as follows:

                       *   *   *    *   *   *   *

               (3) Double exclusion of an item of gross income.--

                       *   *   *    *   *   *   *

                                                         (continued...)
                                   - 9 -

must meet in order for it to be a determination that may lead to

an adjustment under sections 1311 and 1314.         Section 1314(b)8

describes the method by which this adjustment is to be made.

     Thus, in general, the mitigation provisions apply only if

(1) there is an error, (2) there is a determination that meets

certain requirements, (3) at the time of the determination a “law

or rule of law” has the effect of “locking in” the error, and (4)

the detailed statutory “method of adjustment” in section 1314(b)

is complied with.

     In the instant cases, the error that respondent complains of

is that petitioners did not report on their 1985 tax returns the


7
     (...continued)
                    (B) Items not included in income.--The
               determination requires the exclusion from gross
               income of an item not included in a return filed
               by the taxpayer and with respect to which the tax
               was not paid but which is includible in the gross
               income of the taxpayer for another taxable year or
               in the gross income of a related taxpayer.
8
     Sec. 1314(b) provides, in pertinent part, as follows:

     SEC. 1314. AMOUNT AND METHOD OF ADJUSTMENT.

                       *   *   *    *   *   *   *

           (b) Method of Adjustment.--The adjustment authorized in
     section 1311(a) shall be made by assessing and collecting,
     or refunding or crediting, the amount thereof in the same
     manner as if it were a deficiency determined by the
     Secretary with respect to the taxpayer as to whom the error
     was made or an overpayment claimed by such taxpayer, as the
     case may be, for the taxable years or year with respect to
     which an amount is ascertained under subsection (a), and as
     if on the date of the determination one year remained before
     the expiration of the periods of limitation upon assessment
     or filing claim for refund for such taxable year or years.
     * * *
                              - 10 -

income that, respondent contends, Beaton and Steiner received on

the occasion of the conversion of their VeloBind Junior Common

Stock--Series A into VeloBind common stock.   When our

determination that this conversion occurred in 1985, and not

1984, became final (the determination that respondent contends is

described in section 1312), 1985 was closed by the statute of

limitations.

     Section 1314(b) directs respondent to precede “in the same

manner as if it [the claimed adjustment] were a deficiency

determined by the Secretary with respect to the taxpayer as to

whom the error was made”--e.g., by notices of deficiency to

petitioners.   Section 1314(b) then provides its own statute of

limitations--i.e., “as if on the date of the determination one

year remained before the expiration of the periods of limitation

upon assessment * * * for such taxable year”.

     This statutory structure envisions a two-step procedure:      A

determination, followed by the issuance of a notice of deficiency

within 1 year after the determination.    See Benenson v. United

States, 385 F.2d 26, 31 (2d Cir. 1967).

     Section 1.1314(b)-1(b), Income Tax Regs., provides in

pertinent part, as follows:

          (b) For the purpose of the adjustments authorized by
     section 1311, the period of limitations upon the making of
     an assessment or upon refund or credit, as the case may be,
     for the taxable year of an adjustment shall be considered as
     if, on the date of the determination, one year remained
     before the expiration of such period. The Commissioner thus
     has one year from the date of the determination within which
     to mail a notice of deficiency in respect of the amount of
                             - 11 -

     the adjustment where such adjustment is treated as if it
     were a deficiency. The issuance of such notice of
     deficiency, in accordance with the law and regulations
     applicable to the assessment of deficiencies will suspend
     the running of the 1-year period of limitations provided in
     section 1314(b). * * *

     Any doubt as to sequencing that might have remained after

examining the statute is dispelled by the Treasury Regulations,

which require respondent to issue the notice of deficiency within

“one year from the date of the determination”.   Thus, the

structure of the mitigation provisions does not leave room for a

mitigation claim to be made in a notice of deficiency issued

before a relevant determination.

     Because the notices of deficiency in the instant case were

issued before the only determinations that could be relevant

determinations as to petitioners herein, these notices of

deficiency have not made effective mitigation claims.

     This analysis is consistent with, and this conclusion is

identical to, that appearing in O’Donnell v. Belcher, 414 F.2d at

842-843.

     This conclusion also is consistent with the analyses in

Benenson v. United States, 385 F.2d at 30-31 n.7, and Cory v.

Commissioner, 29 T.C. 903, 907 (1958), affd. 261 F.2d 702, 704

(2d Cir. 1958), to the effect that until the decision in the

first case became final (1) “there can be no certain need for an

adjustment” (Benenson), and (2) the Commissioner “could not

correctly determine a deficiency” for the second case (Cory).
                             - 12 -

     Because the period of limitations for 1985 under section

6501 expired before the notices of deficiency were issued in the

instant cases, assessment in each of the instant cases is barred

by the statute of limitations.



     Petitioners ask us to also decide the following:

     (1) Each of the final decisions entered pursuant to our

opinion in Steiner v. Commissioner, T.C. Memo. 1995-122, “Does

Not Represent a Determination described in Code section

1312(3)(B) for Purposes of the Mitigation Provisions.”

     (2) “The Statute of Limitations for 1985 Expired [sic] on

April 15, 1989 [sic] prior to the issuance of the Notice of

Deficiency for 1984.”

     Our conclusions in the instant cases, and the decisions

entered herein, would not be affected by any conclusion we might

state as to either of these issues.    Accordingly, we decline to

analyze either of these issues.     Chevron Corp. v. Commissioner,

98 T.C. 590 (1992); LTV Corp. v. Commissioner, 64 T.C. 589

(1975).

     In light of the foregoing.

                                      Respondent’s motions will be

                                 granted, and decisions will be

                                 entered that there are no

                                 deficiencies and no additions

                                 to tax.
